Problem
Thompson Plumbing Inc. is a wholesaler of plumbing accessories. Thompson Plumbing began operations in September of the current year and engaged in the following transactions during September and October of this year. Thompson Plumbing uses a perpetual inventory system.
Sept. 3 Purchased $240,000 of plumbing accessories, terms n/30.
Sept. 15 Sold $180,000 of plumbing accessories, terms n/60. The cost of the accessories sold is $120,000.
Sept. 28 Purchased $360,000 of plumbing accessories, terms n/45.page 284
Oct. 3 Settled the $240,000 purchase of September 3.
Oct. 15 Sold $450,000 of plumbing accessories, terms n/60. The cost of the accessories sold is $300,000.
Oct. 27 Purchased $540,000 of plumbing accessories, terms n/30.
Task
A. Compute the gross profit on Thompson Plumbing's transactions during September and October.
B. Compute the gross profit on Thompson Plumbing's transactions during September and October if a cash-basis accounting system was used. (Hint: In a cash-basis system, only transactions that result in cash being received or paid are recorded.)
C. Explain the difference between the results in (A) and (B).
D. Assume that the fair value of Thompson Plumbing's inventory at October 31 is $900,000. A potential lender asks Thompson Plumbing to prepare a fair-value-based balance sheet. Prepare the journal entry to reflect inventory at fair value. Comment on how a wholesaler might determine fair value for inventory items.