CHAPTER 8 SOLUTIONS TO B EXERCISES E81B (15–20 minutes) Items 6, 7, 8, 9, 11, 13, 14, 17, and 18 would be reported as inventory in the financial statements The following items would not be reported as inventory: Cost of goods sold in the income statement Shortterm investments in the current asset section of the balance sheet Office supplies in the current assets section of the balance sheet Cost of goods sold in the income statement Cost of goods sold in the income statement 10 Interest expense in the income statement 12 Not reported in the financial statements 15 Not reported in the financial statements 16 Advertising expense in the income statement E82B (10–15 minutes) Inventory per physical count Goods in transit to customer, f.o.b. destination Goods in transit from vendor, f.o.b. seller Inventory to be reported on balance sheet $200,000 + 25,000 + 42,000 $267,000 The consigned goods of $20,000 are not owned by the company and were properly excluded The goods in transit to a customer of $23,000, shipped f.o.b. shipping point, are properly excluded from the inventory because the title to the goods passed when they left the seller and therefore a sale and related cost of goods sold should be recorded in 2014 The goods in transit from a vendor of $60,000, shipped f.o.b. destination, are properly excluded from the inventory because the title to the goods does not pass to buyer until the buyer receives them Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 81 E83B (10–15 minutes) Include. Merchandise passes to customer only when it is shipped Do not include. Title did not pass until January 3 Include in inventory. Product belonged to Weaver Inc. at December 31, 2014 Do not include. Goods received on consignment remain the property of the consignor Include in inventory. Under invoice terms, title passed when goods were shipped E84B (10–15 minutes) Raw Materials Inventory 40,500 Accounts Payable 40,500 Raw Materials Inventory 140,000 Accounts Payable 140,000 No adjustment necessary Accounts Payable 38,000 Raw Materials Inventory 38,000 Raw Materials Inventory 95,000 Accounts Payable 95,000 82 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E85B (15–20 minutes) (a) Inventory December 31, 2014 (unadjusted) Transaction 2 Transaction 3 Transaction 4 Transaction 5 Transaction 6 Transaction 7 Transaction 8 Inventory December 31, 2014 (adjusted) (b) Transaction 2 Accounts Payable 21,500 Purchases (To reverse purchase entry in 2014) Transaction 3 Sales 6,050 Accounts Receivable (To reverse sale entry in 2014) Transaction 4 Purchases 12,610 Accounts Payable (To record purchase of merchandise in 2014) Transaction 8 Sales Returns and Allowances Accounts Receivable $561,810 –0– –0– –0– 6,525 (26,500) (6,100) 600 $536,335 21,500 6,050 12,610 1,100 1,100 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 83 E86B (10–20 minutes) Sales Sales returns Net sales Beginning inventory Ending inventory Purchases Purchase returns and allowances Transportationin Cost of good sold Gross profit 2013 $217,500 8,250 209,250 15,000 24,000* 181,500 3,750 6,000 174,750 34,500 2014 $270,000 9,750 260,250 24,000 27,750 195,000 6,000 6,750 192,000 68,250 2015 $307,500 15,000 292,500 27,750** 33,000 223,500 7,500 9,000 219,750 72,750 *This was given as the beginning inventory for 2014 **This was calculated as the ending inventory for 2014 E87B (10–15 minutes) (a) (b) May 10 Purchases 19,600 Accounts Payable ($20,000 X .98) .19,600 May 11 Purchases 18,018 Accounts Payable ($18,200 X .99) .18,018 May 19 Accounts Payable 19,600 Cash 19,600 May 24 Purchases 16,170 Accounts Payable ($16,500 X .98) 16,170 May 31 Purchase Discounts Lost 182 Accounts Payable ($18,200 X .01) (Discount lost on purchase of May 11, $18,200, terms 1/15, n/30) 182 84 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 85 E88B (10 minutes) (a) (b) Feb. 1 Inventory ($21,600 x (1 – 5%)) 20,520 Accounts Payable 20,520 Feb. 4 Accounts Payable ($5,000 x (1 – 5%)) 4,750 Inventory Feb. 13 Accounts Payable ($20,520 – $4,750) 15,770 Inventory (2% X $15,770) 315 * Cash 15,455 Feb. 1 Purchases 20,520 Accounts Payable 20,520 Feb. 4 Accounts Payable 4,750 Purchase Returns and Allowances Feb. 13 Accounts Payable 15,770 Purchase Discounts 215 * Cash 15,455 (c) Purchase price (list) Less: Trade discount ($21,600 x 5%) Less: Cash discount (20,520 X 2%) Net price * Rounded 4,750 4,750 $21,600 1,080 410 * $20,110 E89B (15–25 minutes) (a) Jan. 4 Accounts Receivable 3,840 Sales (240 X $16) 3,840 Jan. 11 Purchases ($450 X $12) 5,400 Accounts Payable 5,400 Jan. 13 Accounts Receivable 6,300 Sales (360 X $17.50) 6,300 Jan. 20 Purchases (480 X $14) 6,720 Accounts Payable 6,720 86 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 87 E89B (Continued) Jan. 27 Accounts Receivable 5,400 Sales (300 X $18) 5,400 Jan. 31 Inventory ($14 X 330) 4,620 Cost of Goods Sold 10,500 Purchases ($5,400 + $6,720) 12,120 Inventory (300 X $10) .3,000 (b) Sales ($3,840 + $6,300 + $5,400) Cost of goods sold Gross profit (c) Jan. 4 $15,540 10,500 $ 5,040 Accounts Receivable 3,840 Sales 3,840 Cost of Goods Sold 2,400 Inventory (240 X $10) 2,400 Jan. 11 Inventory 5,400 Accounts Payable 5,400 Jan. 13 Accounts Receivable 6,300 Sales 6,300 Cost of Goods Sold 4,200 Inventory [(60 X $10) + (300 X $12)] 4,200 Jan. 20 Inventory 6,720 Accounts Payable 6,720 Jan. 27 Accounts Receivable 5,400 Sales 5,400 Cost of Goods Sold 3,900 Inventory [(150 X $12) + (150 X $14)] 3,900 (d) Sales Cost of goods sold ($2,400 + $4,200 + $3,900) Gross profit $15,540 10,500 $ 5,040 88 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E810B (10–15 minutes) Working capital Current ratio Retained earnings Net income 2014 Understated Understated Understated Understated 2015 No effect No effect No effect Overstated Working capital Current ratio Retained earnings Net income Overstated Overstated Overstated Overstated No effect No effect No effect Understated Working capital Current ratio Retained earnings Net income No effect Overstated No effect No effect No effect No effect No effect No effect E811B (10–15 minutes) (a) $638,000 $384,000 (b) $638,000 + $11,000 – $13,000 +$4,000 = 1.71 to 1 $384,000 – $10,000 = 1.66 to 1 (c) Event Overstatement of purchases Understatement of freightin and inventory (no effect on COGS); overstatement of advertising expense Understatement of ending inventory Overstatement of ending inventory Effect of Error Decreases net income Adjust Income Increase (Decrease) $10,000 Decrease net income $4,000 Decreases net income $11,000 Increases net income (13,000) $ 12,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 89 E812B (15–20 minutes) Errors in Inventories Year 2010 2011 2012 2013 2014 2015 Net Income Per Books $ 50,000 71,000 78,000 65,000 68,000 72,000 $404,000 Add Overstate ment Jan. 1 Deduct Understate ment Jan. 1 Deduct Add Overstate Understate ment Dec. 31 ment Dec. 31 $8,000 $8,000 $6,000 $6,000 6,000 6,000 3,000 3,000 2,000 Corrected Net Income $ 58,000 57,000 84,000 59,000 77,000 71,000 $406,000 E813B (15–20 minutes) (a) (b) (c) Cost of Goods Sold LIFO 750 @ $3 = $2,250 750 @ $2 = 1,500 $3,750 Ending Inventory 450 @ $1 = $ 450 450 @ $2 = 900 $1,350 FIFO 450 @ $1 = 1,050 @ $2 = $ 450 2,100 $2,550 750 @ $3 = 150 @ $2 = LIFO 150 @ $1 = 450 @ $2 = 300 @ $3 = $ 150 900 900 $1,950 Sales Cost of goods sold Gross profit (FIFO) $2,250 300 $2,550 $3,810 = ($2.40 X 300) + ($2.50 X 750) + ($2.70 X 450) 2,550 $1,260 Note: FIFO periodic and FIFO perpetual provide the same gross profit and inventory value 810 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E813B (Continued) (d) FIFO inventory is based on current costs Therefore, older costs are included in cost of goods sold. In periods of rising prices (as is generally the case), this results in a lower amount for costs of goods sold and higher gross profit E814B (20–25 minutes) (a) LIFO 1,200 @ $10.00 = Average cost Total cost = Total units $12,000 $12,000 $67,805* = $10.43 average cost per unit 6,500 1,200 @ $10.43 = $12,516 *Units 2,000 1,500 600 900 1,200 300 6,500 (b) @ @ @ @ @ @ Price $10.00 $10.05 $10.50 $11.00 $11.00 $11.10 = = = = = = Total Cost $ 20,000 15,075 6,300 9,900 13,200 3,330 $67,805 FIFO 300 @ $11.10 = 900 @ $11.00 = $ 3,330 9,900 $13,230 LIFO 400 @ $10.00 = 800 @ $11.00 = $ 4,000 8,800 $12,800 (c) Total merchandise available for sale Less inventory (FIFO) Cost of goods sold (d) FIFO $67,805 13,230 $54,575 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 811 E815B (15–20 minutes) (a) SAWYER COMPANY Computation of Inventory For Product BAP Under FIFO Inventory Method March 31, 2014 March 26, 2014 February 16, 2014 January 25, 2014 (portion) March 31, 2014, inventory (b) Unit Cost $6.00 5.50 5.00 Total Cost $ 7,200 8,800 2,000 $18,000 SAWYER COMPANY Computation of Inventory For Product BAP Under LIFO Inventory Method March 31, 2014 Beginning inventory January 5, 2014 (portion) March 31, 2014, inventory (c) Units 1,200 1,600 400 3,200 Units 1,200 2,000 3,200 Unit Cost $4.00 4.50 Total Cost $ 4,800 9,000 $13,800 SAWYER COMPANY Computation of Inventory For Product BAP Under WeightedAverage Inventory Method March 31, 2014 Beginning inventory January 5, 2014 January 25, 2014 February 16, 2014 March 26, 2014 Units 1,200 2,400 2,600 1,600 1,200 9,000 Weightedaverage cost ($44,600 ÷ 9,000) March 31, 2014, inventory Unit Cost $4.00 4.50 5.00 5.50 6.00 Total Cost $ 4,800 10,800 13,000 8,800 7,200 $44,600 $4.96* 3,200 $4.96 $15,872 *Rounded off 812 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E816B (15–20 minutes) (a) (b) 3,100 units available for sale – 2,500 units sold = 600 units in the ending inventory 300 @ $9.05 = $2,715 200 @ 9.10 = 1,820 100 @ 9.00 = 900 600 $5,435 Ending inventory at FIFO cost 600 @ 8.50 = 600 $27,235 cost of goods available for sale ÷ 3,100 units available for sale = $8.79 weightedaverage unit cost 600 units X $8.79 = $5,274 Ending inventory at weightedaverage cost LIFO will yield the lowest gross profit because this method will yield the highest cost of goods sold figure in the situation presented The company has experienced rising purchase prices for its inven tory acquisitions. In a period of rising prices, LIFO will yield the highest cost of goods sold because the most recent purchase prices (which are the higher prices in this case) are used to price cost of goods sold while the older (and lower) purchase prices are used to cost the ending inventory LIFO will yield the lowest ending inventory because LIFO uses the oldest costs to price the ending inventory units. The company has experienced rising purchase prices. The oldest costs in this case are the lower costs 5,100 $5,100 Ending inventory at LIFO cost E817B (10–15 minutes) (a) 600 @ $15 = 240 @ $12 = $ 9,000 2,880 $11,880 600 @ $10 = 240 @ $12 = $6,000 2,880 $8,880 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 813 E817B (Continued) (b) FIFO $11,800 [same as (a)] LIFO 150 @ $10 = 90 @ $12 = 600 @ $15 = $ 1,500 1,080 9,000 $11,580 E818B (15–20 minutes) Firstin, firstout Sales Cost of goods sold: Inventory, Jan. 1 Purchases Cost of goods available Inventory, Dec. 31 Cost of goods sold Gross profit Operating expenses Net income *Purchases 3,000 @ $17 = 5,000 @ $20 = 3,500 @ $25 = Lastin, firstout $472,500 $ 45,000 238,500* 283,500 97,500** 186,000 286,500 100,000 $186,500 $472,500 $ 45,000 238,500 283,500 62,000*** 221,500 251,000 100,000 $151,000 $ 51,000 100,000 87,500 $238,500 **Computation of inventory, Dec. 31: Firstin, firstout: 3,500 units @ $25 = $87,500 500 units @ $20 = 10,000 $97,500 ***Lastin, firstout: 3,000 units @ $15 = 1,000 units @ $17 = $45,000 17,000 814 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) $62,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 815 E819B (20–25 minutes) CONSTANCE CORPORATION Schedules of Cost of Goods Sold For the First Quarter Ended July 31, 2014 Beginning inventory Plus purchases Cost of goods available for sale Less ending inventory Cost of goods sold Schedule 1 Firstin, Firstout $ 60,000 239,250* 299,250 78,550 $220,700 Schedule 2 Lastin, Firstout $ 60,000 239,250 299,250 72,200 $227,050 *($73,200 + $93,750 + $19,500 + $52,800) Schedules Computing Ending Inventory Beginning inventory Plus purchases Units available for sale Less sales ($540,000 ÷ 15) Ending inventory Units 10,000 38,000 48,000 36,000 12,000 The unit computation is the same for both assumptions, but the cost assigned to the units of ending inventory are different Firstin, Firstout (Schedule 1) 8,000 at $6.60 = $52,800 3,000 at $6.50 = 19,500 1,000 at $6.25 = 6,250 12,000 $78,550 Lastin, Firstout (Schedule 2) 10,000 at $6.00 = $60,000 2,000 at $6.10 = 12,200 12,000 $72,200 816 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E820B (10–15 minutes) (a) FIFO Ending Inventory December 31, 2014 105 @ $9.80* = $1,029.00 20 @ $11.88** = 237.60 $1,266.60 *[$10.00 – 0.02 ($10.00)] **[$12.00 – 0.01 ($12.00)] (b) LIFO Cost of Goods Sold—2014 105 @ $9.80 = $1,029.00 180 @ $11.88 = 2,138.40 40 @ $12.87* = 514.80 35 @ $10.78** = 377.30 $4,059.50 *[$13.00 – 0.01 ($13)] **[$11.00 – 0.02 ($11)] (c) FIFO matches older costs with revenue. When prices are increasing then declining, as in this case, additional analysis is required. FIFO results in a higher amount for cost of goods sold Therefore, it is recommended that FIFO be used by Pro Sports Shop to minimize taxable income E821B (10–15 minutes) (a) The difference between the inventory used for internal reporting pur poses and LIFO is referred to as the Allowance to Reduce Inventory to LIFO or the LIFO reserve. The change in the allowance balance from one period to the next is called the LIFO effect (or as shown in this example, the LIFO adjustment) (b) LIFO subtracts inflation from inventory costs by charging the items pur chased recently to cost of goods sold As a result, ending inventory (assuming increasing prices) will be lower than FIFO or average cost Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 817 E821B (Continued) (c) Cash flow was computed as follows: Revenue $6,500,000 Cost of goods sold (4,800,000) Operating expenses (300,000) Income taxes (520,000) Cash flow $ 880,000 If the company has any sales on account or payables, then the cash flow number is incorrect. It is assumed here that the cash basis of accounting is used (d) The company has extra cash because its taxes are less The reason taxes are lower is because cost of goods sold (in a period of inflation) is higher under LIFO than FIFO. As a result, net income is lower which leads to lower income taxes. If prices are decreasing, the opposite effect results E822B (25–30 minutes) (a) Ending inventory—Specific Identification Date No. Units Unit Cost November 20 June 6 Ending inventory—FIFO Date No. Units November 20 September 11 100 50 150 100 50 150 Ending inventory—LIFO Date No. Units January 1 March 20 100 50 150 Total Cost $90 81 $9,000 4,050 $13,050 Unit Cost Total Cost $90 85 $9,000 4,250 $13,250 Unit Cost Total Cost $76 80 $7,600 4,000 $11,600 818 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E822B (Continued) Ending inventory—Average Cost Date Explanation No Units Unit Cost Total Cost January 1 March 20 Beginning inventory Purchase 100 300 $76 80 $ 7,600 24,00 32,40 25,50 9,000 $98,500 June 6 Purchase 400 81 September 11 November 20 Purchase 300 85 Purchase 100 1,200 90 $98,500 ÷ 1,200 = $82.08 Ending Inventory—Average Cost No. Units Unit Cost 150 $82.08 (b) Double Extension Method BaseYear Costs Units 150 Total Cost $12,312 BaseYear Cost Per Unit $76 Current Costs Total $11,400 Units 100 50 CurrentYear Cost Per Unit $90 $85 Ending Inventory for the Period at Current Cost Ending Inventory for the Period at BaseYear Cost Total $9,000 4,250 $13,250 = $13,250 = 1.162 $11,400 Ending inventory at baseyear prices ($13,250 ÷ 1.162) $11,403 Base layer (100 units at $76) 7,600 Increment in baseyear dollars 3,803 Current index 1.162 Increment in current dollars 4,419 Base layer (100 units at $76) 7,600 Ending inventory at dollarvalue LIFO $12,019 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 819 8ư20 Copyrightâ2014JohnWiley&Sons,Inc.Kieso,IntermediateAccounting,15/e,ExerciseBSolutions(ForInstructorUseOnly) E8ư23B(510minutes) $24,250$23,000=$1,250increaseatbaseprices $25,500$24,150=$1,350increaseindollarưvalueLIFOvalue $1,250XIndex=$1,350 Index=108 E8ư24B(1520minutes) (a) 12/31/14inventoryat1/1/14prices,$530,000ữ1.06 $500,000 Inventory 1/1/14 510,000 Inventory decrease at base prices $ 10,000 Inventory at 1/1/14 prices $510,000 Less decrease at 1/1/14 prices 10,000 Inventory 12/31/14 under dollarvalue LIFO method $500,000 (b) 12/31/15 inventory at base prices, $588,600 ÷ 1.09 $540,000 12/31/14 inventory at base prices 500,000 Inventory increment at base prices $ 40,000 Inventory at 12/31/14 $500,000 Increment added during 2015 at 12/31/15 prices, $40,000 X 1.09 43,600 Inventory 12/31/15 $543,600 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 821 E825B (20–25 minutes) Ending Inventory—Dollarvalue LIFO: 2013 $180,000 2014 $180,000 @ 1.00 = 30,000 @ 1.05 = $180,000 31,500 $211,500 2015 $180,000 @ 1.00 = 10,000 @ 1.05 = $180,000 10,500 $190,500 2016 $180,000 @ 1.00 = 10,000 @ 1.05 = 4,000 @ 1.25 = $180,000 10,500 5,000 $195,500 2017 $180,000 @ 1.00 = 10,000 @ 1.05 = 4,000 @ 1.25 = 16,000 @ 1.35 = $180,000 10,500 5,000 21,600 $217,100 2018 $180,000 @ 1.00 = 10,000 @ 1.05 = 4,000 @ 1.25 = 16,000 @ 1.35 = 12,000 @ 1.40 = $180,000 10,500 5,000 21,600 16,800 $233,900 822 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E826B (15–20 minutes) Date Dec. 31, 2013 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Current $ Price Index BaseYear $ Change from Prior Year $154,000 196,768 205,656 228,448 211,200 1.00 1.04 1.14 1.18 1.20 $154,000 189,200 180,400 193,600 176,000 — +$35,200 (8,800) +13,200 (17,600) Ending Inventory—Dollarvalue LIFO: Dec. 31, 2013 $154,000 Dec. 31, 2014 $154,000 @ 1.00 = 35,200 @ 1.04 = $154,000 36,608 $190,608 Dec. 31, 2015 $154,000 @ 1.00 = 26,400 @ 1.04 = $154,000 27,456 $181,456 Dec. 31, 2016 $154,000 @ 1.00 = 26,400 @ 1.04 = 13,200 @ 1.18 = $154,000 27,456 15,576 $197,032 Dec. 31, 2017 $154,000 @ 1.00 = 22,000 @ 1.04 = $154,000 22,880 $176,880 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 823 ... 82 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E85B (15–20 minutes) (a) Inventory December 31, 2014 (unadjusted)... Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 83 E86B (10–20 minutes) Sales Sales returns... 84 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only)