AC213_Ch08_ExerciseSolutions

AC213_Ch08_ExerciseSolutions Exercise 8–1

1.To record the purchase of inventory on account and the payment of freight charges.

Inventory 5,000

Accounts payable 5,000

Inventory 300

Cash 300

2.To record purchase returns.

Accounts payable 600

Inventory 600

3.To record cash sales and cost of goods sold.

Cash 5,200

Sales revenue 5,200

Cost of goods sold 2,800

Inventory 2,800

Exercise 8–2

1.To record the purchase of inventory on account and the payment of freight charges.

Purchases 5,000

Accounts payable 5,000

Freight-in 300

Cash 300

2.To record purchase returns.

Accounts payable 600

Purchase returns 600

3.To record cash sales.

Cash 5,200

Sales revenue 5,200

NO ENTRY IS MADE FOR THE COST OF GOODS SOLD.

Exercise 8–3

Requirement 1

Beginning inventory $ 32,000

Plus net purchases:

Purchases $240,000

Less: Purchase discounts (6,000)

Less: Purchases returns (10,000)

Plus: Freight-in 17,000 241,000

Cost of goods available for sale 273,000

Less: Ending inventory (40,000)

Cost of goods sold $233,000

Requirement 2

Cost of goods sold (above) 233,000

Inventory (ending) 40,000

Purchase discounts 6,000

Purchase returns 10,000

Inventory (beginning) 32,000

Purchases 240,000

Freight-in 17,000

Exercise 8–4

Perpetual System Periodic System

($ in 000s)

Purchases

Inventory 155 Purchases 155
Accounts payable 155 Accounts payable 155

Freight

Inventory 10 Freight-in 10
Cash 10 Cash 10

Returns

Accounts payable 12 Accounts payable 12
Inventory 12 Purchase returns 12

Sales

Accounts receivable 250 Accounts receivable 250
Sales revenue 250 Sales revenue 250

Cost of goods sold 148 No entry

Inventory 148

End of period

No entry Cost of goods sold (below)148
Inventory (ending) 30
Purchase returns 12
Inventory (beginning) 25
Purchases 155
Freight-in 10

Cost of goods sold:

Beginning inventory $25

Purchases $155

Less: Returns (12)

Plus: Freight-in 10

Net purchases 153

Cost of goods available 178

Less: Ending inventory (30)

Cost of goods sold $148

Exercise 8–5

2013 2014 2015

Beginning inventory 275 (1) 249 (3) 225

Cost of goods sold 627 621 584 (6)

Ending inventory 249 (2) 225 216

Cost of goods available for sale 876 846 (4) 800

Purchases (gross) 630 610 (5) 585

Purchase discounts 18 15 12 (7)

Purchase returns 24 30 14

Freight-in 13 32 16

Net purchases = Purchases (gross) – Purchase returns – Purchase discounts + Freight-in

Beginning inventory + Net purchases = Cost of goods available for sale

Cost of goods available for sale – Ending inventory = Cost of goods sold

2013:

(1) Cost of goods available for sale – Net purchases = Beginning inventory

876 – (630 – 18 – 24 + 13) = 275 = Beginning inventory

(2) Cost of goods available for sale – Cost of goods sold = Ending inventory

876 – 627 = 249 = Ending inventory

2014:

(3)2014 beginning inventory = 2013 ending inventory = 249

(4) Cost of goods sold + Ending inventory = Cost of goods available for sale

621 + 225 = 846 = Cost of goods available for sale

(5) Cost of goods available for sale – Beginning inventory = Net purchases

846 – 249 = 597 = Net purchases

Net purchases + Purchases discounts + Purchase returns – Freight-in = Purchases(gross)

597 + 15 + 30 – 32 = 610 = Purchases (gross)

2015:

(6) Cost of goods available for sale – Ending inventory = Cost of goods sold

800 – 216 = 584 = Cost of goods sold

Exercise 8–5 (concluded)

(7) Cost of goods available for sale – Beginning inventory = Net purchases

800 – 225 = 575 = Net purchases

Purchases (gross) – Purchase returns + Freight-in – Net purchases = Purchase discounts

585 – 14 + 16 – 575 = 12 = Purchase discounts

Exercise 8–6

Inventory balance before additional transactions $165,000

Add:

Goods shipped to Kwok f.o.b. shipping point on Dec. 28 17,000

Goods shipped to customer f.o.b. destination on December 27 22,000

Correct inventory balance $204,000

Exercise 8–7

Inventory balance before additional transactions $210,000

Add:

Merchandise on consignment with Joclyn Corp. 15,000

Deduct:

Merchandise shipped to Raymond f.o.b. destination on December 26 (30,000)

Merchandise held on consignment from the Harrison Company (14,000)

Correct inventory balance $181,000

Exercise 8–8

1. Excluded
2. Included
3. Included
4. Excluded
5. Included
6. Excluded
7. Included

Exercise 8–9

Requirement 1

Purchase price = 1,000 units x $50 = $50,000

July 15, 2013

Purchases 50,000

Accounts payable 50,000

July 23, 2013

Accounts payable 50,000

Cash (98% x $50,000) 49,000

Purchase discounts (2% x $50,000) 1,000

Requirement 2

August 15, 2013

Accounts payable 50,000

Cash 50,000

Requirement 3

The July 15 entry would include a debit to the inventory account instead of to purchases, and the July 23 entry would include a credit to the inventory account instead of topurchase discounts.

Exercise 8–10

Requirement 1

July 15, 2013

Purchases (98% x $50,000) 49,000

Accounts payable 49,000

July 23, 2013

Accounts payable 49,000

Cash 49,000

Requirement 2

August 15, 2013

Accounts payable 49,000

Interest expense 1,000

Cash 50,000

Requirement 3

The July 15 entry would include a debit to the inventory account instead of to purchases.

Exercise 8–11

Requirement 1

Purchases: $500 x 70% = $350 per unit.

100 units x $350 = $35,000

November 17, 2013

Purchases 35,000

Accounts payable 35,000

November 26, 2013

Accounts payable 35,000

Purchase discounts (2% x $35,000) 700

Cash (98% x $35,000) 34,300

Requirement 2

December 15, 2013

Accounts payable 35,000

Cash 35,000

Exercise 8–11 (concluded)

Requirement 3

Requirement 1:

November 17, 2013

Purchases (98% x $35,000) 34,300

Accounts payable 34,300

November 26, 2013

Accounts payable 34,300

Cash 34,300

Requirement 2:

December 15, 2013

Accounts payable 34,300

Interest expense (2% x $35,000) 700

Cash 35,000

Exercise 8–12

The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. The specific citation for each of the following items is:

1. Define the meaning of cost as it applies to the initial measurement of inventory.

FASB ASC 330–10–30–1: “Inventory–Overall–Initial Measurement.”

The primary basis of accounting for inventories is cost, which has been defined generally as the price paid or consideration given to acquire an asset. As applied to inventories, cost means in principle the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location. It is understood to mean acquisition and production cost, and its determination involves many considerations.

1. Indicate the circumstances when it is appropriate to initially measure agricultural inventory at fair value.

FASB ASC 905–330–30–1: “Agriculture–Inventory–Initial

Measurement.”

Exceptional cases exist in which it is not practicable to determine an appropriate cost basis for products. A market basis is acceptable if the products meet all of the following criteria:

• a.  They have immediate marketability at quoted market prices that cannot be influenced by the producer.
• b.  They have characteristics of unit interchangeability.
• c.  They have relatively insignificant costs of disposal.

The accounting basis of those kinds of inventories shall be their realizable value, calculated on the basis of quoted market prices less estimated direct costs of disposal. An example is freshly dressed meats produced in meat packing operations.

Exercise 8–12 (concluded)

1. What is a major objective of accounting for inventory?

FASB ASC 330–10–10–1: “Inventory–Overall–Objectives.”

A major objective of accounting for inventories is the proper determination of income through the process of matching appropriate costs against revenues.

1. Are abnormal freight charges included in the cost of inventory?

FASB ASC 330–10–30–7: “Inventory–Overall–Initial Measurement.”

Unallocated overheads shall be recognized as an expense in the period in which they are incurred. Other items such as abnormal freight, handling costs, and amounts of wasted materials (spoilage) require treatment as current period charges rather than as a portion of the inventory cost.

Exercise 8–13

Cost of goods available for sale:

Beginning inventory (2,000 x $6.10) $12,200

Purchases:

10,000 x $5.50 $55,000

6,000 x $5.00 30,000 85,000

Cost of goods available (18,000 units) $97,200

First-in, first-out (FIFO)

Cost of goods available for sale (18,000 units) $97,200
Less: Ending inventory (determined below) (15,000)
Cost of goods sold $82,200

Cost of ending inventory:

Date of
purchase Units Unit cost Total cost

August 18 3,000 $5.00 $15,000

Last-in, first-out (LIFO)

Cost of goods available for sale (18,000 units) $97,200
Less: Ending inventory (determined below) (17,700)
Cost of goods sold $79,500

Cost of ending inventory:

Date of
purchase Units Unit cost Total cost

Beg. Inv. 2,000 $6.10 $12,200

August 8 1,000 5.50 5,500

Total $17,700

Exercise 8–13 (concluded)

Average cost

Cost of goods available for sale (18,000 units) $97,200
Less: Ending inventory (determined below) (16,200)
Cost of goods sold $81,000 *

Cost of ending inventory: $97,200

Weighted-average unit cost = = $5.40

18,000 units

3,000 units x $5.40 = $16,200

* Alternatively, could be determined by multiplying the units sold by the average

cost: 15,000 units x $5.40 = $81,000

Exercise 8–14

First-in, first-out (FIFO)

Cost of goods sold:

Date of Cost of
Sale Units Sold Units Sold Total Cost

Aug. 14 2,000 (from Beg. Inv.) $6.10 $12,200
6,000 (from 8/8 purchase) 5.50 33,000
Aug. 25 4,000 (from 8/8 purchase) 5.50 22,000
3,000 (from 8/18 purchase) 5.00 15,000
Total 15,000 $82,200

Ending inventory = 3,000 units x $5.00 = $15,000

Last-in, first-out (LIFO)

Date	Purchased	Sold	Balance
Beginning inventory	2,000 @ $6.10 = $12,200		2,000 @ $6.10 $12,200
August 8	10,000 @ $5.50 = $55,000		2,000 @ $6.10 10,000 @ $5.50 $67,200
August 14		8,000 @ $ 5.50 = $44,000	2,000 @ $6.10 2,000 @ $5.50 $23,200
August 18	6,000 @ $5.00 = $30,000		2,000 @ $6.10 2,000 @ $5.50 $53,200 6,000 @ $5.00
August 25		6,000 @ $5.00 = $30,000 1,000 @ $5.50 = $ 5,500	2,000 @ $6.10 1,000 @ $5.50 $17,700 Ending inventory
	Total cost of goods sold	= $79,500

Exercise 8–14 (concluded)

(Note: the perpetual inventory LIFO results in this exercise are the same as periodic LIFO results, due to the timing of sales and purchases. The same LIFO layers are on hand at the end of the period under each method. This is unusual. LIFO perpetual and LIFO periodic normally produce different results for ending inventory and cost of goods sold.)

Average cost

Date	Purchased	Sold	Balance
Beginning inventory	2,000 @ $6.10 = $12,200		2,000 @ $6.10 $12,200
August 8 Available	10,000 @ $5.50 = $55,000 $67,200 = $5.60/unit 12,000 units
August 14		8,000 @ $5.60 = $44,800	4,000 @ $5.60 $22,400
August 18 Available	6,000 @ $5.00 = $30,000 $52,400 = $5.24/unit 10,000 units
August 25		7,000 @ $5.24 = $36,680	3,000 @ $5.24 $15,720 Ending inventory
	Total cost of goods sold	= $81,480

Exercise 8–15

Requirement 1

LIFO will result in the highest cost of goods sold figure because both the cost of merchandise and the quantity of merchandise rose during the period. FIFO will result in the highest ending inventory balance for the same reasons.

Requirement 2

Cost of goods available for sale:

Beginning inventory (600 x $80) $ 48,000

Purchases:

1,000 x $ 95 $95,000

800 x $100 80,000 175,000

Cost of goods available (2,400 units) $223,000

First-in, first-out (FIFO)

Cost of goods available for sale (2,400 units) $223,000
Less: Ending inventory (below) (80,000)
Cost of goods sold $143,000

Cost of ending inventory:

Date of
purchase Units Unit cost Total cost

January 21 800 $100 $80,000

Last-in, first-out (LIFO)

Cost of goods available for sale (2,400 units) $223,000
Less: Ending inventory (below) (67,000)
Cost of goods sold $156,000

Cost of ending inventory:

Date of
purchase Units Unit cost Total cost

Beg. Inv. 600 $80 $48,000

January 15 200 95 19,000

Total $67,000

Exercise 8–16

Requirement 1

Cost of goods available for sale:

Beginning inventory (5,000 x $10.00) $ 50,000

Purchases:

3,000 x $10.40 $31,200

8,000 x $10.75 86,000 117,200

Cost of goods available (16,000 units) $167,200

Cost of goods available for sale (16,000 units) $167,200
Less: Ending inventory (below) (73,150)
Cost of goods sold $ 94,050*

Cost of ending inventory:
$167,200

Weighted-average unit cost = = $10.45

16,000 units

7,000 units x $10.45 = $73,150

* Alternatively, could be determined by multiplying the units sold by the average

cost: 9,000 units x $10.45 = $94,050

Exercise 8–16 (concluded)

Requirement 2

Date	Purchased	Sold	Balance
Beginning inventory	5,000 @ $10.00 = $50,000		5,000 @ $10.00 $50,000
September 7 Available	3,000 @ $10.40 = $31,200 $81,200 = $10.15/unit 8,000 units
September 10		4,000 @ $10.15 = $40,600	4,000 @ $10.15 $40,600
September 25 Available	8,000 @ $10.75 = $86,000 $126,600 = $10.55/unit 12,000 units
September 29		5,000 @ $10.55 = $52,750	7,000 @ $10.55 $73,850 Ending inventory
	Total cost of goods sold	= $93,350

Exercise 8–17

Requirement 1

FIFO cost of goods sold:

10,000 units @ $5.00 = $50,000

+ 10,000 units @ $6.00 (determined below) = 60,000

$110,000

Requirement 2

LIFO cost of goods sold:

20,000 units @ $6.00 (determined below) = $120,000

Calculations to determine cost per unit of year 2013 purchases:

Cost of goods sold

= Weighted-average cost per unit

Number of units sold

$115,000

= $5.75 per unit

20,000 units

$5.75 x 40,000 units = $230,000 = Cost of goods available for sale

$230,000 – 50,000 (beginning inventory) = $180,000 = Cost of purchases

$180,000

= $6 = Cost per unit of year 2013 purchases

30,000 units purchased

Cost of goods available for sale:

Beginning inventory (10,000 x $5.00) $ 50,000

Purchases (30,000 x $6.00) 180,000

Cost of goods available (40,000 units) $230,000

Exercise 8–18

Requirement 1

February 25, 2011 ($ in millions)

LIFO reserve ($21.3 – 20.9) .4

Cost of goods sold .4

Requirement 2

$1,693.8 + .4 = $1,694.2 million cost of goods sold under FIFO.

Requirement 3

$20.9 x 35% = $7.315 million in tax savings.

Exercise 8–19

Requirement 1

Cost of goods sold:

50,000 units x $8.50 = $425,000

4,000 units x $7.00 = 28,000

$453,000

Requirement 2

When inventory quantity declines during a reporting period, liquidation of LIFO inventory layers carried at different costs prevailing in prior year’s results in noncurrent costs being matched with current selling prices. If the resulting effect on income is material, it must be disclosed. In this case, the effect of the LIFO layer liquidation is to increase income (ignoring taxes) by $6,000 [4,000 units liquidated x $1.50 ($8.50 current year cost per unit – $7 LIFO layer cost per unit)].

Exercise 8–20

Requirement 2

The specific citation that describes the disclosure requirements that must be made by publicly traded companies for a LIFO liquidation is FASB ASC 330–10–S99–3: “Inventory–Overall–SEC Materials–LIFO Liquidations.”

Requirement 3

When a company using LIFO liquidates a substantial portion of its LIFO inventory and as a result includes a material amount of income in its income statement that otherwise would not have been recorded, it must disclose the amount of income realized as a result of the inventory liquidation.

Such disclosure would be required in order to make the financial statements not misleading. Disclosure may be made either in a footnote or parenthetically on the face of the income statement.

Exercise 8–21

($ in millions)

Home Depot Lowe’s

Gross profit ratio ₌ 23,304 _=34.3% 17,152 _{= 35.1%}
67,997 48,815

Inventory turnover = 44,693 _{=4.29 times} 31,663 _{=3.82 times}
10,406.5 8,285

Average days = 365 _{=85 days} 365 _{=96 days}
in inventory 4.29 3.82

The gross profit ratios for the two companies are similar and both exceed the industry average of 27%. On average, Lowe’s turns over its inventory eleven days slower than does Home Depot and both companies turn over their inventories much faster than the industry average.

Exercise 8–22

Ending

Ending Inventory Inventory Layers Inventory Layers Inventory

Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost

1/1/13 $660,000

= $660,000 $660,000 (base) $660,000 x 1.00 = $660,000 $660,000

1.00

12/31/13 $690,000

= $663,462 $660,000 (base) $660,000 x 1.00 = $660,000

1.04 3,462 (2013) 3,462 x 1.04 = 3,600 663,600

12/31/14 $760,000

= $703,704 $660,000 (base) $660,000 x 1.00 = $660,000

1.08 3,462 (2013) 3,462 x 1.04 = 3,600

40,242 (2014) 40,242 x 1.08 = 43,461 707,061

Exercise 8–23

Ending

Ending Inventory Inventory Layers Inventory Layers Inventory

Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost

12/31/13 $200,000

= $200,000 $200,000 (base) $200,000 x 1.00 = $200,000 $200,000

1.00

12/31/14 $231,000

= $220,000 Index = 1.05

Index

$200,000 (base) $200,000 x 1.00 = $200,000

20,000 (2014) 20,000 x 1.05 = 21,000 221,000

12/31/15 $299,000

= $260,000 Index = 1.15

Index

$200,000 (base) $200,000 x 1.00 = $200,000

20,000 (2014) 20,000 x 1.05 = 21,000

40,000 (2015) 40,000 x 1.15 = 46,000 267,000

12/31/16 $300,000

= $250,000 Index = 1.20

Index

$200,000 (base) $200,000 x 1.00 = $200,000

20,000 (2014) 20,000 x 1.05 = 21,000

30,000 (2015) 30,000 x 1.15 = 34,500 255,500

Exercise 8–24

List A List B

i 1. Perpetual inventory a. Legal title passes when goods are

system delivered to common carrier.

l 2. Periodic inventory system b. Goods are transferred to another company

but title remains with transferor.

a 3. F.o.b. shipping point c. Purchase discounts not taken are included

in inventory cost.

c 4. Gross method d. If LIFO is used for taxes, it must be used

for financial reporting.

g 5. Net method e. Items sold are those acquired first.

h 6. Cost index f. Items sold are those acquired last.

k 7. F.o.b. destination g. Purchase discounts not taken are

considered interest expense.

e 8. FIFO h. Used to convert ending inventory at year-

end cost to base year cost.

f 9. LIFO i. Continuously records changes in

inventory.

b 10. Consignment j. Items sold come from a mixture of goods

acquired during the period.

j 11. Average cost k. Legal title passes when goods arrive at

location.

d 12. IRS conformity rule l. Adjusts inventory at the end of the period.