Computer Resources Inc. is a computer retailer. Computer Resources began operations in December of the current year and engaged in the following transactions during that month. Computer Resources uses a perpetual inventory system.

Dec. 5 Purchased $100,000 of computer equipment, terms n/30.

Dec. 12 Sold $100,000 of computer equipment, terms n/30. The cost of the equipment sold is $50,000.

Dec. 26 Purchased $200,000 of computer equipment, terms n/30.

Instructions

a. Compute the gross profit on Computer Resources’s transactions during December.

b. Compute the gross profit on Computer Resources’s transactions during December if a cash-basis accounting system was used.

c. Explain the difference between the results in a and b.

d. Assume that the fair value of Computer Resources’s inventory at December 31 is $375,000. A potential lender asks Computer Resources to prepare a fair-value–based balance sheet. Prepare the journal entry to reflect inventory at fair value. Comment on how a retailer might determine fair value for inventory items.