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The inventory transactions of VTS Corporation are shown below. Date Transaction Number of Units Unit Cost/PriceJanuary 1 Beginning inventory 500 $10February 25 Sale 300 20May 21 Purchase 400 12July 15 Purchase 500 15December 10 Sale 800 20All purchase/sale transactions are made on credit. The company uses the FIFO method and perpetual inventory system to record transactions. Which of the following will be recorded on February 25?Multiple ChoiceDebit to Accounts Receivable for $3,000Credit to Sales Revenue for $6,000Debit to Cost of Goods Sold for $6,000Credit to Inventory for $5,000

Question

The inventory transactions of VTS Corporation are shown below. Date Transaction Number of Units Unit Cost/PriceJanuary 1 Beginning inventory 500 10February25Sale30020May21Purchase40012July15Purchase50015December10Sale80020Allpurchase/saletransactionsaremadeoncredit.ThecompanyusestheFIFOmethodandperpetualinventorysystemtorecordtransactions.WhichofthefollowingwillberecordedonFebruary25?MultipleChoiceDebittoAccountsReceivablefor10February 25 Sale 300 20May 21 Purchase 400 12July 15 Purchase 500 15December 10 Sale 800 20All purchase/sale transactions are made on credit. The company uses the FIFO method and perpetual inventory system to record transactions. Which of the following will be recorded on February 25?Multiple ChoiceDebit to Accounts Receivable for 3,000Credit to Sales Revenue for 6,000DebittoCostofGoodsSoldfor6,000Debit to Cost of Goods Sold for 6,000Credit to Inventory for $5,000

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Solution

On February 25, VTS Corporation sold 300 units at a price of 20each.Thismeansthatthetotalsalesrevenueforthistransactionis300units∗20 each. This means that the total sales revenue for this transaction is 300 units * 20/unit = $6,000.

Since the company uses the FIFO (First-In, First-Out) method, the cost of the units sold is based on the cost of the earliest purchased units. The beginning inventory shows that there were 500 units at a cost of 10each.Therefore,thecostofthe300unitssoldis300units∗10 each. Therefore, the cost of the 300 units sold is 300 units * 10/unit = $3,000.

So, the entries that will be recorded on February 25 are:

  1. Debit to Accounts Receivable for $6,000: This is the amount that the customers owe to the company for the units sold on credit.

  2. Credit to Sales Revenue for $6,000: This represents the revenue earned from the sale of the 300 units.

  3. Debit to Cost of Goods Sold for $3,000: This represents the cost of the inventory items that were sold.

  4. Credit to Inventory for $3,000: This reduces the inventory account by the cost of the units sold.

Therefore, the correct answer is:

  • Debit to Accounts Receivable for $6,000
  • Credit to Sales Revenue for $6,000
  • Debit to Cost of Goods Sold for $3,000
  • Credit to Inventory for $3,000

The option "Credit to Inventory for 5,000"isincorrectbecausetheinventoryisreducedbythecostoftheunitssold,whichis5,000" is incorrect because the inventory is reduced by the cost of the units sold, which is 3,000, not $5,000.

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