Question 4.8: Kahn Distribution Limited (KDL) purchases inventory items fo...
Kahn Distribution Limited (KDL) purchases inventory items for resale. During 2006, Kahn had the following transactions:
Inventory sales during the year were 5,600 units at $50 per unit. KDL determines that there were 2,000 remaining units of inventory and specifically identifies that 1,900 were those purchased in the fourth quarter and 100 were purchased in the third quarter. What are the revenue and expense associated with these transactions during 2006?
| Inventory Purchases | |
| First quarter | 2,000 units at $40 per unit |
| Second quarter | 1,500 units at $41 per unit |
| Third quarter | 2,200 units at $43 per unit |
| Fourth quarter | \underline{1,900} units at $45 per unit |
| Total | 7,600 units at a total cost of $321,600 |
The revenue for 2006 would be $280,000 (5,600 units × $50 per unit).
Initially, the total cost of the goods purchased would be recorded as inventory (an asset) in the amount of $321,600. During 2006, the cost of the 5,600 units sold would be expensed (matched against the revenue) while the cost of the 2,000 remaining unsold units would remain in inventory as follows:
To confirm that total costs are accounted for: $231,800 + $89,800 = $321,600
The cost of the goods sold would be expensed against the revenue of $280,000 as follows:
The remaining inventory amount of $89,800 will be matched against revenue in a future year when the inventory items are sold.
| Cost of Goods Sold | ||
| From the first quarter | 2,000 units at $40 per unit = | $80,000 |
| From the second quarter | 1,500 units at $41 per unit = | $61,500 |
| From the third quarter | 2,100 units at $43 per unit = | \underline{\$90,300} |
| Total cost of goods sold | $231,800 | |
| Cost of Goods Remaining in Inventory | ||
| From the third quarter | 100 units at $43 per unit = | $4,300 |
| From the fourth quarter | 1,900 units at $45 per unit = | \underline{\$85,500} |
| Total remaining (or ending) | $89,800 | |
| inventory cost |
| Revenue | $280,000 |
| Cost of goods sold | \underline{231,800} |
| Gross profit | \underline{\$ 48,200} |