Ranns Supply uses a perpetual inventory system. On January 1, its inventory account had a beginning balance of 6,450,000. Ranns engaged in the following transactions during the year:.
1. Purchased merchandise inventory for 9,500,000
2. Generated net sales of 26,000,000
3. Recorded inventory shrinkage of 10,000 after taking a physical inventory at year-end
4. Reported gross profit for the year of 15,000,000 in its income statement
A. At what amount was Cost of Goods Sold reported in the company's year-end income statement?
B. At what amount was Merchandise Inventory reported in the company's year-end balance sheet?
C. Immediately prior to recording inventory shrinkage at the end of the year, what was the balance of the Cost of Goods Sold account? What was the balance of the Merchandise Inventory account?

Part A

Cost of Goods Sold reported in the company's year-end income statement is $11000000

Part B

Merchandise Inventory reported in the company's year-end balance sheet is $84000000

Part C

The balance of the Cost of Goods Sold account  Immediately prior to recording inventory shrinkage is $ 10000000

The balance of the Merchandise Inventory account  Immediately prior to recording inventory shrinkage is $85000000

Explanation:

Cost of Goods Sold

Ranns Supply use the perpetual inventory system. This means that cost of goods sold is calculated after every sale agreement.

In this case Cost of Sales figure reported at company`s year end can be calculated using missing figure approach in the Income Statement

Calculation of the Cost of Sales figure is as follows:

Net Sales $2600000 - Gross Profit $15000000 = $1100000

Merchandise

The merchandise account records assets of inventory in hand during the year.

The Merchandise used during the year should match with the cost of sales figure.But if the figure is lower than the cost of sales figure, then inventory was written down to its replacement value in terms of IAS 2.

Calculation of Merchandise in Hand is as follows:

Purchase of Merchandise $9500000 - Shrinkage During the year $10000000 - Write down of Inventory $1000000 = $ 84000000

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