problem 6.1B

Big Oak Lumber is a lumber yard on Angel Island. Some of Big Oaks transactions during the current

year are as follows:

Apr. 15 Sold lumber on account to Hard Hat Construction, $19,700. The inventory subsidiary

ledger shows the cost of this merchandise was $10,300.

Apr. 19 Purchased lumber on account from LHP Company, $3,700.

May 10 Collected in cash the $19,700 account receivable from Hard Hat Construction.

May 19 Paid the $3,700 owed to LHP Company.

Dec. 31 Big Oaks personnel counted the inventory on hand and determined its cost to be

$114,000. The accounting records, however, indicate inventory of $116,500 and a cost

of goods sold of $721,000. The physical count of the inventory was observed by the

companys auditors and is considered correct.

Instructions

a. Prepare journal entries to record these transactions and events in the accounting records of Big

Oak Lumber. (The company uses a perpetual inventory system.)

b. Prepare a partial income statement showing the companys gross profit for the year. (Net sales for the year amount to $1,422,000.)

c. Big Oak purchases merchandise inventory at the same wholesale prices as other lumber yards.

Because of its remote location the company must pay between $8,000 and $18,000 per year in

extra transportation charges to receive delivery of merchandise. (These additional charges are

included in the amount shown as cost of goods sold.)

Assume that an index of key business ratios in your library shows lumber yards of Big

Oaks approximate size (in total assets) average net sales of $1 million per year and a gross

profit rate of 22 percent.

Is Big Oak able to pass its extra transportation costs on to its customers? Does the business

appear to suffer or benefit financially from its remote location? Explain your reasoning and

support your conclusions with specific accounting data comparing the operations of Big Oak Lumber with the industry averages.