Choculator’s preliminary 2014 net income was $5,400,000 without considering items a.-f. below. Determine the correct 2014 net income by adjusting this amount on the next page for the appropriate amounts from items a-f.
a. On October 1, 2014, Choculator sold merchandise to CPAsRUs and received an 8-month noninterest-bearing $300,000 note in payment. An appropriate discount rate was 12%.
b. On December 27, 2014, Choculator received payment for merchandise sold on account for $600,000, terms 2/10, net 30. The customer paid within the discount period. Choculator used the gross method for recording sales discounts.
c. On December 31, 2014, the balance in accounts receivable was $1,200,000. On this date, Choculator issued a 12%, $1,000,000 short-term note to First Bank and assigned accounts receivable of $1,200,000 as collateral. First Bank charged a fee of 3% of the assigned receivables.
d. On December 31, 2014, Choculator recorded the COGS entry using the average cost method. The company sold 1,500,000 units in 2014, reflecting a disappointing drop in demand for milk chocolate products as U.S. consumers switched to dark chocolate for its many health benefits.
Inventory at December 31, 2013 (800,000 units) $4,600,000
2014 purchases (800,000 units) 1,000,000
$5,600,000
e. Assume that before the end of 2014, the FASB changed the definition of market value to be net realizable value for the lower-of-cost-or-market rule.
On December 31, 2014, Choculator applied the LCM rule to ending inventory and recorded the inventory writedown, if necessary. Any writedown is recorded as a separate loss. The selling price and disposal costs of ending inventory were estimated to be $330,000 and $30,000, respectively.
f. On December 31, 2014, Choculator recorded the necessary adjusting entries, if any, for items a. – c. above.