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Comprehensive cycle problem: perpetual system

At the beginning of 2005, the C. Eaton Company had the following balances in its accounts:

Cash $6,500
Inventory $9,000
Retained Earnings $15,500

During 2005, the company experienced the following events.

1. Purchased inventory with a list price of $3,000 on account from Blue Company under terms 1/10, n/30. The merchandise was delivered FOB shipping point. Freight cost of $150 was paid in cash.
2. Returned $300 of the inventory that it had purchased because the inventory was damaged in transit. The freight company agreed to pay the return freight cost.
3. Paid the amount due on its account payable to Blue Company but not within the cash discount period.
4. Sold inventory with a list price of $6,000 and a cost of $3,500 on account, under terms 2/10, n/45.
5. Received returned merchandise from a customer. The merchandise originally cost $400 and was sold to the customer for $650 cash. The customer was paid $650 cash for the returned merchandise.
6. Delivered merchandise in Event 4 FOB destination. Freight costs of $80 were paid in cash.
7. Collected the amount due on the account receivable but not within the discount period.
8. Took a physical cost indicating that $8,300 of inventory was on hand at the end of the accounting period.


a. Identify these events as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE).

b. Prepare an income statement, a statement of changes in stockholders' equity, a balance sheet, and a statement of cash flows.

Solution Preview

“The event type is classified as
• Asset Source Transactions result in an increase in an asset account and an increase in a claims account. Examples include acquiring cash from owners, borrowing money from a bank, earning cash revenue or revenue on account, and purchasing inventory, supplies, or other assets on account.

• Asset Use Transactions result in a decrease in an asset account and a decrease in a claims account. Examples include paying cash dividends to owners, paying off debt, recognizing depreciation expense, paying cash expenses, and writing down assets to market value.

• Asset Exchange Transactions result in a decrease in one asset account and an increase in another asset account. Examples include the cash purchase of inventory, supplies, or other assets, the collection of accounts receivable, and trading physical assets ...

Solution Summary

The solution explains the classification of the given transactions and the preparation of financial statements