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PROBLEM 6.7A Accrual Accounting, Cash Flow, and Fair Value 106-1, L06-3.0L06-6 Thompson Plumbing Inc. is a wholesaler of plumbing accessories. Thompson Plumbing began operations in

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PROBLEM 6.7A Accrual Accounting, Cash Flow, and Fair Value 106-1, L06-3.0L06-6 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 Page 284 Sept. 3 Sept. 15 Sept. 28 Oct. 3 Oct. 15 Oct. 27 Purchased $240.000 of plumbing accessories, terms n/30. Sold $180,000 of plumbing accessories, terms 1/60. The cost of the accessories sold is $120,000. Purchased $360,000 of plumbing accessories, terms n/45 Settled the $240,000 purchase of September 3. Sold $450.000 of plumbing accessories, terms n/60. The cost of the accessories sold is $300,000 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. (Hint: In a cashbasis system, only transactions that result in cash being received or paid are recorded.) 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 faiwalue-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. (Hint: Increase the Inventory account by the difference between fair value and book value with the offset to an account titled Revaluation of Inventory to Market Value) 1

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