c08BExercises.qxd 11/21/12 10:16 PM Page B EXERCISES E8-1B (Inventoriable Costs) Presented below is a list of items that may or may not be reported as inventory in a company’s December 31 balance sheet Goods sold where large returns are predictable Short-term investments in stocks and bonds that will be resold in the near future Office supplies Goods sold f.o.b shipping point that are in transit at December 31 Goods sold on an installment basis (bad debts can be reasonably estimated) Factory supplies Freight charges on goods purchased Goods out on consignment at another company’s store Goods sold f.o.b destination that are in transit at December 31 Interest costs incurred for inventories that are routinely manufactured Goods purchased f.o.b shipping point that are in transit at December 31 Goods held on consignment from another company Materials on hand not yet placed into production by a manufacturing firm Costs identified with units completed by a manufacturing firm, but not yet sold Goods purchased f.o.b destination that are in transit at December 31 Costs incurred to advertise goods held for resale Raw materials on which a manufacturing firm has started production, but which are not completely processed 18 Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that covers all costs related to the inventory 10 11 12 13 14 15 16 17 Instructions Indicate which of these items would typically be reported as inventory in the financial statements If an item should not be reported as inventory, indicate how it should be reported in the financial statements E8-2B (Inventoriable Costs) In your audit of Ali Company, you find that a physical inventory on December 31, 2014, showed merchandise with a cost of $200,000 was on hand at that date You also discover the following items were all excluded from the $200,000 Merchandise of $20,000 which is held by Ali on consignment The consignor is the Max Suzuki Company Merchandise costing $25,000 which was shipped by Ali f.o.b destination to a customer on December 31, 2014 The customer was expected to receive the merchandise on January 6, 2015 Merchandise costing $23,000 which was shipped by Ali f.o.b shipping point to a customer on December 29, 2014 The customer was scheduled to receive the merchandise on January 2, 2015 Merchandise costing $60,000 shipped by a vendor f.o.b destination on December 30, 2014, and received by Ali on January 4, 2015 Merchandise costing $42,000 shipped by a vendor f.o.b shipping point on December 31, 2014, and received by Ali on January 5, 2015 Instructions Based on the above information, calculate the amount that should appear on Ali’s balance sheet at December 31, 2014, for inventory E8-3B (Inventoriable Costs) Assume that in an annual audit of Weaver Inc at December 31, 2014, you find the following transactions near the closing date A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shipping room on December 31, 2014 The customer was billed when the machine was shipped on January 6, 2015 Merchandise costing $6,000 was received on January 3, 2015, and the related purchase invoice recorded January The invoice showed the shipment was made on December 28, 2014, f.o.b destination A packing case containing a product costing $4,500 was standing in the shipping room when the physical inventory was taken It was not included in the inventory because it was marked “Hold for shipping instructions.” Your investigation revealed that the customer’s order was dated December 28, 2014, but that the case was shipped and the customer billed on January 10, 2015 The product was a stock item of your client Consignment merchandise costing $1,650 was received and recorded on December 30, 2014 1 c08BExercises.qxd • 11/21/12 10:16 PM Page Chapter Valuation of Inventories: A Cost-Basis Approach Merchandise received on January 5, 2015, costing $750 was entered in the purchase journal on January 6, 2015 The invoice showed shipment was made f.o.b supplier’s warehouse on December 30, 2014 Because it was not on hand at December 31, it was not included in inventory Instructions Assuming that each of the amounts is material, state whether the merchandise should be included in the client’s inventory, and give your reason for your decision on each item E8-4B (Inventoriable Costs—Perpetual) Farrell Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases The transactions below relate to the Raw Materials inventory account, which is debited for materials purchased and credited for materials requisitioned for use An invoice for $40,500, terms f.o.b destination, was received and entered January 2, 2015 The receiving report shows that the materials were received December 28, 2014 Materials costing $140,000, shipped f.o.b destination, were not entered by December 31, 2014, “because they were in a railroad car on the company’s siding on that date and had not been unloaded.” Materials costing $35,000 were returned to the creditor on December 29, 2014, and were shipped f.o.b shipping point The return was entered on that date, even though the materials are not expected to reach the creditor’s place of business until January 6, 2015 An invoice for $38,000, terms f.o.b shipping point, was received and entered December 30, 2014 The receiving report shows that the materials were received January 4, 2015, and the bill of lading shows that they were shipped January 2, 2015 Materials costing $95,000 were received December 30, 2014, but no entry was made for them because “they were ordered with a specified delivery of no earlier than January 10, 2015.” Instructions Prepare correcting general journal entries required at December 31, 2014, assuming that the books have not been closed E8-5B (Inventoriable Costs—Error Adjustments) Wycliffe Company asks you to review its December 31, 2014, inventory values and prepare the necessary adjustments to the books The following information is given to you Wycliffe uses the periodic method of recording inventory A physical count reveals $561,810 of inventory on hand at December 31, 2014 Not included in the physical count of inventory is $21,500 of merchandise purchased on December 20 This merchandise was shipped f.o.b destination on December 29 and arrived in January The invoice arrived and was recorded on December 31 Included in inventory is merchandise sold on December 30, f.o.b destination This merchandise was shipped after it was counted The invoice was prepared and recorded as a sale on account for $6,050 on December 31 The merchandise cost $5,120, and the customer received it on January Included in inventory was merchandise received on December 31 with an invoice price of $12,610 The merchandise was shipped f.o.b shipping point The invoice, which has not yet arrived, has not been recorded Not included in inventory is $6,525 of merchandise purchased from Sohio Industries This merchandise was received on December 31 after the inventory had been counted The invoice was received and recorded on December 30 Included in inventory was $26,500 of inventory held by Wycliffe on consignment from Standard Industries Included in inventory is merchandise sold to Suland Corp f.o.b shipping point This merchandise was shipped after it was counted The invoice was prepared and recorded as a sale for $7,800 on December 31 The cost of this merchandise was $6,100, and Suland received the merchandise on January Excluded from inventory was a carton labeled “Please accept for credit.” This carton contains merchandise costing $600 which had been sold to a customer for $1,100 No entry had been made to the books to reflect the return, but none of the returned merchandise seemed damaged Instructions (a) Determine the proper inventory balance for Wycliffe Company at December 31, 2014 (b) Prepare any necessary entries at December 31, 2014 Assume the books have not been closed c08BExercises.qxd 11/21/12 10:16 PM Page B Exercises E8-6B (Determining Merchandise Amounts—Periodic) Two or more items are omitted in each of the following tabulations of income statement data Fill in the amounts that are missing 2013 Sales Sales returns Net sales Beginning inventory Ending inventory Purchases Purchase returns and allowances Transportation-in Cost of goods sold Gross profit on sales $217,500 8,250 ? 15,000 ? ? 3,750 6,000 174,750 34,500 2014 2015 ? 9,750 260,250 24,000 ? 195,000 6,000 6,750 ? 68,250 $307,500 ? ? ? ? 223,500 7,500 9,000 219,750 72,750 $ E8-7B (Purchases Recorded Net) Presented below are transactions related to Jennings, Inc May 10 11 19 24 Purchased goods billed at $20,000 subject to cash discount terms of 2/10, n/60 Purchased goods billed at $18,200 subject to terms of 1/15, n/30 Paid invoice of May 10 Purchased goods billed at $16,500 subject to cash discount terms of 2/10, n/30 Instructions (a) Prepare general journal entries for the transactions above under the assumption that purchases are to be recorded at net amounts after cash discounts and that discounts lost are to be treated as financial expense (b) Assuming no purchase or payment transactions other than those given above, prepare the adjusting entry required on May 31 if financial statements are to be prepared as of that date E8-8B (Purchases Recorded, Gross Method) Castro Industries purchased $21,600 of merchandise on February 1, 2014, subject to a trade discount of 5% and with credit terms of 2/15, n/60 It returned $5,000 (gross price before trade or cash discount) on February The invoice was paid on February 13 Instructions (a) Assuming that Castro uses the perpetual method for recording merchandise transactions, record the purchase, return, and payment using the gross method (b) Assuming that Castro uses the periodic method for recording merchandise transactions, record the purchase, return, and payment using the gross method (c) At what amount would the purchase on February be recorded if the net method were used? E8-9B (Periodic versus Perpetual Entries) Shin Company sells one product Presented below is information for January for Shin Company Jan 11 13 20 27 Inventory Sale Purchase Sale Purchase Sale 300 240 450 360 480 300 units at $10 each units at $16 each units at $12 each units at $17.50 each units at $14 each units at $18 each Shin uses the FIFO cost flow assumption All purchases and sales are on account Instructions (a) Assume Shin uses a periodic system Prepare all necessary journal entries, including the end-ofmonth closing entry to record cost of goods sold A physical count indicates that the ending inventory for January is 330 units (b) Compute gross profit using the periodic system (c) Assume Shin uses a perpetual system Prepare all necessary journal entries (d) Compute gross profit using the perpetual system E8-10B (Inventory Errors—Periodic) Burgess Company makes the following errors during 2014 Ending inventory is understated, but purchases are recorded correctly Ending inventory is correct, but a purchase on account for 2014 was recorded in 2015 Both ending inventory and purchases on account are understated for 2014 (Assume the purchase was recorded in 2015.) Instructions Indicate the effect of each of these errors on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for 2014 and 2015 • c08BExercises.qxd • 11/21/12 10:16 PM Page Chapter Valuation of Inventories: A Cost-Basis Approach E8-11B (Inventory Errors) At December 31, 2014, McGlaggen Corporation reported current assets of $638,000 and current liabilities of $384,000 The following items may have been recorded incorrectly McGlaggen uses the periodic method Goods purchased costing $10,000 were shipped f.o.b destination by a supplier on December 26 McGlaggen received and recorded the invoice on December 31, but the goods were not included in McGlaggen’s physical count of inventory because they were not received until January 2 Freight-in of $4,000 was debited to advertising expense on December 28 Goods purchased costing $11,000 were shipped f.o.b shipping point by a supplier on December 28 McGlaggen received and recorded the invoice on December 29, but the goods were not included in McGlaggen’s physical count of inventory because they were not received until January 4 Goods held on consignment from Brown Company were included in McGlaggen’s physical count of inventory at $13,000 Instructions (a) Compute the current ratio based on McGlaggen’s balance sheet (b) Recompute the current ratio after corrections are made (c) By what amount will income (before taxes) be adjusted up or down as a result of the corrections? E8-12B (Inventory Errors) The net income per books of Alfonso Company was determined without knowledge of the errors indicated Year Net Income per Books 2010 2011 2012 2013 2014 2015 $50,000 71,000 78,000 65,000 68,000 72,000 Error in Ending Inventory Understated Overstated No error Overstated Understated Understated $ 8,000 6,000 6,000 3,000 2,000 Instructions Prepare a work sheet to show the adjusted net income figure for each of the years after taking into account the inventory errors E8-13B (FIFO and LIFO—Periodic and Perpetual) Inventory information for Part 311 of Bonds Corp discloses the following information for the month of June June Balance 11 Purchased 20 Purchased 450 units @ $1 1,200 units @ $2 750 units @ $3 June 10 Sold 15 Sold 27 Sold 300 units @ $2.40 750 units @ $2.50 450 units @ $2.70 Instructions (a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under (1) LIFO and (2) FIFO (b) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the value of the ending inventory at LIFO? (c) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the gross profit if the inventory is valued at FIFO? (d) Why is it stated that FIFO usually produces a higher gross profit than LIFO? E8-14B (FIFO, LIFO, and Average Cost Determination) Latrio Company’s record of transactions for the month of June was as follows Purchases June (balance on hand) 15 20 27 Sales 2,000 1,500 600 900 1,200 300 @ @ @ @ @ @ $10.00 10.05 10.50 11.00 11.00 11.10 June 18 30 500 1,600 700 1,800 700 @ @ @ @ @ $21.00 22.00 22.00 21.00 23.00 5,300 6,500 Instructions (a) Assuming that periodic inventory records are kept, compute the inventory at June 30 using (1) LIFO and (2) average cost (b) Assuming that perpetual inventory records are kept in both units and dollars, determine the inventory at June 30 using (1) FIFO and (2) LIFO c08BExercises.qxd 11/21/12 10:16 PM Page B Exercises (c) Compute cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO (d) In an inflationary period, which inventory method—FIFO, LIFO, average cost—will show the highest net income? E8-15B (FIFO, LIFO, Average Cost Inventory) Sawyer Company was formed on December 1, 2013 The following information is available from Sawyer’s inventory records for Product BAP Units January 1, 2014 (beginning inventory) Purchases: January 5, 2014 January 25, 2014 February 16, 2014 March 26, 2014 Unit Cost 1,200 $4.00 2,400 2,600 1,600 1,200 4.50 5.00 5.50 6.00 A physical inventory on March 31, 2014, shows 3,200 units on hand Instructions Prepare schedules to compute the ending inventory at March 31, 2014, under each of the following inventory methods (a) FIFO (b) LIFO (c) Weighted average E8-16B (Compute FIFO, LIFO, Average Cost—Periodic) Presented below is information related to radios for the Singles Company for the month of March Date March 10 12 15 18 22 25 30 Units In Unit Cost Total Balance Purchase Sale Sale Purchase Sale Purchase Sale Purchase Sale 600 1,000 $8.50 8.60 $ 5,100 8,600 Totals 3,100 Transaction 1,000 9.00 9,000 200 9.10 1,820 300 9.05 2,715 $27,235 Units Sold Selling Price Total 500 500 $11.00 11.00 $ 5,500 5,500 600 11.40 6,840 700 12.00 8,400 200 12.00 2,500 2,400 $28,640 Instructions (a) Assuming that the periodic inventory method is used, compute the inventory cost at March 31 under each of the following cost flow assumptions (1) FIFO (2) LIFO (3) Weighted-average (b) Answer the following questions (1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why (2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why E8-17B (FIFO and LIFO—Periodic and Perpetual) The following is a record of Ensberg Company’s transactions for Colt Products for the month of May May Balance 600 units @ $10.00 12 Purchase 900 units @ $12.00 28 Purchase 600 units @ $15.00 May 10 Sale 450 units @ $19 20 Sale 810 units @ $19 Instructions (a) Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 840 units on hand, what is the cost of the ending inventory using (1) FIFO and (2) LIFO? (b) Assuming that perpetual records are maintained and they tie into the general ledger, calculate the ending inventory using (1) FIFO and (2) LIFO • c08BExercises.qxd • 11/21/12 10:16 PM Page Chapter Valuation of Inventories: A Cost-Basis Approach E8-18B (FIFO and LIFO; Income Statement Presentation) The board of directors of Soho Corporation is considering whether or not it should instruct the accounting department to shift from a first-in, firstout (FIFO) basis of pricing inventories to a last-in, first-out (LIFO) basis The following information is available Sales Inventory, January Purchases 10,500 units 3,000 units 3,000 units 5,000 units 3,500 units 4,000 units $100,000 Inventory, December 31 Operating expenses @ @ @ @ @ @ $45 $15 $17 $20 $25 ? Instructions Prepare a condensed income statement for the year on both bases for comparative purposes E8-19B (FIFO and LIFO Effects) You are the vice president of finance of Constance Corporation, a retail company that prepared two different schedules of gross margin for the first fiscal quarter ended July 31 These schedules appear below Schedule Schedule Sales ($15 per unit) Cost of Goods Sold Gross Margin $540,000 540,000 $220,700 227,050 $319,300 312,950 The computation of cost of goods sold in each schedule is based on the following data Beginning Purchase, Purchase, Purchase, Purchase, inventory, May May June June 18 July Units Cost per Unit Total Cost 10,000 12,000 15,000 3,000 8,000 $6.00 6.10 6.25 6.50 6.60 $60,000 73,200 93,750 19,500 52,800 Connie Miller, the president of the corporation, cannot understand how two different gross margins can be computed from the same set of data As the vice president of finance you have explained to Ms Miller that the two schedules are based on different assumptions concerning the flow of inventory costs, i.e., FIFO and LIFO Schedules and were not necessarily prepared in this sequence of cost flow assumptions Instructions Prepare two separate schedules computing cost of goods sold and supporting schedules showing the composition of the ending inventory under both cost flow assumptions (assume periodic system) E8-20B (FIFO and LIFO—Periodic) ProSports Shop began operations on January 2, 2014 The following stock record card for soccer balls was taken from the records at the end of the year Date Voucher Terms 1/6 3/8 7/2 8/5 10/21 10624 11437 21332 27644 31269 Net 30 2/10, net 30 1/10, net 30 1/10, net 30 2/5, net 30 Totals Units Received Unit Invoice Cost Gross Invoice Amount 100 60 40 180 105 485 $10 11 13 12 10 $1,000 660 520 2,160 1,050 $5,390 A physical inventory on December 31, 2014, reveals that 125 were in stock The bookkeeper informs you that all the discounts were taken Assume that ProSports Shop uses the invoice price less discount for recording purchases Instructions (a) Compute the December 31, 2014, inventory using the FIFO method (b) Compute the 2014 cost of goods sold using the LIFO method (c) What method would you recommend to the owner to minimize income taxes in 2014, using the inventory information for soccer balls as a guide? c08BExercises.qxd 11/21/12 10:16 PM Page B Exercises E8-21B (LIFO Effect) The following example was provided to encourage the use of the LIFO method In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a LIFO reserve account on the books The LIFO benefit grows as inflation widens the gap between current-year and past-year (minus inflation) inventory costs This gap is: With LIFO Without LIFO $6,500,000 4,800,000 300,000 $6,500,000 4,800,000 300,000 1,400,000 100,000 1,400,000 Taxable income $1,300,000 $1,400,000 Income taxes @ 40% $ 520,000 $ 560,000 Cash flow $880,000 $840,000 Extra cash $40,000 5% 0% Revenues Cost of goods sold Operating expenses Operating income LIFO adjustment Increased cash flow Instructions (a) Explain what is meant by the LIFO reserve account (b) How does LIFO subtract inflation from inventory costs? (c) Explain how the cash flow of $880,000 in this example was computed Explain why this amount may not be correct (d) Why does a company that uses LIFO have extra cash? Explain whether this situation will always exist E8-22B (Alternative Inventory Methods—Comprehensive) Blakely Corporation began operations on December 1, 2014 The only inventory transaction in 2014 was the purchase of inventory on December 15, 2014, at a cost of $76 per unit None of this inventory was sold in 2014 Relevant information is as follows Ending inventory units December 31, 2014 December 31, 2015, by purchase date November 20, 2015 June 6, 2015 100 100 50 150 During the year the following purchases and sales were made Purchases March 20 June September 11 November 20 300 400 300 100 Sales units units units units at at at at $80 81 85 90 April July October 10 December 18 300 150 300 300 The company uses the periodic inventory method Instructions (a) Determine ending inventory under (1) specific identification, (2) FIFO, (3) LIFO, and (4) average cost (b) Determine ending inventory using dollar-value LIFO Assume that the November 20, 2015, purchase cost is the current cost of inventory (Hint: The beginning inventory is the base-layer priced at $76 per unit.) E8-23B (Dollar-Value LIFO) Sandberg Company has used the dollar-value LIFO method for inventory cost determination for many years The following data were extracted from Sandberg’s records Date Price Index Ending Inventory at Base Prices Ending Inventory at Dollar-Value LIFO December 31, 2013 December 31, 2014 104 ? $23,000 24,250 $24,150 25,500 Instructions Calculate the index used for 2014 that yielded the above results E8-24B (Dollar-Value LIFO) The dollar-value LIFO method was adopted by Queen Corp on January 1, 2014 Its inventory on that date was $510,000 On December 31, 2014, the inventory at prices existing on that date amounted to $530,000 The price level at January 1, 2014, was 100, and the price level at December 31, 2014, was 106 • c08BExercises.qxd • 11/21/12 10:16 PM Page Chapter Valuation of Inventories: A Cost-Basis Approach Instructions (a) Compute the amount of the inventory at December 31, 2014, under the dollar-value LIFO method (b) On December 31, 2015, the inventory at prices existing on that date was $588,600, and the price level was 109 Compute the inventory on that date under the dollar-value LIFO method E8-25B (Dollar-Value LIFO) Presented below is information related to Meghani Company Date December December December December December December 31, 31, 31, 31, 31, 31, 2013 2014 2015 2016 2017 2018 Ending Inventory (End-of-Year Prices) Price Index $180,000 220,500 218,500 242,500 283,500 310,800 100 105 115 125 135 140 Instructions Compute the ending inventory for Meghani Company for 2013 through 2018 using the dollar-value LIFO method E8-26B (Dollar-Value LIFO) The following information relates to James Company Date December December December December December 31, 31, 31, 31, 31, 2013 2014 2015 2016 2017 Ending Inventory (End-of-Year Prices) Price Index $154,000 196,768 205,656 228,448 211,200 100 104 114 118 120 Instructions Use the dollar-value LIFO method to compute the ending inventory for James Company for 2013 through 2017 ... necessary entries at December 31, 2014 Assume the books have not been closed c08BExercises.qxd 11/21/12 10:16 PM Page B Exercises E8-6B (Determining Merchandise Amounts—Periodic) Two or more items... dollars, determine the inventory at June 30 using (1) FIFO and (2) LIFO c08BExercises.qxd 11/21/12 10:16 PM Page B Exercises (c) Compute cost of goods sold assuming periodic inventory procedures... taxes in 2014, using the inventory information for soccer balls as a guide? c08BExercises.qxd 11/21/12 10:16 PM Page B Exercises E8-21B (LIFO Effect) The following example was provided to encourage