Thompson Plumbing Inc. is a wholesaler of plumbing accessories. Thompson Plumbing began operations in September of the current year and engaged in the following transactions during September and October of this year. Thompson Plumbing uses a perpetual inventory system.

Sept. 3 Purchased $240,000 of plumbing accessories, terms n/30.

Sept. 15 Sold $180,000 of plumbing accessories, terms n/60. The cost of the accessories sold is $120,000.

Sept. 28 Purchased $360,000 of plumbing accessories, terms n/45.

Oct. 3 Settled the $240,000 purchase of September 3.

Oct. 15 Sold $450,000 of plumbing accessories, terms n/60. The cost of the accessories sold is $300,000.

Oct. 27 Purchased $540,000 of plumbing accessories, terms n/30.

Instructions

a. Compute the gross profit on Thompson Plumbing’s transactions during September and October.

b. Compute the gross profit on Thompson Plumbing’s transactions during September and October 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 Thompson Plumbing’s inventory at October 31 is $900,000. A potential lender asks Thompson Plumbing to prepare a fair-value–based balance sheet. Prepare the journal entry to reflect inventory at fair value. Comment on how a wholesaler might determine fair value for inventory items.