Demonstrati ion Prob bl lem
2. The cash sale of 15 WordCrafter programs on January 9, at a retail price of $350 each
Assume that Software City uses the FIFO flow assumption.
b. Now assume that the current replacement cost of the WordCrafter programs is $405 each. A physical inventory finds only 25 of these programs on hand at December 31. (For this part, return to the original information and ignore what you did in part a. )
Jensen Tire had two large shipments in transit at December 31. One was a $125,000 inbound ship- ment of merchandise (shipped December 28, F.O.B. shipping point), which arrived at Jensen’s receiving dock on January 2. The other shipment was a $95,000 outbound shipment of merchan- dise to a customer, which was shipped and billed by Jensen on December 30 (terms F.O.B. ship- ping point) and reached the customer on January 3.
In taking a physical inventory on December 31, Jensen counted all goods on hand and priced the inventory on the basis of average cost. The total amount was $600,000. No goods in transit were included in this figure.
What amount should appear as inventory on the company’s balance sheet at December 31?
Explain. If you indicate an amount other than $600,000, state which asset or liability other than inventory also would be changed in amount.
EXERCISE 8.5 Transfer of Title E
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Late in the year, Software City began carrying WordCrafter, a new word processing software pro- gram. At December 31, Software City’s perpetual inventory records included the following cost layers in its inventory of WordCrafter programs:
EXERCISE 8.6 Inventory Write-Downs E
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Jan. 1 Beginning inventory . . . 9 units @ $3.00 $ 27.00 Feb. 23 Purchase . . . 12 units @ $3.50 42.00 Apr. 20 Purchase . . . 30 units @ $3.80 114.00 May 4 Purchase . . . 40 units @ $4.00 160.00 Nov. 30 Purchase . . . 19 units @ $5.00 95.00 Totals . . . 110 units $438.00
2011 2010
Sales . . . $2,000,000 $1,500,000 Cost of goods sold . . . 1,250,000 900,000 Gross profit on sales . . . $ 750,000 $ 600,000 Operating expenses . . . 400,000 350,000 Net income . . . $ 350,000 $ 250,000 A physical count indicates 20 units in inventory at year-end.
Determine the cost of the ending inventory on the basis of each of the following methods of inventory valuation. (Remember to use periodic inventory costing procedures.)
a. Average cost b. FIFO c. LIFO
d. Which of the above methods (if any) results in the same ending inventory valuation under both periodic and perpetual costing procedures? Explain.
Boswell Electric prepared the following condensed income statements for two successive years:
EXERCISE 8.8 Effects of Errors in Inventory Valuation E
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At the end of 2010 (right-hand column above), the inventory was understated by $40,000, but the error was not discovered until after the accounts had been closed and financial statements prepared at the end of 2011. The balance sheets for the two years showed owner’s equity of $500,000 at the end of 2010 and $580,000 at the end of 2011. (Boswell is organized as a sole proprietorship and does not incur income taxes expense.)
a. Compute the corrected net income figures for 2010 and 2011.
b. Compute the gross profit amounts and the gross profit percentages for each year on the basis of corrected data.
c. What correction, if any, should be made in the amounts of the company’s owner’s equity at the end of 2010 and at the end of 2011?
1. Prepare the journal entry to record the shrinkage loss assuming that Software City uses the FIFO flow assumption.
2. Prepare the journal entry to record the shrinkage loss assuming that Software City uses the LIFO flow assumption.
3. Which cost flow assumption (FIFO or LIFO) results in the lowest net income for the period?
Would using this assumption really mean that the company’s operations are less efficient?
Explain.
Pemberton Products uses a periodic inventory system. The company’s records show the beginning inventory of PH4 oil filters on January 1 and the purchases of this item during the current year to be as follows:
EXERCISE 8.7 Costing Inventory in a Periodic System E
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Confirming Pages
Exercises 369
When Laura Rapp arrived at her store on the morning of January 29, she found empty shelves and display racks; thieves had broken in during the night and stolen the entire inventory. Rapp’s accounting records showed that she had inventory costing $50,000 on January 1. From January 1 to January 29, she had made net sales of $70,000 and net purchases of $80,000. The gross profit during the past several years had consistently averaged 45 percent of net sales. Rapp wishes to file an insurance claim for the theft loss.
a. Using the gross profit method, estimate the cost of Rapp’s inventory at the time of the theft.
b. Does Rapp use the periodic inventory method or does she account for inventory using the perpetual method? Defend your answer.
EXERCISE 8.9 Estimating Inventory by the Gross Profit Method
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Phillips Supply uses a periodic inventory system but needs to determine the approximate amount of inventory at the end of each month without taking a physical inventory. Phillips has provided the following inventory data:
EXERCISE 8.10 Estimating Inventory by the Retail Method E
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Retail
Cost Selling
Price Price
Inventory of merchandise, June 30. . . $300,000 $500,000 Purchases during July . . . 222,000 400,000 Goods available for sale during July. . . $522,000 $900,000 Net sales during July . . . $600,000
a. Estimate the cost of goods sold and the cost of the July 31 ending inventory using the retail method of evaluation.
b. Was the cost of Phillips’s inventory, as a percentage of retail selling prices, higher or lower in July than it was in June? Explain.
An annual report issued by General Motors Corporation included the following information:
EXERCISE 8.11 Evaluating Cost Flow Assumptions
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a. Does the company’s use of three different inventory methods violate the accounting principle of consistency? Defend your answer.
b. Had the LIFO method not been used, would the company’s gross profit reported in its income statement have been higher or lower? Explain.
c. On the basis of the information from the company’s annual report, do its inventory replace- ment costs appear to be rising or falling? Explain.
Ford Motor Company uses LIFO to account for all of its domestic inventories. A note to the company’s financial statements indicated that:
If the FIFO method had been used instead of the LIFO method, inventories would have been higher by over a billion dollars.
EXERCISE 8.12 FIFO versus LIFO: A Challenging Analysis E
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Inventories are valued using various cost methods. The percentage of year-end inventories valued using each of these methods is:
LIFO . . . 50%
FIFO and Average Cost . . . 50%
If the LIFO method of valuation had not been used, total inventories would have been $1.4 billion more than reported.
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a. Indicate whether each of the following financial measurements would have been higher, lower, or unaffected had Ford Motor Company used FIFO instead of LIFO. Explain the reasoning behind your answers.
1. Gross profit rate.