Question

Northwest Fur Co. started 2021 with $110,000 of merchandise inventory on hand. During 2021, $540,000 in merchandise was purchased on account with credit terms of 3/15, n/45. All discounts were taken. Purchases were all made f.o.b. shipping point. Northwest paid freight charges of $8,800. Merchandise with an invoice amount of $3,100 was returned for credit. Cost of goods sold for the year was $375,000. Northwest uses a perpetual inventory system. What is ending inventory assuming Northwest uses the gross method to record purchases?a.$659,500.
b.$639,600.
c.$656,100.
d.$639,747.

Answer 1

Answer:

B) $639,600.

Explanation:

when you use the gross method to record purchases, the journal entries should be as follows:

Dr Merchandise inventory 540,000

    Cr Accounts payable 540,000

Dr Merchandise inventory 8,800 (freight charges)

    Cr Cash 8,800

Dr Accounts payable 3,100 (returned merchandise)

    Cr Merchandise inventory 3,100

Dr Accounts payable 536,900

    Cr Cash 520,793

    Cr Merchandise inventory 16,107

Merchandise inventory = initial balance + purchase + freight charges - returns - purchase discounts = $110,000 + $540,000 + $8,800 - $3,100 - 16,107 = $639,593 ≈ $639,600 (it's the closest option).