What is the balance in the inventory account

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Reference no: EM131524260



Hank Inc. bought an existing business from Al on 1st January 2013. Al developed a new product called Bok-boks, and has established a supply chain to make the products. Hank has plans to open a flagship store in New York to sell the product and is looking to expand the operations to sell Bok-boks around the country through other retailers, as well as set up a new service and repair facility for customers. The company's balance sheet on 1st January, 2013 contained the following balances: Cash 40,000; Inventory ?; Goodwill 170,000; Intangible Assets 230,000; Common Stock 400,000; Additional Paid in Capital 98,000; Retained Earnings -43,000.

The following transactions occurred during the first quarter of 2013.

1. Hank Inc. issued 100,000 new shares of $10 par value for $1,200,000 on 1st January 2013.

2. On the same day, it took out a bank loan for $500,000. The loan carries an interest of 8% which is payable semi-annually on 30th June and 31st December.

3. On the same day, the company leased some property in The Bronx for its corporate offices, and repair and servicing shops. It paid $200,000 for the land and buildings - representing four years' lease rental. Also, it paid advance rent for a whole year on retail stores rented by the company on Fifth Avenue for $120,000.

4. On the same day, furniture and fixtures worth $96,000 was purchased. This included furniture for the corporate office that cost $24,000, and for the retail stores that cost $72,000. It is expected that the furniture at the stores will suffer more wear and tear, and have an estimated life of 4 years, and no salvage value. The office furniture is expected to have a life of 8 years.

5. On January 5th, it received its first shipment of Bok-boks from its suppliers, BB of Taiwan Inc. The cost of the materials received was $740,000. The terms call for payment in 30 days which the company did by sending a money transfer on February 4th. On March 26th, it placed another order with its supplier for $800,000 of Bok-boks which it expects to receive on April 5th.

6. On January 7th, it received an advance order from one of its customers worth $220,000, who enclosed a check with the order. The company banked the check on the same day.

7. On January 10th, the company supplied the goods against the order. The cost of the materials shipped against this order was $132,000.

8. On March 2nd, it made a sale of $540,000 to another customer. The company maintained a gross margin of 40% on this order. The company gave the customer 30 days to pay.

9. Sales at the flagship store during the quarter amounted to $486,000. Sales at the store are made for cash.  Cost of goods sold was $291,600.

10. During the quarter, the company paid salaries of $52,000. Salaries are paid on the first day of each following month. March salaries of $26,000 was due at the end of March and paid by the company on 1st April.

11. On March 25, the CEO of Hank Inc. attended a dinner in Silicon valley on tech processes in Bok-boks and the company believes that the knowledge he gained will reduce expenses by at least $60,000 per year from the next year.

12. The company hired Publicis to manage its advertising. Publicis billed the company $10,000 on 1st March, 2013. The company paid the bill on March 15. At the end of the month, the company determined that of this amount, $5,000 represents expense of the quarter and the balance will be used up in the following quarter.

13. Publicis told the company that since one of the company employees had won a snowboarding gold at the Sochi Olympics, there should be at least 50% better returns on the promotion dollars being spent.


a. What is the balance in the inventory account at the beginning of the year?

b. Record each transaction on a spreadsheet format using the accounting equation. Add columns to the spreadsheet format provided if necessary. Make sure that all the adjusting entries required are recorded on the spreadsheet. Finally, make the closing entry on the spreadsheet, and show the balances that will be carried over to the next quarter. (Note: You must do it in the equation spreadsheet format - doing T-accounts is not acceptable.)  Separately, write out the closing entry in the debit/credit format.

c. Prepare the income statement for the first quarter.

d. Prepare the balance sheet at the end of the quarter.

e. Prepare the statement of cash flows for the quarter, using the indirect method.


The Palo-Alto Company started its operations during the 20th century.  Many years later, the balance sheet for December 31, 2012, showed the following account balances (there were no other accounts listed):

Paid in capital 500, Loan from bank 28, Prepaid advertising 10, PP&E 410, Interest receivable 5, Cash 618, Wages payable 10, Accounts payable 1, Loan to ABC 25, Accumulated   depreciation   145,   Accounts   receivable   120,   Retained earnings 781, Trademark (the right to use the term Knowledge For Action) 195, Prepaid rent 7, Advances to suppliers (?).

During 2013 the following transactions occurred:

1. Cash sales were $1,100, credit sales were $1,200 and the ending balance of accounts receivable was $210.

2. Palo-Alto purchased $1,706 worth of inventory, and paid its suppliers $1,607.

3. Do you know that wearing a helmet while riding your bicycle could save your life?

4. A new machine was purchased, in cash, for $800. Depreciation expense for the year was $100.

5. In addition to the transactions in item 2 above, Palo-Alto purchased, from the supplier it had advances with on December 31, 2012, 120 units of inventories, at $2.50 per unit. By the end of the year, Palo-Alto settled the account and paid it in full.

6. Palo-Alto declared a dividend of $75, and paid in cash $65.

7. ABC paid Palo-Alto $37: $5 for the interest related to last year (recorded as interest receivable in 2012), $7 for interest related to the year 2013, and the rest ($25) against the loan principal.

8. On the first day of the year, Palo-Alto sold to JB&PR, for $195 cash (i.e., neither a gain nor a loss), the right to use the trade name Knowledge For Action.

9. Ending inventory, including the remaining units of Silicon-Valleys, was $116.

10. The employees of Palo-Alto earned $75, and were paid $80 as wages.

11. Rent expense for 2013 was $150, while rent payments were $135.

12. Palo-Alto accrued interest of $8 on its loan from the bank. No payments were made during the year.

13. The CFO of Palo-Alto was invited to a dinner at Jackson Hole. It is believed that the knowledge generated during the dinner will reduce expenses next year by $150.

14. The prepaid advertising was used, in full, during the year.


a. What was the balance of the account Advances to suppliers on December 31, 2012?

b. Record all transactions that occurred during 2013. Use the accounting equation format to record the transactions dividing the worksheet given at the end of this file into sections for the asset side, the liability & equity and income statement columns.

c. For each transaction recorded on the spreadsheet, make the journal entries in the debit/credit format. Create T-accounts and show how the journal entries will be posted into the T-accounts.

d. Prepare the closing entry for the year 2013 (enter it in the spreadsheet) and prepare the post-closing trial balance. Also, record the closing entry as a journal entry in the debit/credit format.

e. Prepare an Income Statement for the year ended December 31, 2013.

f. Prepare a Balance Sheet for December 31, 2013.

g. Prepare a Statement of Cash Flows for the year ended December 31, 2013.

h. What is the company's ROA? What is its ROE? Decompose its ROA and comment.


Excerpts from a previous annual report of Hudson Trading Co. Inc. are given below:

($ in millions) (From the Balance Sheet)

February 1 2007

February 3 2006


Cash and cash equivalents

$ 201





Merchandise inventories




Accounts payable



(From the Income Statement)






Cost of goods sold



Given below are the account flow for Inventory, Payables, and Receivables. For this exercise, assume that all sales and all purchases are made by the company on credit. Cost of goods sold represents the inventory cost of goods sold. Since Hudson is a retailer, all purchases are for inventory.  Fill in the amounts in the table below.


Beginning balance


Add: Purchases

Subtract: COGS

Ending balance


Accounts Payable

Beginning balance


Add: Purchases

Subtract: Payments

Ending balance


Accounts Receivable

Beginning balance


Add: Sales

Subtract: Collections

Ending balance


Reference no: EM131524260

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