Use the following image(if needed) to answer the question below.
Purchase discounts reduce the amount recorded for the buyers inventory.
o True
o False
4 Goals: Inventory purchases (discounts, returns), inventory sales (discounts, returns), inventory shrink 1. Watkins Glen Inc. purchases and receives $100,000 of inventory on March 15, 2016 with terms of 2/10, n60. On March 20, Watkins Glen returns $10,000 of the previous purchase to the vendor. a. How does the purchase of inventory affect the balance sheet and income statement? Increases assets (inventory), increases liabilities (A/P); no effect on income statement. b. Assuming that Watkins Glen's policy is to use purchase discounts, how does the discount affect the balance sheet and income statement? Reduces assets (inventory), reduces liabilities (A/P); no effect on income statement. c. Make the JE for the purchase of the inventory using the discount. 3/15 Inventory $100,000 (Increase) A/P $100,000 (Increase) d. How does the return of inventory to the vendor affect the balance sheet and income statement? Reduces assets (inventory), reduces liabilities (A/P); no effect on income statement. e. Make the JE for the return of the goods to the vendor. 3/20 A/P $ 10,000 (decrease) Inventory $ 10,000 (decrease) f. How does the payment of the purchase using the discount affect the balance sheet and income statement? Reduces liabilities (A/P), reduces inventory (by the amount of the discount), reduces assets (Cash) g. Make the JE for the payment of the purchase using the discount. 3/25 $ 90,000 (decrease) Inventory $ 1,800 ($90,000 x 2%, decrease) Cash $ 88,200 (decrease) 2. Watkins Glen Inc. sells $100,000 of inventory for $225,000 on April 15, 2016 with terms of 3/10, n30. On April 20. the customer returns $45,000 (customer's cost) of inventory from the previous sale to Watkins Glen. a. How does the sale of inventory affect the balance sheet and income statement (for Watkins Glen)? Net increase in assets (A/R increase is greater than the inventory decrease), and net increase in SHE (revenue is greater than COGS, so net increase in RE; revenue is greater than COGS, so net income increases on the income statement. b. Assuming that the customer's policy is to use purchase discounts, how does the discount affect Watkins Glen's balance sheet and income statement? Reduces assets (A/R), reduces SHE (R/E); effectively reduces previously recognized revenue on the income statement. c. Make the JE for the sale of the inventory for Watkins Glen. 4/15 AR $225,000 (increase) COGS $100,000 (increase) Inventory $100,000 (decrease) Revenue $225,000 (increase) d. How does the return of inventory to Watkins Glen affect the balance sheet and income statement for Watkins Glen? Reduces assets (inventory), reduces liabilities (A/P); no effect on income statement. e. Make the JE for Watkins Glen for the return of the inventory. 3/20 Inventory $20,000 (increase) Sales returns $45,000 (decreases revenue) COGS $20,000 (decrease) AR $45,000 (decrease) f. Make the JE for the customer's payment using the discount. 3/25 Cash $174,600 (increase) Sales discounts $ 5,400 ($180,000 x 3%, decrease revenue) AR $ 180,000 (decrease) 3. At December 31, 2016, Keyo-Depot, Inc. performs a physical inventory count, which indicates a value of $1,000,000, while the inventory records indicate a value of $1,100,000. a. What is the issue? The issue is inventory shrinkage, which is an unaccountable loss of inventory. b. What are some explanations for the inventory discrepancy between the physical and the electronic records? The loss could be an input error for the electronic records (i.e., incorrect quantity recorded for goods purchased or sold), customer or employee theft, misplaced inventory, or incorrect goods shipped to customer. c. How will Keyo-Depot record the loss? Keyo-Depot will reduce the amount of inventory to match the physical inventory count, and report the loss in COGS
