8 Valuation of Inventories: A Cost-Basis Approach PROBLEMS 8
PROBLEMS
P8-1 (L02,3,4) GROUPWORK (Various Inventory Issues) The following independent situations relate to inventory accounting.
1. Kim Co. purchased goods with a list price of $175,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. How much should Kim Co. record as the cost of these goods?
2. Keillor Company’s inventory of $1,100,000 at December 31, 2017, was based on a physical count of goods priced at cost and before any year-end adjustments relating to the following items.
(a) Goods shipped from a vendor f.o.b. shipping point on December 24, 2017, at an invoice cost of $69,000 to Keillor Company were received on January 4, 2018.
(b) The physical count included $29,000 of goods billed to Sakic Corp. f.o.b. shipping point on December 31, 2017. The carrier picked up these goods on January 3, 2018.
What amount should Keillor report as inventory on its balance sheet?
3. Zimmerman Corp. had 1,500 units of part M.O. on hand May 1, 2017, costing $21 each. Purchases of part M.O. during May were as follows.
Units Unit Cost
May 9 2,000 $22.00
17 3,500 23.00
26 1,000 24.00
A physical count on May 31, 2017, shows 2,000 units of part M.O. on hand. Using the FIFO method, what is the cost of part M.O. inventory at May 31, 2017? Using the LIFO method, what is the inventory cost? Using the average-cost method, what is the inventory cost?
4. Ashbrook Company adopted the dollar-value LIFO method on January 1, 2017 (using internal price indexes and multiple pools). The following data are available for inventory pool A for the 2 years following adoption of LIFO.
Computing an internal price index and using the dollar-value LIFO method, at what amount should the inventory be reported at December 31, 2018?
5. Donovan Inc., a retail store chain, had the following information in its general ledger for the year 2018…
Instructions
Answer each of the preceding questions about inventories, and explain your answers.
P8-2 (L02) GROUPWORK (Inventory Adjustments) Dimitri Company, a manufacturer of small tools, provided the following information from its accounting records for the year ended December 31, 2017.
Inventory at December 31, 2017 (based on physical count of goods in Dimitri’s plant, at cost, on December 31, 2017) $1,520,000
Accounts payable at December 31, 2017 1,200,000
Net sales (sales less sales returns) 8,150,000
Additional information is as follows.
1. Included in the physical count were tools billed to a customer f.o.b. shipping point on December 31, 2017. These tools had a cost of $31,000 and were billed at $40,000. The shipment was on Dimitri’s loading dock waiting to be picked up by the common carrier.
2. Goods were in transit from a vendor to Dimitri on December 31, 2017. The invoice cost was $76,000, and the goods were shipped f.o.b. shipping point on December 29, 2017.
3. Work in process inventory costing $30,000 was sent to an outside processor for plating on December 30, 2017.
4. Tools returned by customers and held pending inspection in the returned goods area on December 31, 2017, were not included in the physical count. On January 8, 2018, the tools costing $32,000 were inspected and returned to inventory.
Credit memos totaling $47,000 were issued to the customers on the same date.
5. Tools shipped to a customer f.o.b. destination on December 26, 2017, were in transit at December 31, 2017, and had a cost of $26,000. Upon notification of receipt by the customer on January 2, 2018, Dimitri issued a sales invoice for $42,000.
6. Goods, with an invoice cost of $27,000, received from a vendor at 5:00 p.m. on December 31, 2017, were recorded on a receiving report dated January 2, 2018. The goods were not included in the physical count, but the invoice was included in accounts payable at December 31, 2017.
7. Goods received from a vendor on December 26, 2017, were included in the physical count. However, the related $56,000 vendor invoice was not included in accounts payable at December 31, 2017, because the accounts payable copy of the receiving report was lost.
8. On January 3, 2018, a monthly freight bill in the amount of $8,000 was received. The bill specifically related to merchandise purchased in December 2017, one-half of which was still in the inventory at December 31, 2017. The freight charges were not included in either the inventory or in accounts payable at December 31, 2017.
Instructions
Using the format shown below, prepare a schedule of adjustments as of December 31, 2017, to the initial amounts per Dimitri’s accounting records. Show separately the effect, if any, of each of the eight transactions on the December 31, 2017, amounts. If the transactions would have no effect on the initial amount shown, enter NONE…
P8-3 (L02) EXCEL (Purchases Recorded Gross and Net) Some of the transactions of Torres Company during August are listed below. Torres uses the periodic inventory method.
August 10 Purchased merchandise on account, $12,000, terms 2/10, n/30.
13 Returned part of the purchase of August 10, $1,200, and received credit on account.
15 Purchased merchandise on account, $16,000, terms 1/10, n/60.
25 Purchased merchandise on account, $20,000, terms 2/10, n/30.
28 Paid invoice of August 15 in full.
Instructions
(a) Assuming that purchases are recorded at gross amounts and that discounts are to be recorded when taken:
(1) Prepare general journal entries to record the transactions.
(2) Describe how the various items would be shown in the financial statements.
(b) Assuming that purchases are recorded at net amounts and that discounts lost are treated as financial expenses:
(1) Prepare general journal entries to enter the transactions.
(2) Prepare the adjusting entry necessary on August 31 if financial statements are to be prepared at that time.
(3) Describe how the various items would be shown in the financial statements.
(c) Which of the two methods do you prefer and why?
P8-4 (L03) EXCEL (Compute FIFO, LIFO, and Average-Cost) Hull Company’s record of transactions concerning part X for the month of April was as follows…
Instructions
(a) Compute the inventory at April 30 on each of the following bases. Assume that perpetual inventory records are kept in units only. Carry unit costs to the nearest cent.
(1) First-in, first-out (FIFO).
(2) Last-in, first-out (LIFO).
(3) Average-cost.
(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, what amount would be shown as ending inventory in (1), (2), and (3) above? (Carry average unit costs to four decimal places.)
P8-5 (L03) (Compute FIFO, LIFO, and Average-Cost) Some of the information found on a detail inventory card for Slatkin Inc. for the first month of operations is as follows…
Instructions
(a) From these data compute the ending inventory on each of the following bases. Assume that perpetual inventory records are kept in units only. (Carry unit costs to the nearest cent and ending inventory to the nearest dollar.)
(1) First-in, first-out (FIFO).
(2) Last-in, first-out (LIFO).
(3) Average-cost.
(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, would the amounts shown as ending inventory in (1), (2), and (3) above be the same? Explain and compute. (Round average unit costs to four decimal places.)
P8-6 (L03) GROUPWORK (Compute FIFO, LIFO, Average-Cost—Periodic and Perpetual) Ehlo Company is a multiproduct firm. Presented below is information concerning one of its products, the Hawkeye.
Instructions
Compute cost of goods sold, assuming Ehlo uses:
(a) Periodic system, FIFO cost flow. (d) Perpetual system, LIFO cost flow.
(b) Perpetual system, FIFO cost flow. (e) Periodic system, weighted-average cost flow.
(c) Periodic system, LIFO cost flow. (f) Perpetual system, moving-average cost flow.
P8-7 (L03) GROUPWORK (Financial Statement Effects of FIFO and LIFO) The management of Tritt Company has asked its accounting department to describe the effect upon the company’s financial position and its income statements of accounting for inventories on the LIFO rather than the FIFO basis during 2017 and 2018. The accounting department is to assume that the change to LIFO would have been effective on January 1, 2017, and that the initial LIFO base would have been the inventory value on December 31, 2016. The following are the company’s financial statements and other data for the years 2017 and 2018 when the FIFO method was employed…
Instructions
Name the account(s) presented in the financial statements that would have different amounts for 2018 if LIFO rather than FIFO had been used, and state the new amount for each account that is named. Show computations.
(CMA adapted)
P8-8 (L04) (Dollar-Value LIFO) Norman’s Televisions produces television sets in three categories: portable, midsize, and flat-screen. On January 1, 2017, Norman adopted dollar-value LIFO and decided to use a single inventory pool.
…
Instructions
(Round to four decimals.)
(a) Compute ending inventory, cost of goods sold, and gross profit.
(b) Assume the company uses three inventory pools instead of one. Repeat instruction (a).
P8-9 (L04) GROUPWORK (Internal Indexes—Dollar-Value LIFO) On January 1, 2017, Bonanza Wholesalers Inc. adopted the dollar-value LIFO inventory method for income tax and external financial reporting purposes. However, Bonanza continued to use the FIFO inventory method for internal accounting and management purposes. In applying the LIFO method, Bonanza uses internal conversion price indexes and the multiple pools approach under which substantially identical inventory items are grouped into LIFO inventory pools. The following data were available for inventory pool no. 1, which comprises products A and
B, for the 2 years following the adoption of LIFO.
Instructions
(a) Prepare a schedule to compute the internal conversion price indexes for 2017 and 2018. Round indexes to two decimal places.
(b) Prepare a schedule to compute the inventory amounts at December 31, 2017 and 2018, using the dollar-value LIFO inventory method.
(AICPA adapted)
P8-10 (L04) (Internal Indexes—Dollar-Value LIFO) Presented below is information related to Kaisson Corporation for the last 3 years…
Instructions
Compute the ending inventories under the dollar-value LIFO method for 2016, 2017, and 2018. The base period is January 1, 2016, and the beginning inventory cost at that date was $45,000. Compute indexes to two decimal places.
P8-11 (L04) WRITING (Dollar-Value LIFO) Richardson Company cans a variety of vegetable-type soups. Recently, the company decided to value its inventories using dollar-value LIFO pools. The clerk who accounts for inventories does not understand how to value the inventory pools using this new method, so, as a private consultant, you have been asked to teach him how this new method works.
He has provided you with the following information about purchases made over a 6-year period…
You have already explained to him how this inventory method is maintained, but he would feel better about it if you were to leave him detailed instructions explaining how these calculations are done and why he needs to put all inventories at a base-year value.
Instructions
(a) Compute the ending inventory for Richardson Company for 2013 through 2018 using dollar-value LIFO.
(b) Using your computation schedules as your illustration, write a step-by-step set of instructions explaining how the calculations are done. Begin your explanation by briefly explaining the theory behind this inventory method, including the purpose of putting all amounts into base-year price levels.
