Case:

Evil Empire Inc. is a wholesaler that sells three lines of sound systems. Pertinent details of the company follow: ? EEI purchases and resells the outdoor Product A and jogging Product B sound systems without alteration. For its indoor Product C sound system, EEI purchases the three component parts from separate producers and then assembles the finished product on its premises. ? EEI tracks its inventory using a perpetual inventory system and values it using the weighted average cost formula. ? The terms of all of EEI's sales are FOB shipping point — that is, EEI records revenue when the product is shipped from its premises. EEI normally offers credit terms of 2/10, net 30 to its retail clients. The company records its accounts receivable using the gross method. EEI sells strictly on a cash basis to unestablished new clients. EEI also occasionally offers extended payment terms to well-established clients and tailors the credit terms to suit the specific situation. ? The terms of all of EEI's purchases are FOB destination — that is, EEI takes ownership of the goods when received from the vendor. All but one of EEI's suppliers offer 30-day credit terms to the company. The exception is Active Co., which supplies the jogging sound system (Product B). Active Co. offers EEI terms of 1/15, net 30. EEI records its accounts payable using the gross method. ? While the resulting journal entries will all be entered to the nearest dollar, EEI rounds all dollar-based calculations to the nearest whole cent (for example, $21.46) and percentages to two decimal places (for example, 13.41%). You should do likewise in your supporting calculations. ? EEI's opening inventory as at December 1, 20X4, follows: Product Units Cost per unit Total cost Finished inventory   Outdoor A 384 $110 $ 42,240 Jogging B 422 46  19,412 Indoor C 239 132  31,548 

Work-in-progress inventory   Receivers C1 62 50  3,100 Amplifiers C2 58 40  2,320 Speakers C3 115 20  2,300   $ 100,920 

 

Product C — components of indoor sound system and number of units Receiver (C1) 1 unit Amplifier (C2) 1 unit Speaker (C3) 2 units Conversion costs $5 per finished indoor sound system (Product C) 

 

Note: Conversion costs are debited to inventory and credited to wage expense. 

 

? EI maintains separate general ledger accounts for finished inventory and work-in-progress (WIP) inventory. ? EEI's inventory-related transactions for December 20X4 (not recorded in the company's accounting records) are as follows: December 1, 20X4 i) EEI received 100 units of Product A from Electronics Ltd. at a cost of $105 per unit plus a total of $200 freight-in. ii) EEI received 200 units of Product B from Active Co. at a total cost of $8,800. iii) EEI received a $9,800 payment on account from Mega Retailer Corp. (MRC) within the 10-day discount period for goods sold in November 20X4. 

December 6, 20X4 iv) EEI sold 80 units of Product A for $16,000 cash. 

December 8, 20X4 v) EEI received 200 units of Product A from Electronics Ltd. at a cost of $98 per unit plus $300 freight-in and $980 GST. vi) EEI received an $11,500 payment on account from MRC. This payment was received 25 days after the invoice date for goods sold in November 20X4. vii) EEI assembled 50 units of Product C. 

December 12, 20X4 viii) EEI paid the invoice pertaining to the units of Product B received on December 1, 20X4. ix) EEI accepted a one-year, interest-free, $57,000 note from Stereo Discounter Corp. (SDC) in exchange for 200 units of Product C. The cash-equivalent sales price for the goods was $54,000. x) EEI shipped 100 units of Product A to Clarity Inc. and invoiced the company for $20,000. 

December 18, 20X4 xi) EEI received payment in full from Clarity for the sale of Product A on December 12, 20X4. xii) EEI shipped 300 units of Product B to Clarity on a priority basis and invoiced the customer for $27,700, including $100 of freight costs. 

December 24, 20X4 xiii) EEI sold 150 units of Product A to Renegade Retail Corp. (RRC) for $30,000 before an expected price increase took effect on January 1, 20X5. As RRC does not have sufficient storage space on its premises, EEI has agreed to store the inventory at its premises on behalf of the customer. Given the generic nature of the product, and as EEI almost always has this inventory in stock, EEI did not specifically segregate the inventory that it agreed to sell to RRC. 

December 30, 20X4 xiv) EEI shipped 50 units of Product A to RRC relating to the sale of goods on December 24, 20X4. xv) EEI received payment in full from Clarity for the sale of Product B on December 18, 20X4. ? During December 20X4, several factors impacted both the price that EEI pays for its product and the price for which it can sell the finished product. EEI compiled the information that follows, with the effective date of these costs and prices being December 31, 20X4. 

Replacement cost Sale price Cost to sell Product A $80 $150 $3 Product B 25 38 2 Product C 270 0 Component C1 40  Component C2 30  Component C3 15    ? EEI reviewed its accounts receivable at its December 31, 20X4, year end and determined that it needed an allowance for doubtful accounts equal to the following: o 1% of accounts aged from 0 to 30 days o 2% of accounts aged from 31 to 60 days o 5% of accounts aged from 61 to 90 days o 50% of accounts aged 91 days and longer ? A summary of EEI's accounts receivable and other pertinent information follows: Summary aging report — December 31, 20X4 0-30 31-60 61-90 91+ Total Balance 89,142 45,242 13,462 6,312 154,158 Provision 1% 2% 5% 50%  

 

Allowance for doubtful accounts — January 1, 20X4 $3,542 Bad debt expense provided for during 20X4 4,800 Write-offs of accounts receivable during 20X4 4,721 Recovery of bad debts in 20X4 previously written off 892 

Questions:

d) Record the journal entries pertaining to the identified transactions in the same order as those presented in the question. Ensure that the journal entries are dated and include a brief description of the pertinent details. Supporting calculations are to be referenced or included in the description. 

e) Record the year-end adjusting journal entries pertaining to: (i) the valuation of inventory at the lower of cost and net realizable value; (ii) the bad debt expense for the year; and (iii) the accrual of interest revenue