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 $200,000 of plumbing accessories, terms n/30.
Sept. 15 Sold $150,000 of plumbing accessories, terms n/60. The cost of the accessories sold is $100,000.
Sept. 28 Purchased $300,000 of plumbing accessories, terms n/45.
Oct. 3 Settled the $200,000 purchase of September 3.
Oct. 15 Sold $375,000 of plumbing accessories, terms n/60. The cost of the accessories sold is $250,000.
Oct. 27 Purchased $450,000 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 $750,000. 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.