Boston Bait Shop uses a periodic inventory system.

At December 31, Year 2, the accounting

records include the following information:

Inventory (as of December 31, Year 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,800

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,600
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,200

A complete physical inventory taken at December 31, Year 2, indicates merchandise costing
$3,000 remains in stock.

a. How were the amounts of beginning and ending inventory determined?

b. Compute the amount of the cost of goods sold in Year 2.
c. Prepare two closing entries at December 31, Year 2: the first to create a Cost of Goods
Sold
account with the appropriate balance and the second to bring the Inventory account up-to-
date.
d. Prepare a partial income statement showing the shop’s gross profit for the year.
e. Describe why a company such as Boston Bait Shop would use a periodic inventory system
rather than a perpetual inventory system.

Solution:
Step 1/5
Step 1: Determine the amount of beginning inventory. - The beginning
inventory is given as $2,800.

Step 2/5
Step 2: Determine the amount of ending inventory. - The physical
inventory taken at December 31, Year 2, indicates merchandise costing
$3,000 remains in stock.

Step 3/5
Step 3: Calculate the cost of goods sold (COGS) in Year 2. - COGS can
be calculated using the formula: Beginning Inventory + Purchases -
Ending Inventory. - Beginning Inventory = $2,800 - Purchases = $30,200
- Ending Inventory = $3,000 - COGS = $2,800 + $30,200 - $3,000 =
$30,000
Step 4/5
Step 4: Prepare the closing entries at December 31, Year 2. - First
closing entry: Debit the Cost of Goods Sold account for $30,000 and
credit the Income Summary account for $30,000. - Second closing entry:
Debit the Income Summary account for $30,000 and credit the Inventory
account for $30,000.

Answer
Step 5: Prepare a partial income statement showing the shop's gross
profit for the year. - Gross Profit = Net Sales - COGS - Net Sales =
$79,600 - COGS = $30,000 - Gross Profit = $79,600 - $30,000 =
$49,600
Final Answer:
a. The beginning inventory was determined to be $2,800 and the ending
inventory was determined to be $3,000.
b. The cost of goods sold in Year 2 is $30,000.
c. The first closing entry debits the Cost of Goods Sold account for
$30,000 and credits the Income Summary account for $30,000. The
second closing entry debits the Income Summary account for $30,000
and credits the Inventory account for $30,000.
d. The shop's gross profit for the year is $49,600. A company such as
Boston Bait Shop would use a periodic inventory system rather than a
perpetual inventory system because it is simpler and less costly to
maintain. With a periodic inventory system, the inventory is only counted
periodically, such as at the end of the year, whereas a perpetual
inventory system requires continuous tracking of inventory levels.