Hearthstone sells commercial kitchen equipment. At December 31, 2015, Hearthstone's inventory amounted to $750,000. During the first week of January 2016, the company made only one purchase and one sale. These transactions were as follows:

Jan. 5 Purchased 90 machines from Rock Creek Corporation. The total cost of these machines was $60,000, terms 3/10, n/60.

Jan. 10 Sold 45 different types of products on account to Harolds, Inc. The total sales price was $42,000, terms 5/10, n/90. The total cost of these 45 units to Hearthstone was $15,000 (net of the purchase discount).

Hearthstone has a full-time accountant and a computer-based accounting system. It records sales at the gross sales price and purchases at net cost and maintains subsidiary ledgers for accounts receivable, inventory, and accounts payable.

Instructions

a. Briefly describe the operating cycle of a merchandising company. Identify the assets and liabilities directly affected by this cycle.

b. Prepare journal entries to record these transactions, assuming Hearthstone uses a perpetual inventory system.

c. Explain the information in part b that should be posted to subsidiary ledger accounts.

d. Compute the balance in the Inventory control account at the close of business on January 10.

e. Prepare journal entries to record the two transactions, assuming that Hearthstone uses a periodic inventory system.

f. Compute the cost of goods sold for the two weeks of January assuming use of the periodic system. (Use your answer to part d as the ending inventory.)

g. Which type of inventory system do you think Hearthstone most likely would use? Explain your reasoning.

h. Compute the gross profit margin on the January 10 sales transaction.