Question
Harborview Trading uses a periodic inventory system. Its adjusted trial balance at December 31, 2025 is shown below.
| Account | Debit | Credit |
|---|
| Cash | 35,850 | |
| Accounts Receivable | 41,000 | |
| Inventory, January 1 | 36,000 | |
| Prepaid Insurance | 3,200 | |
| Equipment | 75,000 | |
| Accumulated Depreciation - Equipment | | 22,500 |
| Accounts Payable | | 31,200 |
| Notes Payable (due 2028) | | 20,000 |
| Share Capital - Ordinary | | 70,000 |
| Retained Earnings (January 1) | | 26,150 |
| Dividends | 8,000 | |
| Sales Revenue | | 284,000 |
| Sales Returns and Allowances | 6,500 | |
| Sales Discounts | 3,500 | |
| Purchases | 168,000 | |
| Purchase Returns and Allowances | | 4,200 |
| Purchase Discounts | | 2,800 |
| Freight-In | 5,600 | |
| Freight-Out | 4,700 | |
| Salaries and Wages Expense | 38,000 | |
| Rent Expense | 12,000 | |
| Insurance Expense | 2,400 | |
| Depreciation Expense | 7,500 | |
| Interest Expense | 1,700 | |
| Income Tax Expense | 11,900 | |
| 460,850 | 460,850 |
Additional information:
- A physical count on December 31, 2025 determined that inventory on hand was $42,500.
- The note payable is due in 2028; interest for 2025 has been paid in full.
- The income tax rate is 25%; all 2025 income tax has been paid.
- Dividends of $8,000 were declared and paid during the year.
Instructions:
- Prepare a multi-step income statement for the year ended December 31, 2025, showing the full cost of goods sold computation.
- Prepare a classified statement of financial position at December 31, 2025. (Retained earnings must be updated for net income and dividends.)
Statements in this challenge
- Income StatementIncome Statement
- Statement of Financial PositionBalance Sheet
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 2 — Inventories; IFRS 15 — Revenue from Contracts with Customers
Work each transaction from the perspective stated in the question: the same shipment is a purchase to one party and a sale to the other, and the entries are not mirror images because only the seller recognises revenue and cost of sales. Read the credit terms and the freight terms before writing anything.
Common mistakes
- Ignoring the shipping terms — they decide who owns goods in transit and who bears the freight.
- Applying a settlement discount to the gross invoice when returns have already reduced the amount owed.
- Confusing a trade discount, which never enters the records, with a settlement discount, which does.
Further readingIAS 2: costing methods and NRV