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8.12. EXERCISES

E8-1 (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.

  1. Goods sold on an installment basis (bad debts can be reasonably estimated).

  2. Goods out on consignment at another company's store.

  3. Goods purchased f.o.b. shipping point that are in transit at December 31.

  4. Goods purchased f.o.b. destination that are in transit at December 31.

  5. 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.

  6. Goods sold where large returns are predictable.

  7. Goods sold f.o.b. shipping point that are in transit at December 31.

  8. Freight charges on goods purchased.

  9. Interest costs incurred for inventories that are routinely manufactured.

  10. Materials on hand not yet placed into production by a manufacturing firm.

  11. Costs incurred to advertise goods held for resale.

  12. Office supplies.

  13. Raw materials on which a manufacturing firm has started production, but which are not completely processed.

  14. Factory supplies.

  15. Goods held on consignment from another company.

  16. Costs identified with units completed by a manufacturing firm, but not yet sold.

  17. Goods sold f.o.b. destination that are in transit at December 31.

  18. Short-term investments in stocks and bonds that will be resold in the near future.

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.

E8-2 (Inventoriable Costs) In your audit of Garza Company, you find that a physical inventory on December 31, 2010, showed merchandise with a cost of $441,000 was on hand at that date. You also discover the following items were all excluded from the $441,000.

  1. Merchandise of $61,000 which is held by Garza on consignment. The consignor is the Bontemps Company.

  2. Merchandise costing $33,000 which was shipped by Garza f.o.b. destination to a customer on December 31, 2010. The customer was expected to receive the merchandise on January 6, 2011.

  3. Merchandise costing $46,000 which was shipped by Garza f.o.b. shipping point to a customer on December 29, 2010. The customer was scheduled to receive the merchandise on January 2, 2011.

  4. Merchandise costing $73,000 shipped by a vendor f.o.b. destination on December 30, 2010, and received by Garza on January 4, 2011.

  5. Merchandise costing $51,000 shipped by a vendor f.o.b. shipping point on December 31, 2010, and received by Garza on January 5, 2011.

Instructions

Based on the above information, calculate the amount that should appear on Garza's balance sheet at December 31, 2010, for inventory.

E8-3 (Inventoriable Costs) Assume that in an annual audit of Webber Inc. at December 31, 2010, you find the following transactions near the closing date.

  1. 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, 2010. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2011.

  2. Merchandise costing $2,800 was received on January 3, 2011, and the related purchase invoice recorded January 5. The invoice showed the shipment was made on December 29, 2010, f.o.b. destination.

  3. A packing case containing a product costing $3,400 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 18, 2010, but that the case was shipped and the customer billed on January 10, 2011. The product was a stock item of your client.

  4. Merchandise costing $720 was received on December 28, 2010, and the invoice was not recorded. You located it in the hands of the purchasing agent; it was marked "on consignment."

  5. Merchandise received on January 6, 2011, costing $680 was entered in the purchase journal on January 7, 2011. The invoice showed shipment was made f.o.b. supplier's warehouse on December 31, 2010. 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.

E8-4 (Inventoriable Costs—Perpetual) Bradford 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.

  1. An invoice for $8,100, terms f.o.b. destination, was received and entered January 2, 2011. The receiving report shows that the materials were received December 28, 2010.

  2. Materials costing $7,300 were returned to the supplier on December 29, 2010, 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 supplier's place of business until January 6, 2011.

  3. Materials costing $28,000, shipped f.o.b. destination, were not entered by December 31, 2010, "because they were in a railroad car on the company's siding on that date and had not been unloaded."

  4. An invoice for $7,500, terms f.o.b. shipping point, was received and entered December 30, 2010. The receiving report shows that the materials were received January 4, 2011, and the bill of lading shows that they were shipped January 2, 2011.

  5. Materials costing $19,800 were received December 30, 2010, but no entry was made for them because "they were ordered with a specified delivery of no earlier than January 10, 2011."

Instructions

Prepare correcting general journal entries required at December 31, 2010, assuming that the books have not been closed.

E8-5 (Inventoriable Costs—Error Adjustments) Werth Company asks you to review its December 31, 2010, inventory values and prepare the necessary adjustments to the books. The following information is given to you.

  1. Werth uses the periodic method of recording inventory. A physical count reveals $234,890 of inventory on hand at December 31, 2010.

  2. Not included in the physical count of inventory is $10,420 of merchandise purchased on December 15 from Browser. This merchandise was shipped f.o.b. shipping point on December 29 and arrived in January. The invoice arrived and was recorded on December 31.

  3. Included in inventory is merchandise sold to Bubbey 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 $12,800 on December 31. The merchandise cost $7,350, and Bubbey received it on January 3.

  4. Included in inventory was merchandise received from Dudley on December 31 with an invoice price of $15,630. The merchandise was shipped f.o.b. destination. The invoice, which has not yet arrived, has not been recorded.

  5. Not included in inventory is $8,540 of merchandise purchased from Minsky Industries. This merchandise was received on December 31 after the inventory had been counted. The invoice was received and recorded on December 30.

  6. Included in inventory was $10,438 of inventory held by Werth on consignment from Jackel Industries.

  7. Included in inventory is merchandise sold to Sims f.o.b. shipping point. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale for $18,900 on December 31. The cost of this merchandise was $11,520, and Sims received the merchandise on January 5.

  8. Excluded from inventory was a carton labeled "Please accept for credit." This carton contains merchandise costing $1,500 which had been sold to a customer for $2,600. No entry had been made to the books to reflect the return, but none of the returned merchandise seemed damaged.

Instructions

  1. Determine the proper inventory balance for Werth Company at December 31, 2010.

  2. Prepare any correcting entries to adjust inventory to its proper amount at December 31, 2010. Assume the books have not been closed.

E8-6 (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.



E8-7 (Purchases Recorded Net) Presented below are transactions related to Guillen, Inc.



Instructions

  1. 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.

  2. 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.

E8-8 (Purchases Recorded, Gross Method) Wizard Industries purchased $12,000 of merchandise on February 1, 2010, subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned $3,000 (gross price before trade or cash discount) on February 4. The invoice was paid on February 13.

Instructions

  1. Assuming that Wizard uses the perpetual method for recording merchandise transactions, record the purchase, return, and payment using the gross method.

  2. Assuming that Wizard uses the periodic method for recording merchandise transactions, record the purchase, return, and payment using the gross method.

  3. At what amount would the purchase on February 1 be recorded if the net method were used?

E8-9 (Periodic versus Perpetual Entries) Chippewas Company sells one product. Presented below is information for January for Chippewas Company.



Chippewas uses the FIFO cost flow assumption. All purchases and sales are on account.

Instructions

  1. Assume Chippewas uses a periodic system. Prepare all necessary journal entries, including the end-of-month closing entry to record cost of goods sold. A physical count indicates that the ending inventory for January is 110 units.

  2. Compute gross profit using the periodic system.

  3. Assume Chippewas uses a perpetual system. Prepare all necessary journal entries.

  4. Compute gross profit using the perpetual system.

E8-10 (Inventory Errors—Periodic) Thomason Company makes the following errors during the current year. (In all cases, assume ending inventory in the following year is correctly stated.)

  1. Both ending inventory and purchases and related accounts payable are understated. (Assume this purchase was recorded and paid for in the following year.)

  2. Ending inventory is overstated, but purchases and related accounts payable are recorded correctly.

  3. Ending inventory is correct, but a purchase on account was not recorded. (Assume this purchase was recorded and paid for in the following year.)

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 the current year and the subsequent year.

E8-11 (Inventory Errors) At December 31, 2010, Dwight Corporation reported current assets of $390,000 and current liabilities of $200,000. The following items may have been recorded incorrectly. Dwight uses the periodic method.

  1. Goods purchased costing $22,000 were shipped f.o.b. shipping point by a supplier on December 28. Dwight received and recorded the invoice on December 29, 2010, but the goods were not included in Dwight's physical count of inventory because they were not received until January 4, 2011.

  2. Goods purchased costing $20,000 were shipped f.o.b. destination by a supplier on December 26. Dwight received and recorded the invoice on December 31, but the goods were not included in Dwight's 2010 physical count of inventory because they were not received until January 2, 2011.

  3. Goods held on consignment from Kishi Company were included in Dwight's December 31, 2010, physical count of inventory at $13,000.

  4. Freight-in of $3,000 was debited to advertising expense on December 28, 2010.

Instructions

  1. Compute the current ratio based on Dwight's balance sheet.

  2. Recompute the current ratio after corrections are made.

  3. By what amount will income (before taxes) be adjusted up or down as a result of the corrections?

E8-12 (Inventory Errors) The net income per books of Adamson Company was determined without knowledge of the errors indicated on the next page.



Instructions

Prepare a work sheet to show the adjusted net income figure for each of the 6 years after taking into account the inventory errors.

E8-13 (FIFO and LIFO—Periodic and Perpetual) Inventory information for Part 311 of Seminole Corp. discloses the following information for the month of June.



Instructions

  1. Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under (1) LIFO and (2) FIFO.

  2. 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?

  3. 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?

  4. Why is it stated that LIFO usually produces a lower gross profit than FIFO?

E8-14 (FIFO, LIFO, and Average Cost Determination) LoBianco Company's record of transactions for the month of April was as follows.



Instructions

  1. Assuming that periodic inventory records are kept, compute the inventory at April 30 using (1) LIFO and (2) average cost.

  2. Assuming that perpetual inventory records are kept in both units and dollars, determine the inventory at April 30 using (1) FIFO and (2) LIFO.

  3. Compute cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.

  4. In an inflationary period, which inventory method—FIFO, LIFO, average cost—will show the highest net income?

E8-15 (FIFO, LIFO, Average Cost Inventory) Esplanade Company was formed on December 1, 2009. The following information is available from Esplanade's inventory records for Product BAP.



A physical inventory on March 31, 2010, shows 1,500 units on hand.

Instructions

Prepare schedules to compute the ending inventory at March 31, 2010, under each of the following inventory methods.

  1. FIFO.

  2. LIFO.

  3. Weighted-average.

E8-16 (Compute FIFO, LIFO, Average Cost—Periodic) Presented below is information related to radios for the Couples Company for the month of July.



Instructions

  1. Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions.

    1. FIFO.

    2. LIFO.

    3. Weighted-average.

  2. 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.

E8-17 (FIFO and LIFO—Periodic and Perpetual) The following is a record of Cannondale Company's transactions for Boston Teapots for the month of May 2010.



Instructions

  1. Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 510 units on hand, what is the cost of the ending inventory using (1) FIFO and (2) LIFO?

  2. Assuming that perpetual records are maintained and they tie into the general ledger, calculate the ending inventory using (1) FIFO and (2) LIFO.

E8-18 (FIFO and LIFO, Income Statement Presentation) The board of directors of Oksana Corporation is considering whether or not it should instruct the accounting department to change from a first-in, first-out (FIFO) basis of pricing inventories to a last-in, first-out (LIFO) basis. The following information is available.



Instructions

Prepare a condensed income statement for the year on both bases for comparative purposes.

E8-19 (FIFO and LIFO Effects) You are the vice president of finance of Mickiewicz Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2010. These schedules appear below.



The computation of cost of goods sold in each schedule is based on the following data.



Peggy Fleming, 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. Fleming that the two schedules are based on different assumptions concerning the flow of inventory costs, i.e., FIFO and LIFO. Schedules 1 and 2 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).

E8-20 (FIFO and LIFO—Periodic) Tom Brady Shop began operations on January 2, 2010. The following stock record card for footballs was taken from the records at the end of the year.



A physical inventory on December 31, 2010, reveals that 110 footballs were in stock. The bookkeeper informs you that all the discounts were taken. Assume that Tom Brady Shop uses the invoice price less discount for recording purchases.

Instructions

  1. Compute the December 31, 2010, inventory using the FIFO method.

  2. Compute the 2010 cost of goods sold using the LIFO method.

  3. What method would you recommend to the owner to minimize income taxes in 2010, using the inventory information for footballs as a guide?

E8-21 (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:



Instructions

  1. Explain what is meant by the LIFO reserve account.

  2. How does LIFO subtract inflation from inventory costs?

  3. Explain how the cash flow of $174,400 in this example was computed. Explain why this amount may not be correct.

  4. Why does a company that uses LIFO have extra cash? Explain whether this situation will always exist.

E8-22 (Alternative Inventory Methods—Comprehensive) Belanna Corporation began operations on December 1, 2010. The only inventory transaction in 2010 was the purchase of inventory on December 10, 2010, at a cost of $20 per unit. None of this inventory was sold in 2010. Relevant information is as follows.



During the year the following purchases and sales were made.



The company uses the periodic inventory method.

Instructions

  1. Determine ending inventory under (1) specific identification, (2) FIFO, (3) LIFO, and (4) average cost.

  2. Determine ending inventory using dollar-value LIFO. Assume that the December 2, 2011, purchase cost is the current cost of inventory. (Hint: The beginning inventory is the base-layer priced at $20 per unit.)

E8-23 (Dollar-Value LIFO) Sisko Company has used the dollar-value LIFO method for inventory cost determination for many years. The following data were extracted from Sisko's records.



Instructions

Calculate the index used for 2010 that yielded the above results.

E8-24 (Dollar-Value LIFO) The dollar-value LIFO method was adopted by King Corp. on January 1, 2010. Its inventory on that date was $160,000. On December 31, 2010, the inventory at prices existing on that date amounted to $151,200. The price level at January 1, 2010, was 100, and the price level at December 31, 2010, was 112.

Instructions

  1. Compute the amount of the inventory at December 31, 2010, under the dollar-value LIFO method.

  2. On December 31, 2011, the inventory at prices existing on that date was $195,500, and the price level was 115. Compute the inventory on that date under the dollar-value LIFO method.

E8-25 (Dollar-Value LIFO) Presented below is information related to Martin Company.



Instructions

Compute the ending inventory for Martin Company for 2007 through 2012 using the dollar-value LIFO method.

E8-26 (Dollar-Value LIFO) The following information relates to the Choctaw Company.



Instructions

Use the dollar-value LIFO method to compute the ending inventory for Choctaw Company for 2007 through 2011.

See the companion website, www.wiley.com/college/kieso, for a set of B Exercises.


  

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