PRC-1 · Chapter 7 · Question 72 of 100
Jaffer Associates sold a generator for Rs. 1,440,000 net of discounts. The business normally sells items at a 25% mark-up on cost and uses a perpetual inventory system. What is the correct entry to update the inventory account?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Debit Cost of Sales Rs. 1,152,000 & Credit Inventory Rs. 1,152,000
Explanation
Sales = Cost + Mark-up. 1,440,000 = Cost * 1.25. Therefore, Cost = 1,440,000 / 1.25 = Rs. 1,152,000. The perpetual entry removes this cost from inventory: Debit Cost of Sales 1,152,000, Credit Inventory 1,152,000.
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