8 Valuation of Inventories: A Cost-Basis Approach EXERCISES 8.2
E8-17 (L03) (FIFO and LIFO—Periodic) Johnny Football Shop began operations on January 2, 2017. The following stock record card for footballs was taken from the records at the end of the year…
A physical inventory on December 31, 2017, reveals that 100 footballs were in stock. The bookkeeper informs you that all the discounts were taken. Assume that Johnny Football Shop uses the invoice price less discount for recording purchases.
Instructions
(a) Compute the December 31, 2017, inventory using the FIFO method.
(b) Compute the 2017 cost of goods sold using the LIFO method.
(c) What method would you recommend to the owner to minimize income taxes in 2017, using the inventory information for footballs as a guide?
E8-18 (L04) (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…
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 $174,400 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.
E8-19 (L03,4) (Alternative Inventory Methods—Comprehensive) Tori Amos Corporation began operations on December 1, 2016. The only inventory transaction in 2016 was the purchase of inventory on December 10, 2016, at a cost of $20 per unit.
None of this inventory was sold in 2016. Relevant information is as follows.
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 December 2, 2017, purchase cost is the current cost of inventory. (Hint: The beginning inventory is the base layer priced at $20 per unit.)
E8-20 (L04) (Dollar-Value LIFO) Oasis Company has used the dollar-value LIFO method for inventory cost determination for many years. The following data were extracted from Oasis’ records…
Instructions
Calculate the index used for 2018 that yielded the above results.
E8-21 (L04) (Dollar-Value LIFO) The dollar-value LIFO method was adopted by Enya Corp. on January 1, 2017. Its inventory on that date was $160,000. On December 31, 2017, the inventory at prices existing on that date amounted to $140,000. The price level at January 1, 2017, was 100, and the price level at December 31, 2017, was 112.
Instructions
(a) Compute the amount of the inventory at December 31, 2017, under the dollar-value LIFO method.
(b) On December 31, 2018, the inventory at prices existing on that date was $172,500, and the price level was 115. Compute the inventory on that date under the dollar-value LIFO method.
E8-22 (L04) (Dollar-Value LIFO) Presented below is information related to Dino Radja Company.
Price Ending Inventory Ending Inventory
Date Index at Base Prices at Dollar-Value LIFO
December 31, 2017 105 $92,000 $92,600
December 31, 2018 ? 97,000 98,350
Instructions
Compute the ending inventory for Dino Radja Company for 2014 through 2019 using the dollar-value LIFO method.
E8-23 (L04) (Dollar-Value LIFO) The following information relates to the Jimmy Johnson Company.
Ending Inventory Price
…
Instructions
Use the dollar-value LIFO method to compute the ending inventory for Johnson Company for 2013 through 2017.
E8-24 (L05) (Inventory Errors—Periodic) Ann M. Martin Company makes the following errors during the current year.
(Evaluate each case independently and 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.)
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.
E8-25 (L05) (Inventory Errors) At December 31, 2016, Stacy McGill Corporation reported current assets of $370,000 and current liabilities of $200,000. The following items may have been recorded incorrectly.
1. Goods purchased costing $22,000 were shipped f.o.b. shipping point by a supplier on December 28. McGill received and recorded the invoice on December 29, 2016, but the goods were not included in McGill’s physical count of inventory because they were not received until January 4, 2017.
2. Goods purchased costing $15,000 were shipped f.o.b. destination by a supplier on December 26. McGill received and recorded the invoice on December 31, but the goods were not included in McGill’s 2016 physical count of inventory because they were not received until January 2, 2017.
3. Goods held on consignment from Claudia Kishi Company were included in McGill’s December 31, 2016, physical count of inventory at $13,000.
4. Freight-in of $3,000 was debited to advertising expense on December 28, 2016.
Instructions
(a) Compute the current ratio based on McGill’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?
E8-26 (L05) (Inventory Errors) The net income per books of Linda Patrick Company was determined without knowledge of the errors indicated…
Instructions
Prepare a worksheet to show the adjusted net income figure for each of the 6 years after taking into account the inventory errors.
