8 Valuation of Inventories: A Cost-Basis Approach EXERCISES 8.1
EXERCISES
E8-1 (L02) (Inventoriable Goods and 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 (L02) EXCEL (Inventoriable Goods and Costs) In your audit of Jose Oliva Company, you find that a physical inventory on December 31, 2017, 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, 2017. The customer was expected to receive the merchandise on January 6, 2018.
3. Merchandise costing $46,000 which was shipped by Oliva f.o.b. shipping point to a customer on December 29, 2017. The customer was scheduled to receive the merchandise on January 2, 2018.
4. Merchandise costing $83,000 shipped by a vendor f.o.b. destination on December 30, 2017, and received by Oliva on January 4, 2018.
5. Merchandise costing $51,000 shipped by a vendor f.o.b. shipping point on December 31, 2017, and received by Oliva on January 5, 2018.
Instructions
Based on the above information, calculate the amount that should appear on Oliva’s balance sheet at December 31, 2017, for inventory.
E8-3 (L02) (Inventoriable Goods and Costs) Assume that in an annual audit of Harlowe Inc. at December 31, 2017, 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, 2017. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2018.
2. Merchandise costing $2,800 was received on January 3, 2018, and the related purchase invoice recorded January 5. The invoice showed the shipment was made on December 29, 2017, 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, 2017, but that the case was shipped and the customer billed on January 10, 2018. The product was a stock item of your client.
4. Merchandise received on January 6, 2018, costing $680 was entered in the purchase journal on January 7, 2018. The invoice showed shipment was made f.o.b. supplier’s warehouse on December 31, 2017. Because it was not on hand at December 31, it was not included in inventory.
5. Merchandise costing $720 was received on December 28, 2017, 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 (L02) (Inventoriable Goods and 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, 2017. The receiving report shows that the materials were received December 28, 2016.
2. Materials costing $28,000, shipped f.o.b. destination, were not entered by December 31, 2016, “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, 2016, 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, 2017.
4. An invoice for $7,500, terms f.o.b. shipping point, was received and entered December 30, 2016. The receiving report shows that the materials were received January 4, 2017, and the bill of lading shows that they were shipped January 2, 2017.
5. Materials costing $19,800 were received December 30, 2016, but no entry was made for them because “they were ordered with a specified delivery of no earlier than January 10, 2017.”
Instructions
Prepare correcting general journal entries required at December 31, 2016, assuming that the books have not been closed.
E8-5 (L02) (Inventoriable Goods and Costs—Error Adjustments) Craig Company asks you to review its December 31, 2017, 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, 2017.
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 on December 31 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; Craig will honor the return.
Instructions
(a) Determine the proper inventory balance for Craig Company at December 31, 2017.
(b) Prepare any correcting entries to adjust inventory to its proper amount at December 31, 2017. Assume the books have not been closed.
E8-6 (L02) (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 (L02) (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 (L02) (Purchases Recorded, Gross Method) Cruise Industries purchased $10,800 of merchandise on February 1, 2017, 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 (L03) EXCEL (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 (L03) (FIFO and LIFO—Periodic and Perpetual) Inventory information for Part 311 of Monique Aaron Corp. discloses the following information for the month of June.
June 1 Balance 300 units @ $10 June 10 Sold 200 units @ $24
11 Purchased 800 units @ $12 15 Sold 500 units @ $25
20 Purchased 500 units @ $13 27 Sold 300 units @ $27
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 LIFO usually produces a lower gross profit than FIFO?
E8-11 (L03) (FIFO, LIFO and Average-Cost Determination) John Adams Company’s record of transactions for the month of April was as follows.
Instructions
(a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and (2) average-cost.
(b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO.
(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?
E8-12 (L03) (FIFO, LIFO, Average-Cost Inventory) Shania Twain Company was formed on December 1, 2016. The following information is available from Twain’s inventory records for Product BAP...
Instructions
Prepare schedules to compute the ending inventory at March 31, 2017, under each of the following inventory methods.
(a) FIFO (b) LIFO. (c) Weighted-average (round unit costs to two decimal places).
E8-13 (L03) (Compute FIFO, LIFO, Average-Cost—Periodic) Presented below is information related to Blowfish radios for the Hootie Company for the month of July.
...
Instructions
(a) 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.
(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.
E8-14 (L03) (FIFO and LIFO—Periodic and Perpetual) The following is a record of Pervis Ellison Company’s transactions for Boston Teapots for the month of May 2017.
May 1 Balance 400 units @ $20 May 10 Sale 300 units @ $38
12 Purchase 600 units @ $25 20 Sale 540 units @ $38
28 Purchase 400 units @ $30
Instructions
(a) Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 560 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.
E8-15 (L03) (FIFO and LIFO; Income Statement Presentation) The board of directors of Ichiro Corporation is considering whether or not it should instruct the accounting department to shift from a first-in, first-out (FIFO) basis of pricing inventories to a last-in, first-out (LIFO) basis. The following information is available.
Sales 21,000 units @ $50
Inventory, January 1 6,000 units @ 20
Purchases 6,000 units @ 22
10,000 units @ 25
7,000 units @ 30
Inventory, December 31 8,000 units @ ?
Operating expenses $200,000
Instructions
Prepare a condensed income statement for the year on both bases for comparative purposes.
E8-16 (L03) (FIFO and LIFO Effects) You are the vice president of finance of Sandy Alomar Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2017. These schedules appear below.
Sales Cost of Gross
($5 per unit) Goods Sold Margin
Schedule 1 $150,000 $124,900 $25,100
Schedule 2 150,000 129,400 20,600
The computation of cost of goods sold in each schedule is based on the following data…
Jane Torville, 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. Torville 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.
