Question 3

Building Supplies Inc. (BSI) sells various construction-related materials to builders and retail customers.

BSI purchases its inventory from various vendors on trade terms. Most suppliers offer BSI 30-day terms; however, one supplier offers BSI credit terms of 2/10, net 30. BSI made two purchases from this supplier during 20X7:

• On April 20, BSI purchased $20,000 of inventory. The invoice was paid on April 29.

• On October 18, BSI purchased $30,000 of inventory. The invoice was paid on October 31.

BSI uses the net method to value its inventory when discounts for early payment are offered by suppliers.

BSI’s inventory holdings for its year ended December 31, 20X7, are available in Excel in the Project 1 Data file. The company applies the lower of cost and net realizable value (LCNRV) rule when valuing inventory for financial statement reporting purposes.

Required:

a) Prepare the journal entries to record the two inventory purchases detailed above, together with payment of the related invoices.

b) Determine the LCNRV for each item and the inventory as a whole. Prepare a journal entry to adjust the inventory to the LCNRV.

Ensure that your journal entries include an explanation as to the nature of the transaction.

Prep-IF1-ASN02