Natalie asks you the following questions — Because has had such successful first few months she considering other opportunities

Because Natalie has had such a successful first few months, she is considering other opportunities to develop her business. One opportunity is the sale of fine European juicing machines. The owner of Kzinski Supply Co. has approached Natalie to become the exclusive Canadian distributor of these fine juicers. The current cost of a juicer is approximately $525 Canadian, and Natalie would sell each one for $1,050. Natalie comes to you for advice on how to account for these juicers. Each juicer has a serial number and can be easily identified.

Natalie asks you the following questions:

1. “Would you consider these juicers to be inventory? Or should they be classified as supplies or equipment?”

2. “I’ve learned a little about keeping track of inventory using both the perpetual and the periodic systems of accounting for inventory. Which system do you think is better? Which one would you recommend for the type of inventory that I want to sell?”

3. “How often do I need to count inventory if I maintain it using the perpetual system? Do I need to count inventory at all?”

In the end, Natalie decides to use the perpetual inventory system. The following transactions happen during the month of June 2017:

June 6 Purchased and received three deluxe juicers on account from Kzinski Supply Co. for $1,575, FOB shipping point, terms n/30.

7 Paid $60 freight on the June 6 purchase.

8 Returned one of the juicers to Kzinski because it was damaged during shipping. Kzinski issued Santé Smoothies a credit note for the cost of the juicer plus $20 for the cost of freight that was paid on June 6 for one juicer.

9 Collected $500 of the accounts receivable from May 2017.

13 Two deluxe juicers were sold on account for $2,100, FOB destination, terms /30. The juicers were sold to Koebel’s Family Bakery, the bakery that is owned and operated by Natalie’s mom and dad. Natalie expects that the juicers will be paid for in early August.

14 Paid the $75 of delivery charges for the two juicers that were sold on June 13.

14 Purchased and received four deluxe juicers on account from Kzinski Supply Co. for $2,100, FOB shipping point, terms n/30.

15 Received a deposit of $125 from another yoga studio for smoothies during the month of August.

20 Natalie was concerned that there was not enough cash available to pay for all of the juicers purchased. She invested an additional $1,000 cash in Santé Smoothies.

21 Paid $80 freight on the June 14 purchase.

21 Sold two deluxe mixers for $2,100 cash.

28 Issued a cheque to an assistant for 20 hours worked in June. The assistant earns $12 an hour.

29 Paid a $154 cellphone bill ($88 for the May 2017 account payable and $66 for the month of June). (Recall that the cellphone is only used for business purposes.)

29 Paid Kzinski all amounts due.

As at June 30, the following adjusting entry data are available:

1. A count of supplies reveals that none were used in June.

2. Another month’s worth of depreciation needs to be recorded on the juicing equipment bought in April and May. (Recall that the equipment cost $1,550 and has a useful life of three years or

36 months.)

3. An additional month’s worth of interest on her mother’s loan needs to be accrued. (Recall that Santé Smoothies borrowed $3,000 and the interest rate is 3%.)

4. An analysis of the Unearned Revenue account reveals that no smoothies have been delivered during the month of June. As a result, the opening balance in Unearned Revenue is still unearned. Natalie has been in contact with the yoga studios that have provided deposits for early June.

5. An inventory count of juicers at the end of June reveals that Natalie has two juicers remaining.

Instructions

Using the information from previous chapters and the new information above, do the following:

(a) Answer Natalie’s questions.

(b) Prepare and post to T accounts the June 2017 transactions.

(c) Prepare a trial balance.

(d) Prepare and post the adjusting journal entries required.

(e) Prepare an adjusted trial balance.

(f) Prepare a multiple-step income statement for the month ended June 30, 2017.

(g) Calculate gross profit margin and profit margin.

SOLUTION

(a) Responses to Natalie’s questions

1. The mixers should be classified as inventory as they are for resale.

2. A perpetual inventory system will provide better control over inventory. Because you are dealing with high-value items, you should use the perpetual system. Also because you are dealing with low volumes and not operating a store, the cost of a perpetual system is minimized because it is not necessary to invest in technology such as scanners.

3. You still need to count inventory to ensure that your records are accurate and that the inventory that is supposed to be on hand is actually there. I suggest you should count once a month.

(b)

[($2,100 + $80) ÷ 4 × 2]

28 Salaries Expense 240

Cash (20 x $12) 240

29 Accounts Payable 88

Telephone Expense 66

Cash 154

31 Accounts Payable 3,130

Cash 3,130

(b) and (d)

(c)

SANTÉ SMOOTHIES

Trial Balance

June 30, 2017

Debit Credit