Reference no: EM133126934
Question - Waikato Ltd, a clothing retailer, sells both seasonal and all-season clothes. The company uses the perpetual inventory method and the First In, First Out cost flow assumption. The company has a clearance sale policy regarding seasonal clothes. Seasonal clothing items are to be sold at a 50% discount of the normal selling price during the final month of each season. The company completes purchasing seasonal clothes before the start of each season.
It had the following transactions for sweaters during the period of May-July 2020. The normal selling price of each sweater is $20. It had no beginning inventory of sweaters. The winter season starts in June and ends on 31August. The financial year ends on 31 July 2020.
10 May 2020 Purchased 2000 sweaters on credit, costing $10 per unit.
14 May 2020 Purchased 1000 sweaters on credit, costing $11 per unit.
20 May 2020 Purchased 1500 sweaters on credit, costing $12 per unit.
June 2020 Sold 2500 sweaters for cash.
July 2020 Sold 1500 sweaters for cash.
Required -
1. Give journal entries to record the above transactions in the books of Waikato Ltd.
2. Give the journal entry if sweaters are to be written down to their net realizable value. Show the calculation.
3. Prepare the relevant sections of the income statement and the statement of financial position and present the effects of these transactions and inventory policies in these two statements, assuming that the sweaters are the only inventory left as at the year end.