1460T_c08.qxd1/10/0603:38 am Page399 EQA Questions·399 10.Understand why companies select given inventory methods.Companies ordinarily prefer LIFO in the following circumstances:(1)if selling prices and revenues have been increasing faster than costs and(2)if a company has a fairly constant "base stock."Conversely,LIFO would probably not be appropriate in the following circumstances:(1)if sale prices tend to lag behind costs,(2)if specific identification is traditional,and(3)when unit costs tend to decrease as production increases,thereby nullifying the tax benefit that LIFO might provide. QUESTIONS 1.In what ways are the inventory accounts of a retailing suppliers promptly.One method suggested was to report company different from those of a manufacturing com- these discounts as financial income when payments are pany? made.Comment on the propriety of this approach. 2.Why should inventories be included in (a)a statement 11.Konerko Inc.purchases 300 units of an item at an invoice of financial position and (b)the computation of net cost of $30,000.What is the cost per unit?If the goods income? are shipped f.o.b.shipping point and the freight bill was 3.What is the difference between a perpetual inventory and $1,500,what is the cost per unit if Konerko Inc.pays the a physical inventory?If a company maintains a perpet- freight charges?If these items were bought on 2/10,n/30 ual inventory,should its physical inventory at any date terms and the invoice and the freight bill were paid be equal to the amount indicated by the perpetual in- within the 10-day period,what would be the cost per ventory records?Why? unit? 4.Mariah Carey,Inc.indicated in a recent annual report 12.Specific identification is sometimes said to be the ideal that approximately $19 million of merchandise was re- method of assigning cost to inventory and to cost of ceived on consignment.Should Mariah Carey,Inc.report goods sold.Briefly indicate the arguments for and this amount on its balance sheet?Explain. against this method of inventory valuation. 5.What is a product financing arrangement?How should 13.FIFO,weighted average,and LIFO methods are often product financing arrangements be reported in the fi- used instead of specific identification for inventory nancial statements? valuation purposes.Compare these methods with the 6.Where,if at all,should the following items be classified specific identification method,discussing the theoretical on a balance sheet? propriety of each method in the determination of income and asset valuation. (a)Goods out on approval to customers 14.How might a company obtain a price index in order to (b)Goods in transit that were recently purchased f.o.b. apply dollar-value LIFO? destination. 15.Describe the LIFO double-extension method.Using the (c)Land held by a realty firm for sale. following information,compute the index at December (d)Raw materials. 31,2007,applying the double-extension method to a (e)Goods received on consignment LIFO pool consisting of 25,500 units of product A and 10,350 units of product B.The base-year cost of product (f)Manufacturing supplies. A is $10.20 and of product B is $37.00.The price at 7.At the balance sheet date Paula Abdul Company held December 31,2007,for product A is $19.00 and for prod- title to goods in transit amounting to $214,000.This uct B is $45.60. amount was omitted from the purchases figure for the year and also from the ending inventory.What is the 16.As compared with the FIFO method of costing invento- effect of this omission on the net income for the year as ries,does the LIFO method result in a larger or smaller calculated when the books are closed?What is the effect net income in a period of rising prices?What is the com- on the company's financial position as shown in its bal- parative effect on net income in a period of falling ance sheet?Is materiality a factor in determining whether prices? an adjustment for this item should be made? 17.What is the dollar-value method of LIFO inventory val- 8.Define"cost"as applied to the valuation of inventories. uation?What advantage does the dollar-value method have over the specific goods approach of LIFO inventory 9.Distinguish between product costs and period costs as valuation?Why will the traditional LIFO inventory cost- they relate to inventory. ing method and the dollar-value LIFO inventory costing 10.Ford Motor Co.is considering alternate methods of method produce different inventory valuations if the accounting for the cash discounts it takes when paying composition of the inventory base changes?
Questions • 399 10. Understand why companies select given inventory methods. Companies ordinarily prefer LIFO in the following circumstances: (1) if selling prices and revenues have been increasing faster than costs and (2) if a company has a fairly constant “base stock.” Conversely, LIFO would probably not be appropriate in the following circumstances: (1) if sale prices tend to lag behind costs, (2) if specific identification is traditional, and (3) when unit costs tend to decrease as production increases, thereby nullifying the tax benefit that LIFO might provide. QUESTIONS 1. In what ways are the inventory accounts of a retailing company different from those of a manufacturing company? 2. Why should inventories be included in (a) a statement of financial position and (b) the computation of net income? 3. What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why? 4. Mariah Carey, Inc. indicated in a recent annual report that approximately $19 million of merchandise was received on consignment. Should Mariah Carey, Inc. report this amount on its balance sheet? Explain. 5. What is a product financing arrangement? How should product financing arrangements be reported in the financial statements? 6. Where, if at all, should the following items be classified on a balance sheet? (a) Goods out on approval to customers. (b) Goods in transit that were recently purchased f.o.b. destination. (c) Land held by a realty firm for sale. (d) Raw materials. (e) Goods received on consignment. (f) Manufacturing supplies. 7. At the balance sheet date Paula Abdul Company held title to goods in transit amounting to $214,000. This amount was omitted from the purchases figure for the year and also from the ending inventory. What is the effect of this omission on the net income for the year as calculated when the books are closed? What is the effect on the company’s financial position as shown in its balance sheet? Is materiality a factor in determining whether an adjustment for this item should be made? 8. Define “cost” as applied to the valuation of inventories. 9. Distinguish between product costs and period costs as they relate to inventory. 10. Ford Motor Co. is considering alternate methods of accounting for the cash discounts it takes when paying suppliers promptly. One method suggested was to report these discounts as financial income when payments are made. Comment on the propriety of this approach. 11. Konerko Inc. purchases 300 units of an item at an invoice cost of $30,000. What is the cost per unit? If the goods are shipped f.o.b. shipping point and the freight bill was $1,500, what is the cost per unit if Konerko Inc. pays the freight charges? If these items were bought on 2/10, n/30 terms and the invoice and the freight bill were paid within the 10-day period, what would be the cost per unit? 12. Specific identification is sometimes said to be the ideal method of assigning cost to inventory and to cost of goods sold. Briefly indicate the arguments for and against this method of inventory valuation. 13. FIFO, weighted average, and LIFO methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determination of income and asset valuation. 14. How might a company obtain a price index in order to apply dollar-value LIFO? 15. Describe the LIFO double-extension method. Using the following information, compute the index at December 31, 2007, applying the double-extension method to a LIFO pool consisting of 25,500 units of product A and 10,350 units of product B. The base-year cost of product A is $10.20 and of product B is $37.00. The price at December 31, 2007, for product A is $19.00 and for product B is $45.60. 16. As compared with the FIFO method of costing inventories, does the LIFO method result in a larger or smaller net income in a period of rising prices? What is the comparative effect on net income in a period of falling prices? 17. What is the dollar-value method of LIFO inventory valuation? What advantage does the dollar-value method have over the specific goods approach of LIFO inventory valuation? Why will the traditional LIFO inventory costing method and the dollar-value LIFO inventory costing method produce different inventory valuations if the composition of the inventory base changes? 1460T_c08.qxd 1/10/06 03:38 am Page 399
1460T_c08.qxd1/19/0611:17 AM Page400 EQA 400.Chapter 8 Valuation of Inventories:A Cost-Basis Approach 18.Explain the following terms. cember 31,2006,price level of 100 and the December 31, (a)LIFO layer.(b)LIFO reserve.(c)LIFO effect. 2007,price level of 108,compute the inventory value at December 31,2007,under the dollar-value LIFO method. 19.On December 31,2006,the inventory of Mario Lemieux Company amounts to $800,000.During 2007,the com- 20.In an article that appeared in the Wall Street Journal,the pany decides to use the dollar-value LIFO method of phrases"phantom(paper)profits"and "high LIFO prof- costing inventories.On December 31,2007,the inventory its"through involuntary liquidation were used.Explain is $1,026,000 at December 31,2007,prices.Using the De- these phrases. BRIEF EXERCISES (L01)BE8-1 Included in the December 31 trial balance of Billie Joel Company are the following assets. Cash $190,000 Work in process $200,000 Equipment(net) 1,100,000 Receivables (net) 400.000 Prepaid insurance 41,000 Patents 110.000 Raw materials 335,000 Finished goods 150,000 Prepare the current assets section of the December 31 balance sheet. (L0 2)BE8-2 Alanis Morrissette Company uses a perpetual inventory system.Its beginning inventory consists of 50 units that cost $30 each.During June,the company purchased 150 units at $30 each,returned 6 units for credit,and sold 125 units at $50 each.Journalize the June transactions. (L0 4)BE8-3 Mayberry Company took a physical inventory on December 31 and determined that goods cost- ing $200,000 were on hand.Not included in the physical count were $15,000 of goods purchased from Taylor Corporation,f.o.b.shipping point,and $22,000 of goods sold to Mount Pilot Company for $30,000, f.o.b.destination.Both the Taylor purchase and the Mount Pilot sale were in transit at year-end.What amount should Mayberry report as its December 31 inventory? (L0 3)BE8-4 Gavin Bryars Enterprises reported cost of goods sold for 2007 of $1,400,000 and retained earnings of $5,200,000 at December 31,2007.Gavin Bryars later discovered that its ending inventories at Decem- ⊕ ber 31,2006 and 2007,were overstated by $110,000 and $45,000,respectively.Determine the corrected amounts for 2007 cost of goods sold and December 31,2007,retained earnings. (L0 5)BE8-5 Jose Zorilla Company uses a periodic inventory system.For April,when the company sold 700 units,the following information is available. Units Unit Cost Total Cost April 1 inventory 250 $10 S2,500 April 15 purchase 400 12 4,800 April 23 purchase 350 4,550 1,000 $11,850 Compute the April 30 inventory and the April cost of goods sold using the average cost method. (L0 5)BE8-6 Data for Jose Zorilla Company are presented in BE8-5.Compute the April 30 inventory and the April cost of goods sold using the FIFO method. (L0 5)BE8-7 Data for Jose Zorilla Company are presented in BE8-5.Compute the April 30 inventory and the April cost of goods sold using the LIFO method. (L0 8)BE8-8 Easy-E Company had ending inventory at end-of-year prices of $100,000 at December 31,2005; $123,200 at December 31,2006;and $134,560 at December 31,2007.The year-end price indexes were 100 at 12/31/05,110 at 12/31/06,and 116 at 12/31/07.Compute the ending inventory for Easy-E Company for 2005 through 2007 using the dollar-value LIFO method. (LO 8)BE8-9 Wingers uses the dollar-value LIFO method of computing its inventory.Data for the past 3 years follow. Year Ended December 31 Inventory at Current-year Cost Price Index 2005 $19,750 100 2006 21,708 108 2007 25,935 114 Instructions Compute the value of the 2006 and 2007 inventories using the dollar-value LIFO method
400 • Chapter 8 Valuation of Inventories: A Cost-Basis Approach 18. Explain the following terms. (a) LIFO layer. (b) LIFO reserve. (c) LIFO effect. 19. On December 31, 2006, the inventory of Mario Lemieux Company amounts to $800,000. During 2007, the company decides to use the dollar-value LIFO method of costing inventories. On December 31, 2007, the inventory is $1,026,000 at December 31, 2007, prices. Using the December 31, 2006, price level of 100 and the December 31, 2007, price level of 108, compute the inventory value at December 31, 2007, under the dollar-value LIFO method. 20. In an article that appeared in the Wall Street Journal, the phrases “phantom (paper) profits” and “high LIFO profits” through involuntary liquidation were used. Explain these phrases. BRIEF EXERCISES BE8-1 Included in the December 31 trial balance of Billie Joel Company are the following assets. Cash $ 190,000 Work in process $200,000 Equipment (net) 1,100,000 Receivables (net) 400,000 Prepaid insurance 41,000 Patents 110,000 Raw materials 335,000 Finished goods 150,000 Prepare the current assets section of the December 31 balance sheet. BE8-2 Alanis Morrissette Company uses a perpetual inventory system. Its beginning inventory consists of 50 units that cost $30 each. During June, the company purchased 150 units at $30 each, returned 6 units for credit, and sold 125 units at $50 each. Journalize the June transactions. BE8-3 Mayberry Company took a physical inventory on December 31 and determined that goods costing $200,000 were on hand. Not included in the physical count were $15,000 of goods purchased from Taylor Corporation, f.o.b. shipping point, and $22,000 of goods sold to Mount Pilot Company for $30,000, f.o.b. destination. Both the Taylor purchase and the Mount Pilot sale were in transit at year-end. What amount should Mayberry report as its December 31 inventory? BE8-4 Gavin Bryars Enterprises reported cost of goods sold for 2007 of $1,400,000 and retained earnings of $5,200,000 at December 31, 2007. Gavin Bryars later discovered that its ending inventories at December 31, 2006 and 2007, were overstated by $110,000 and $45,000, respectively. Determine the corrected amounts for 2007 cost of goods sold and December 31, 2007, retained earnings. BE8-5 Jose Zorilla Company uses a periodic inventory system. For April, when the company sold 700 units, the following information is available. Units Unit Cost Total Cost April 1 inventory 250 $10 $ 2,500 April 15 purchase 400 12 4,800 April 23 purchase 350 13 4,550 1,000 $11,850 Compute the April 30 inventory and the April cost of goods sold using the average cost method. BE8-6 Data for Jose Zorilla Company are presented in BE8-5. Compute the April 30 inventory and the April cost of goods sold using the FIFO method. BE8-7 Data for Jose Zorilla Company are presented in BE8-5. Compute the April 30 inventory and the April cost of goods sold using the LIFO method. BE8-8 Easy-E Company had ending inventory at end-of-year prices of $100,000 at December 31, 2005; $123,200 at December 31, 2006; and $134,560 at December 31, 2007. The year-end price indexes were 100 at 12/31/05, 110 at 12/31/06, and 116 at 12/31/07. Compute the ending inventory for Easy-E Company for 2005 through 2007 using the dollar-value LIFO method. BE8-9 Wingers uses the dollar-value LIFO method of computing its inventory. Data for the past 3 years follow. Year Ended December 31 Inventory at Current-year Cost Price Index 2005 $19,750 100 2006 21,708 108 2007 25,935 114 Instructions Compute the value of the 2006 and 2007 inventories using the dollar-value LIFO method. (L0 1) (L0 2) (L0 4) (L0 3) (L0 5) (L0 5) (L0 5) (L0 8) (L0 8) 1460T_c08.qxd 1/19/06 11:17 AM Page 400
1460T_c08.qxd1/6/0602:15 am Page401 EQA Exercises·401 EXERCISES (L04) E8-1 (Inventoriable Costs)Presented below is a list of items that may or may not be reported as in- ventory in a company's December 31 balance sheet. 1. Goods out on consignment at another company's store. 2. Goods sold on an installment basis (bad debts can be reasonably estimated). 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. Costs incurred to advertise goods held for resale. 11. Materials on hand not yet placed into production by a manufacturing firm. 12. Office supplies. 13. Raw materials on which a manufacturing firm has started production,but which are not com- pletely 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 state- ments. (L0 4)E8-2 (Inventoriable Costs)In your audit of Jose Oliva Company,you find that a physical inventory on December 31,2007,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 Oliva on consignment.The consignor is the Max Suzuki Company. 2. Merchandise costing $38,000 which was shipped by Oliva f.o.b.destination to a customer on December 31,2007.The customer was expected to receive the merchandise on January 6,2008. 3. Merchandise costing $46,000 which was shipped by Oliva f.o.b.shipping point to a customer on December 29,2007.The customer was scheduled to receive the merchandise on January 2,2008. 4. Merchandise costing $83,000 shipped by a vendor f.o.b.destination on December 30,2007,and received by Oliva on January 4,2008. Merchandise costing $51,000 shipped by a vendor f.o.b.seller on December 31,2007,and received by Oliva on January 5,2008. Instructions Based on the above information,calculate the amount that should appear on Oliva's balance sheet at December 31,2007,for inventory. (L0 4)E8-3 (Inventoriable Costs)Assume that in an annual audit of Harlowe Inc.at December 31,2007,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 31,2007.The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4,2008. 2.Merchandise costing $2,800 was received on January 3,2008,and the related purchase invoice recorded January 5.The invoice showed the shipment was made on December 29,2007,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 18,2007,but that the case was shipped and the customer billed on January 10,2008.The product was a stock item of your client
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 out on consignment at another company’s store. 2. Goods sold on an installment basis (bad debts can be reasonably estimated). 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. Costs incurred to advertise goods held for resale. 11. Materials on hand not yet placed into production by a manufacturing firm. 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 Jose Oliva Company, you find that a physical inventory on December 31, 2007, 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 Oliva on consignment. The consignor is the Max Suzuki Company. 2. Merchandise costing $38,000 which was shipped by Oliva f.o.b. destination to a customer on December 31, 2007. The customer was expected to receive the merchandise on January 6, 2008. 3. Merchandise costing $46,000 which was shipped by Oliva f.o.b. shipping point to a customer on December 29, 2007. The customer was scheduled to receive the merchandise on January 2, 2008. 4. Merchandise costing $83,000 shipped by a vendor f.o.b. destination on December 30, 2007, and received by Oliva on January 4, 2008. 5. Merchandise costing $51,000 shipped by a vendor f.o.b. seller on December 31, 2007, and received by Oliva on January 5, 2008. Instructions Based on the above information, calculate the amount that should appear on Oliva’s balance sheet at December 31, 2007, for inventory. E8-3 (Inventoriable Costs) Assume that in an annual audit of Harlowe Inc. at December 31, 2007, 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, 2007. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2008. 2. Merchandise costing $2,800 was received on January 3, 2008, and the related purchase invoice recorded January 5. The invoice showed the shipment was made on December 29, 2007, 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, 2007, but that the case was shipped and the customer billed on January 10, 2008. The product was a stock item of your client. Exercises • 401 (L0 4) (L0 4) (L0 4) 1460T_c08.qxd 1/6/06 02:15 am Page 401
1460T_c08.qxd1/10/0603:38 am Page402 EQA 402.Chapter 8 Valuation of Inventories:A Cost-Basis Approach 4.Merchandise received on January 6,2008,costing $680 was entered in the purchase journal on January 7,2008.The invoice showed shipment was made f.o.b.supplier's warehouse on December 31,2007.Because it was not on hand at December 31,it was not included in inventory. 5.Merchandise costing $720 was received on December 28,2007,and the invoice was not recorded. You located it in the hands of the purchasing agent;it was marked"on consignment." 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. (L0 2,E8-4 (Inventoriable Costs-Perpetual)Colin Davis Machine Company maintains a general ledger 4) 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 deb- ited 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 2,2007.The receiving report shows that the materials were received December 28,2006. 2.Materials costing $28,000,shipped f.o.b.destination,were not entered by December 31,2006,"be- cause they were in a railroad car on the company's siding on that date and had not been un- loaded." 3.Materials costing $7,300 were returned to the supplier on December 29,2006,and were shipped f.o.b.shipping point.The return was entered on that date,even though the materials are not ex- pected to reach the supplier's place of business until January 6,2007. 4. An invoice for $7,500,terms f.o.b.shipping point,was received and entered December 30,2006. The receiving report shows that the materials were received January 4,2007,and the bill of lading shows that they were shipped January 2,2007. 5. Materials costing $19,800 were received December 30,2006,but no entry was made for them because "they were ordered with a specified delivery of no earlier than January 10,2007." Instructions Prepare correcting general journal entries required at December 31,2006,assuming that the books have not been closed. ⊕ (L0 3,E8-5 (Inventoriable Costs-Error Adjustments)Craig Company asks you to review its December 31, 4) 2007,inventory values and prepare the necessary adjustments to the books.The following information is given to you 1.Craig uses the periodic method of recording inventory.A physical count reveals $234,890 of inventory on hand at December 31,2007 2.Not included in the physical count of inventory is $13,420 of merchandise purchased on Decem- ber 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 Champy on December 30,f.o.b.destination.This mer- chandise 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 Champy 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 Glowser Industries.This mer- chandise 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 Craig on consignment from Jackel Industries. 7. Included in inventory is merchandise sold to Kemp 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 $10,520,and Kemp received the merchandise on January 5. 8.Excluded from inventory was a carton labeled "Please accept for credit."This carton contains mer- chandise 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 (a)Determine the proper inventory balance for Craig Company at December 31,2007. (b)Prepare any correcting entries to adjust inventory to its proper amount at December 31,2007. Assume the books have not been closed
4. Merchandise received on January 6, 2008, costing $680 was entered in the purchase journal on January 7, 2008. The invoice showed shipment was made f.o.b. supplier’s warehouse on December 31, 2007. Because it was not on hand at December 31, it was not included in inventory. 5. Merchandise costing $720 was received on December 28, 2007, and the invoice was not recorded. You located it in the hands of the purchasing agent; it was marked “on consignment.” 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) Colin Davis 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, 2007. The receiving report shows that the materials were received December 28, 2006. 2. Materials costing $28,000, shipped f.o.b. destination, were not entered by December 31, 2006, “because they were in a railroad car on the company’s siding on that date and had not been unloaded.” 3. Materials costing $7,300 were returned to the supplier on December 29, 2006, 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, 2007. 4. An invoice for $7,500, terms f.o.b. shipping point, was received and entered December 30, 2006. The receiving report shows that the materials were received January 4, 2007, and the bill of lading shows that they were shipped January 2, 2007. 5. Materials costing $19,800 were received December 30, 2006, but no entry was made for them because “they were ordered with a specified delivery of no earlier than January 10, 2007.” Instructions Prepare correcting general journal entries required at December 31, 2006, assuming that the books have not been closed. E8-5 (Inventoriable Costs—Error Adjustments) Craig Company asks you to review its December 31, 2007, inventory values and prepare the necessary adjustments to the books. The following information is given to you. 1. Craig uses the periodic method of recording inventory. A physical count reveals $234,890 of inventory on hand at December 31, 2007. 2. Not included in the physical count of inventory is $13,420 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 Champy 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 Champy 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 Glowser 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 Craig on consignment from Jackel Industries. 7. Included in inventory is merchandise sold to Kemp 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 $10,520, and Kemp 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 (a) Determine the proper inventory balance for Craig Company at December 31, 2007. (b) Prepare any correcting entries to adjust inventory to its proper amount at December 31, 2007. Assume the books have not been closed. 402 • Chapter 8 Valuation of Inventories: A Cost-Basis Approach (L0 2, 4) (L0 3, 4) 1460T_c08.qxd 1/10/06 03:38 am Page 402
1460T_c08.qxd01:10:200603:38 AM Page403 EQA Exercises·403 (L0 4)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. 2005 2006 2007 Sales $290.000 $? $410.000 Sales returns 11.000 13.000 7 Net sales 7 347,000 1 Beginning inventory 20,000 32.000 Ending inventory 2 Purchases 260,000 298,000 Purchase returns and allowances 5.000 8.,000 10.000 Transportation-in 8,000 9.000 12,000 Cost of goods sold 233,000 293,000 Gross profit on sales 46,000 91,000 97,000 (L0 4)E8-7 (Purchases Recorded Net) Presented below are transactions related to Tom Brokaw,Inc. May 10 Purchased goods billed at $15,000 subject to cash discount terms of 2/10,n/60. 11 Purchased goods billed at $13,200 subject to terms of 1/15,n/30. 19 Paid invoice of May 10. 24 Purchased goods billed at $11.500 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 ad- justing entry required on May 31 if financial statements are to be prepared as of that date. (L0 4)E8-8 (Purchases Recorded,Gross Method)Cruise Industries purchased $10,800 of merchandise on February 1,2007,subject to a trade discount of 10%and with credit terms of 3/15,n/60.It returned $2,500 (gross price before trade or cash discount)on February 4.The invoice was paid on February 13. Instructions (a)Assuming that Cruise uses the perpetual method for recording merchandise transactions,record the purchase,return,and payment using the gross method. (b)Assuming that Cruise 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 1 be recorded if the net method were used? (L0 2)E8-9 (Periodic versus Perpetual Entries)Fong Sai-Yuk Company sells one product.Presented below is information for January for Fong Sai-Yuk Company. Jan.1 Inventory 100 units at $5 each 4 Sale 80 units at $8 each 11 Purchase 150 units at $6 each 13 Sale 120 units at $8.75 each 20 Purchase 160 units at $7 each 27 Sale 100 units at $9 each Fong Sai-Yuk uses the FIFO cost flow assumption.All purchases and sales are on account. Instructions (a)Assume Fong Sai-Yuk 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 end- ing inventory for January is 110 units. (b) Compute gross profit using the periodic system. (c)Assume Fong Sai-Yuk uses a perpetual system.Prepare all necessary journal entries. (d)Compute gross profit using the perpetual system. (L0 3)E8-10 (Inventory Errors-Periodic)Ann M.Martin Company makes the following errors during the current year.(In all cases,assume ending inventory in the following year is correctly stated.) 1.Ending inventory is overstated,but purchases and related accounts payable are recorded correctly. 2.Both ending inventory and purchases and related accounts payable are understated.(Assume this purchase was recorded and paid for in the following year.) 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.)
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. 2005 2006 2007 Sales $290,000 $ ? $410,000 Sales returns 11,000 13,000 ? Net sales ? 347,000 ? Beginning inventory 20,000 32,000 ? Ending inventory ? ? ? Purchases ? 260,000 298,000 Purchase returns and allowances 5,000 8,000 10,000 Transportation-in 8,000 9,000 12,000 Cost of goods sold 233,000 ? 293,000 Gross profit on sales 46,000 91,000 97,000 E8-7 (Purchases Recorded Net) Presented below are transactions related to Tom Brokaw, Inc. May 10 Purchased goods billed at $15,000 subject to cash discount terms of 2/10, n/60. 11 Purchased goods billed at $13,200 subject to terms of 1/15, n/30. 19 Paid invoice of May 10. 24 Purchased goods billed at $11,500 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. E8-8 (Purchases Recorded, Gross Method) Cruise Industries purchased $10,800 of merchandise on February 1, 2007, subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned $2,500 (gross price before trade or cash discount) on February 4. The invoice was paid on February 13. Instructions (a) Assuming that Cruise uses the perpetual method for recording merchandise transactions, record the purchase, return, and payment using the gross method. (b) Assuming that Cruise 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 1 be recorded if the net method were used? E8-9 (Periodic versus Perpetual Entries) Fong Sai-Yuk Company sells one product. Presented below is information for January for Fong Sai-Yuk Company. Jan. 1 Inventory 100 units at $5 each 4 Sale 80 units at $8 each 11 Purchase 150 units at $6 each 13 Sale 120 units at $8.75 each 20 Purchase 160 units at $7 each 27 Sale 100 units at $9 each Fong Sai-Yuk uses the FIFO cost flow assumption. All purchases and sales are on account. Instructions (a) Assume Fong Sai-Yuk 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. (b) Compute gross profit using the periodic system. (c) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries. (d) Compute gross profit using the perpetual system. E8-10 (Inventory Errors—Periodic) Ann M. Martin Company makes the following errors during the current year. (In all cases, assume ending inventory in the following year is correctly stated.) 1. Ending inventory is overstated, but purchases and related accounts payable are recorded correctly. 2. Both ending inventory and purchases and related accounts payable are understated. (Assume this purchase was recorded and paid for in the following year.) 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.) Exercises • 403 (L0 4) (L0 4) (L0 4) (L0 2) (L0 3) 1460T_c08.qxd 01:10:2006 03:38 AM Page 403