CHAPTER 8VALUATION OF INVENTORIES: A COST-BASIS APPROACH TRUE-FALSE—Conceptual Answer T F F F T T F T F T T F F T T F F T F T No. Description 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Work-in-process inventory. Merchandising and manufacturing inventory accounts. Perpetual inventory system. Determining when title passes. Inventory errors. Overstatement of purchases and ending inventory. Period vs. product costs. Reporting Purchase Discounts Lost. Cost flow assumption. FIFO periodic vs. perpetual system. Purchase commitments. Using LIFO for reporting purposes. LIFO liquidation. LIFO liquidations. Dollar-value LIFO Dollar-value LIFO method. LIFO-FIFO comparison. LIFO conformity rule. Selection of inventory method. Appropriateness of LIFO. MULTIPLE CHOICE—Conceptual Answer d b a d d a b c b b d b a a d No. Description 21. 22. 23. 24. 25. 26. 27. S 28. P 29. P 30. S 31. 32. 33. 34. 35. Entries under perpetual inventory system. Classification of goods in transit. Classification of goods in transit. Identify inventory ownership. Identify a product financing arrangement. Identify ownership under product financing arrangement. Classification of goods on consignment. Valuation of inventories. Classification of beginning inventory. Effect of beginning inventory overstated. Effect of understating purchases. Effect of recording merchandise on consignment. Effect of ending inventory overvaluation. Effect of inventory errors on income. Effect of understating purchases and ending inventory. Test Bank for Intermediate Accounting, Twelfth Edition 8-2 MULTIPLE CHOICE—Conceptual (cont.) Answer b d b d a a c a d b a b a b a b a b c d d d a a d c P S No. Description 36. 37. 38. 39. 40. 41. 42. 43. S 44. P 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. S 58. S 59. 60. 61. Identification of product costs. Determine product costs. Interest capitalization in manufacturing inventory. Determine cost of purchased inventory, using net method. Determine cost of purchased inventory, using gross method. Recording inventory purchases at gross or net amounts. Recording inventory purchases at gross or net amounts. Nature of trade discounts. Identifying inventoriable costs. Method approximating current cost. Average cost inventory valuation. Weighted-average inventory method. Nature of FIFO valuation of inventory. Flow of costs in a manufacturing situation. FIFO and decreasing prices. FIFO and increasing prices. FIFO and increasing prices. FIFO and LIFO inventory assumptions. LIFO and increasing prices. Knowledge of inventory valuation methods. Periodic and perpetual inventory methods. LIFO reserve account classification. Dollar-value LIFO method. Identifying advantages of LIFO. LIFO for tax purposes and external reporting. LIFO advantages. These questions also appear in the Problem-Solving Survival Guide. These questions also appear in the Study Guide. MULTIPLE CHOICE—Computational Answer c c d d d a a d d d b d b d a No. Description 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. Classification as inventory. Classification as inventory. Perpetual inventory method. Perpetual inventory method. Effect of inventory and depreciation errors on income. Effect of inventory and depreciation errors on retained earnings. Effect of inventory errors on working capital. Calculate cost of goods available for sale. Accounting for a purchase return (net method). Adjust Accounts Payable using the net method. Calculate ending inventory using weighted-average. Calculate ending inventory using moving average. Calculate ending inventory using LIFO. Calculate cost of goods sold using FIFO. Effect of using LIFO or FIFO. Valuation of Inventories: A Cost-Basis Approach MULTIPLE CHOICE—Computational Answer a c d b c b c c b b c b c b c c a b No. Description 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. Perpetual inventory—LIFO valuation. Perpetual inventory—LIFO valuation. Perpetual inventory—FIFO valuation. Perpetual inventory—average cost valuation. Cost flow assumptions. Cost flow assumptions. LIFO reserve. LIFO reserve. LIFO liquidation. LIFO liquidation Dollar-value LIFO. Dollar-value LIFO. Dollar-value LIFO. Dollar-value LIFO. Calculate ending inventory using dollar-value LIFO. Calculate ending inventory using dollar-value LIFO. Calculate ending inventory using dollar-value LIFO. Calculate price index using double extension method. MULTIPLE CHOICE—CPA Adapted Answer a c d b d a b c c a c c a b No. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. Description Identification of inventory costs. Determine cost of purchased inventory. Determine cost of sales. Calculate Accounts Payable at year end. Calculate Accounts Payable at year end. Calculate Accounts Payable at year end. Determine cost of purchased inventory. Determine cost of purchased inventory. Calculate unit cost using moving-average method. Periodic and perpetual inventory methods. FIFO and LIFO with increasing prices. Calculate ending inventory using LIFO. Dollar-value LIFO and the double extension approach. Calculate ending inventory using dollar-value LIFO. EXERCISES Item E8-109 E8-110 E8-111 E8-112 E8-113 E8-114 Description Recording purchases at net amounts. Recording purchases at net amounts. Comparison of FIFO and LIFO. FIFO and LIFO inventory methods. FIFO and LIFO periodic inventory methods. Perpetual LIFO. 8-3 8. Identify major classifications of inventory. Distinguish between perpetual and periodic inventory systems. Analysis of gross profit. Twelfth Edition 8-4 EXERCISES (cont. 6. 4. Understand the effect of LIFO liquidations. Dollar-value LIFO. Explain the significance and use of a LIFO reserve. Inventory methods. Identify the major advantages and disadvantages of LIFO. PROBLEMS Item Description P8-118 P8-119 P8-120 P8-121 P8-122 P8-123 Inventory cut-off. Explain the dollar-value LIFO method. 10. 7. 5. Understand why companies select given inventory methods. Analysis of errors. CHAPTER LEARNING OBJECTIVES 1. . Identify the effects of inventory errors on the financial statements.) Item Description E8-115 E8-116 E8-117 Perpetual LIFO and periodic FIFO. Understand the items to include as inventory cost. 2. 3. Dollar-value LIFO. Describe and compare the cost flow assumptions used to account for inventories. Accounting for purchase discounts. Dollar-value LIFO. 9.Test Bank for Intermediate Accounting. MC MC MC 25. MC 61. MC 117. TF 116. 33.Valuation of Inventories: A Cost-Basis Approach 8-5 SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item 1. MC 96. MC 94. Learning Objective 9 MC 60. 17. 98. TF 12. 46. 52. 115. TF 20. 5. 27. MC MC MC MC MC 68. MC 70. 39. 47. TF TF 30. 4. S MC 44. MC 76. MC MC MC 40. 50. E P MC MC MC MC MC 103. Learning Objective 4 MC 43. MC 95. 55. MC 69. TF 62. MC 81. MC MC 32. TF 57. 9. S 58. 42. MC 79. 89. 6. Learning Objective 7 E Learning Objective 8 MC 93. Learning Objective 10 E Type Item Type Item Type 100. P MC MC E P MC . 56. 16. TF TF MC 22. 10. MC 80. Learning Objective 6 MC 83. MC 64. 21. MC 35. 41. MC 66. E E E E P 123. TF 111. 23. MC P MC MC MC 101. 105. MC 98. 31. TF 2. MC 82. TF TF MC MC MC 48. 99. MC 122. 8. 7. 3. P 45. 88. 119. 15. 106. 38. MC 65. MC 107. 111. 54. MC 67. TF S 19. MC 84. 120. Learning Objective 3 MC 34. 109. 13. MC 75. 118. TF = True-False MC = Multiple Choice E = Exercise P = Problem Type Item Type Item Learning Objective 1 MC 63. TF TF MC 37. 113. TF 14. MC MC MC MC E 112. MC 77. 121. 51. 92. 11. MC Learning Objective 2 S MC 28. MC 74. Learning Objective 5 MC 73. MC 71. 72. 49. 104. 114. Note: P S 59. 102. P MC 29. MC 108. 24. 36. 91. MC MC MC 90. TF TF MC 87. MC P MC MC MC 97. MC MC E 110. TF 18. MC MC MC MC MC 53. 26. MC 78. 10. 17. 16. 18. it must also use LIFO for financial accounting purposes. LIFO liquidations can occur frequently when using a specific-goods approach. 11. net income is not affected. Twelfth Edition TRUE FALSE—Conceptual 1. The change in the LIFO Reserve from one period to the next is recorded as an adjustment to Cost of Goods Sold.8-6 Test Bank for Intermediate Accounting. A disadvantage of LIFO is that it does not match more recent costs against current revenues as well as FIFO. A manufacturing concern would report the cost of units only partially processed as inventory in the balance sheet. The LIFO conformity rule requires that if a company uses LIFO for tax purposes. 9. 2. In all cases when FIFO is used. LIFO liquidation often distorts net income. If both purchases and ending inventory are overstated by the same amount. 12. 15. The dollar-value LIFO method measures any increases and decreases in a pool in terms of total dollar value and physical quantity of the goods. but usually leads to substantial tax savings. freight charges on goods purchased are debited to Freight-In. destination. If ending inventory is understated. If a supplier ships goods f. 3. 6. title passes to the buyer when the supplier delivers the goods to the common carrier. 13. 5.o. Dollar-value LIFO techniques help protect LIFO layers from erosion. When using a perpetual inventory system.b. Many companies use LIFO for both tax and internal reporting purposes. . Both merchandising and manufacturing companies normally have multiple inventory accounts. 4. then net income is understated. 14. 8. the cost of goods sold would be the same whether a perpetual or periodic system is used. Freight charges on goods purchased are considered a period cost and therefore are not part of the cost of the inventory. Purchase Discounts Lost is a financial expense and is reported in the “other expenses and losses” section of the income statement. 7. The cost flow assumption adopted must be consistent with the physical movement of the goods. T F F F T Item 6. LIFO is inappropriate where unit costs tend to decrease as production increases. Goods in transit which were purchased f. destination. b. 7. Goods received from another company for sale on consignment. None of these.b. F F T F T MULTIPLE CHOICE—Conceptual 21. destination should be a. Which of the following items should be included in a company's inventory at the balance sheet date? a. In 2008 when Foley repurchased the inventory. two entries are required to record a sale. all of these. no Purchases account is used. 8. b. Use the following information for questions 25 and 26. included in the inventory of the buyer. 19. Kline then used the inventory as collateral to borrow from Norwalk Bank.o. 23. none of these. included in the inventory of the seller. c. c. Ans. d. . 5. 9. 13. 18. 12.b. 2. included in the inventory of the seller. d.o. True False Answers—Conceptual Item 1.o. a.b. b. Ans. c. T F T F T Item 11. Goods sold to a customer which are being held for the customer to call for at his or her convenience. When using a perpetual inventory system. b. 4. included in the inventory of the buyer. 14. none of these. T F F T T Item 16. Ans. 20. Goods in transit which are shipped f. d. Goods in transit which are shipped f. d. 10. Kline used the proceeds to repay its bank loan. 15.Valuation of Inventories: A Cost-Basis Approach 8-7 19. 3. During 2007 Foley Corporation transferred inventory to Kline Corporation and agreed to repurchase the merchandise early in 2008. 17. Use of LIFO provides a tax benefit in an industry where unit costs tend to decrease as production increases. Ans. remitting the proceeds to Foley. 22. 24. 20. a Cost of Goods Sold account is used. shipping point should be a. included in the inventory of the shipping company. included in the inventory of the shipping company. c. overstatement. the physical goods to be included in inventory. the costs to be included in inventory. d. b. b. and assets at December 31. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet. no effect. c. Foley Corporation b.8-8 Test Bank for Intermediate Accounting. 26. On whose books should the cost of the inventory appear at the December 31. d. c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet. all of these S 28. This transaction is known as a(n) a. with Foley making appropriate note disclosure of the transaction 27. recorded in a Consignment In account which is an inventory account. 2007 merchandise inventory balance will appear a. Norwalk Bank d. included in the consignee's inventory. assignment for the benefit of creditors. . 2007. The accountant for the Orion Sales Company is preparing the income statement for 2007 and the balance sheet at December 31. Goods on consignment are a. product financing arrangement. Twelfth Edition 25. The January 1. c. overstatement. S 31. Valuation of inventories requires the determination of all of the following except a. no effect. an understatement of liabilities and an overstatement of owners' equity. the cost flow assumption to be adopted. The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in a. b. recorded in a Consignment Out account which is an inventory account. b. an understatement of cost of goods sold and liabilities and an overstatement of assets. overstatement. d. If the beginning inventory for 2006 is overstated. understatement. P 29. net income for 2006. d. only as an asset on the balance sheet. the effects of this error on cost of goods sold for 2006. Kline Corporation c. c. respectively. 2007. c. understatement. overstatement. an overstatement of assets and net income. installment sale. understatement. d. are a. overstatement. b. consignment. Kline Corporation. c. 2007 balance sheet date? a. only in the cost of goods sold section of the income statement. P 30. Orion uses the periodic inventory system. an understatement of assets and net income. the cost of goods held on consignment from other companies. b. understatement. d. overstatement. d. costs which will not benefit any future period. Cross had recorded the transaction. net income. b. d. b. and stockholders' equity were understated. c. 2007. As of January 31. none of these. b. Which of the following is correct? a. b. c. received merchandise on consignment. but did not record the transaction. and retained earnings were overstated. no effect. assets and stockholders' equity were overstated but liabilities were not affected. net income was understated and current liabilities were overstated. current assets. On June 15. c. net income was correct and current assets were understated. net income was overstated and current assets were understated. Belle Co. and current liabilities were overstated. 2007 would be a. d. As of March 31. Interest costs for routine inventories are product costs. The effect of this on its financial statements for January 31 would be a. Selling costs are product costs. Eller Co. Manufacturing overhead costs are product costs. but did not include the merchandise in its inventory. d. b. Belle had recorded the transaction as a purchase and included the goods in inventory. c. assets. Cross Co. stockholders' equity was the only item affected by the omission. 34. All of the following costs should be charged against revenue in the period in which costs are incurred except for a. All of these. Tolon Corporation accepted delivery of merchandise which it purchased on account. costs from idle manufacturing capacity resulting from an unexpected plant shutdown. b. net income was correct and current assets and current liabilities were overstated. d. 33. costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory. received merchandise on consignment. current assets. 35. Eller included the goods in inventory. c. The effect of this on its balance sheet for June 30. Tolon had not recorded the transaction or included the merchandise in its inventory. The effect of this on its financial statements for March 31 would be a. manufacturing overhead costs for a product manufactured and sold in the same accounting period. 37. current assets.Valuation of Inventories: A Cost-Basis Approach 8-9 32. net income was correct and current assets were understated. and retained earnings were understated. net income and current liabilities were overstated. and retained earnings were understated. c. 36. net income. The effect of this on its financial statements for December 31 would be a. net income. As of December 31. net income and current assets were overstated and current liabilities were understated. . accepted delivery of merchandise which it purchased on account. As of June 30. liabilities. current assets. net income. d. Either 1 or 2 will result in the same cost of goods sold. Twelfth Edition 38. invoice price less the purchase discount allowable whether taken or not. which was the first year of operations. Which of the following recording procedures would result in the highest cost of goods sold for 2007? 1. invoice price. invoice price plus the purchase discount lost. 2 c. with the amount of discounts not taken shown under "other expenses" in the income statement a. Cannot be determined from the information provided. Three-fourths of the items purchased were paid for within 10 days of purchase. Recording purchases at gross amounts 2. invoice price. Recording purchases at net amounts. c. Which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory should be capitalized as a product cost? a. All of the goods available had been sold at year end. 41. The use of a Purchase Discounts account implies that the recorded cost of a purchased inventory item is its a. Purchase discounts lost b. Which of the following recording procedures would result in the highest net income for 2007? 1. Cannot be determined from the information provided. Recording purchases at gross amounts 2. Interest incurred during the production of discrete projects such as ships or real estate projects c. All of these should be capitalized. d. Use the following information for questions 41 and 42. d. Recording purchases at net amounts. invoice price less the purchase discount allowable whether taken or not. Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis d. . c.000 before cash discounts. b. The use of a Discounts Lost account implies that the recorded cost of a purchased inventory item is its a. Luther Company had merchandise purchases of $985. n/30. 39. d. 42.8 . 1 b. 40. 1 b. d. with the amount of discounts not taken shown under "other expenses" in the income statement a. invoice price less the purchase discount taken. b. Either 1 or 2 will result in the same net income. All purchases were made on terms of 2/10.10 Test Bank for Intermediate Accounting. 2 c. invoice price less the purchase discount taken. During 2007. invoice price plus any purchase discount lost. LIFO. When using the periodic inventory system. joint cost. weighted-average. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is a. LIFO LIFO 46. b. Which inventory costing method most closely approximates current cost for each of the following: Ending Inventory Cost of Goods Sold a. d. The pricing of issues from inventory must be deferred until the end of the accounting period under the following method of inventory valuation: a. c. FIFO. prime cost. FIFO. c. b. first-out d. 48. b. Trade discounts applicable to purchases during the period b. FIFO FIFO b. d. base stock.Valuation of Inventories: A Cost-Basis Approach 8 . c. Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations? a. LIFO perpetual. First-in. Cost of transportation-in for merchandise purchased during the period S 44. P 45. d. Cash (purchase) discounts taken during the period c. costs that are directly connected with the converting of goods to a salable condition. which of the following generally would not be separately accounted for in the computation of cost of goods sold? a. first-out c. 47. first-out method is a. Costs which are inventoriable include all of the following except a. In situations where there is a rapid turnover. 49. costs that are directly connected with the bringing of goods to the place of business of the buyer. Average cost b. FIFO LIFO c. moving average. an inventory method which produces a balance sheet valuation similar to the first-in. weighted-average. d. b. base stock. average cost. buying costs of a purchasing department. selling costs of a sales department. LIFO FIFO d. c.11 43. Last-in. Purchase returns and allowances of merchandise during the period d. Base stock . d. moving average. LIFO tends to smooth out the net income pattern by matching current cost of goods sold with current revenue. d. LIFO. first-out. b. When a firm using the LIFO method fails to maintain its usual inventory position (reduces stock on hand below customary levels). c. c. b. in what direction did the cost of purchases move during the period? a. d. FIFO. base stock. weighted-average. 53. Prices increased. Twelfth Edition 50. c. c. b. FIFO. LIFO. Prices decreased. Quayle Corporation's inventory cost on its balance sheet was lower using first-in. weighted-average. Price trend cannot be determined from information given. first-out. Up b. Prices remained unchanged. Down c.8 . Cannot be determined 54. 52. none of these. the inventory method which tends to give the highest reported inventory is a. c. when inventories remain at constant quantities. average cost. b. . 55. The use of FIFO permits some control by management over the amount of net income for a period through controlled purchases. Assuming no beginning inventory. first-out. d. what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method? a. last-in. part of the earnings must be invested (plowed back) in inventories when FIFO is used during a period of rising prices. In a period of rising prices. In a period of rising prices. first-in. If inventory quantities are to be maintained. In a period of rising prices. there may be a matching of old costs with current revenue. 51. Assuming no beginning inventory. Steady d. first-out than it would have been using last-in. d. which is not true with LIFO. b. the inventory method which tends to give the highest reported net income is a. the inventory method which tends to give the highest reported cost of goods sold is a. Which of the following statements is not valid as it applies to inventory costing methods? a.12 Test Bank for Intermediate Accounting. FIFO method. b. on the income statement in the Other Revenues and Gains section. then it must also be used for internal reports. c. . then it cannot be used for tax purposes. on the balance sheet in the Current Assets section. moving average method. Under the dollar-value LIFO method. it is possible to have the entire inventory in only one pool. cost of goods sold tends to be stated at approximately current cost on the income statement. None of these. c. Under dollar-value LIFO. d. LIFO method.13 56. on the income statement in the Other Expenses and Losses section. If LIFO is used for external financial reporting. d. Several pools are commonly employed in using the dollar-value LIFO inventory method. income taxes tend to be reduced in periods of rising prices. b. weighted-average method. d. It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with specific goods pooled LIFO. LIFO may not be used with the lower of cost or market approach. There will be a deferral of income tax.Valuation of Inventories: A Cost-Basis Approach 8 . increases and decreases in a pool are determined and measured in terms of total dollar value. S 59. The book value of the inventory of this material at year end will be the same if perpetual records are kept as it would be under a periodic inventory method only if the book value is computed under the a. 57. not physical quantity. d. b. income tends to be smoothed as prices change over time. b. b. c. 60. The inventory will be overstated. Which of the following is not considered an advantage of LIFO when prices are rising? a. The more recent costs are matched against current revenues. If inventory levels are stable or increasing. S 58. 61. c. When a company uses LIFO for external reporting purposes and FIFO for internal reporting purposes. A company's future reported earnings will not be affected substantially by future price declines. c. c. d. For purposes of external financial reporting. an Allowance to Reduce Inventory to LIFO account is used. d. cost assignments typically parallel the physical flow of goods. b. This account should be reported a. Which of the following statements is not true as it relates to the dollar-value LIFO inventory method? a. If LIFO is used for external financial reporting. Which of the following is true regarding the use of LIFO for inventory valuation? a. on the income statement in the Cost of Goods Sold section. an argument which is not an advantage of the LIFO method as compared to FIFO is a. The acquisition cost of a certain raw material changes frequently. 48.o.000. 56. 40. TJones Manufacturing Company has the following account balances at year end: Office supplies Raw materials Work-in-process Finished goods Prepaid insurance $ 4. MULTIPLE CHOICE—Computational 62. 54. $72. Item b c b b d b 33. 37. Item Ans. d a a c a d Item 45. 50. Solutions to those Multiple Choice questions for which the answer is “none of these. d. 42. 47.000 6. Ans.000 59.000. Ans.000 92. c.000 27. then it must also be used for external financial reporting. 44. 52.000. 30.000 6.14 Test Bank for Intermediate Accounting.000 What amount should JSmith report as inventories in its balance sheet? a. 31. $92.000 59. If LIFO is used for tax purposes. Ans.000.000. d. 59. shipping point. 23. 60. d a a d c 51. 58. 35. 43. $182. 25. $178. $76. d b a d d a Item 27. 35. Goods in transit which were purchased f. 26.” 24.000 72. 34.000 27. 53. JSmith Manufacturing Company has the following account balances at year end: Office supplies Raw materials Work-in-process Finished goods Prepaid insurance $ 4. b. 55. Ans.b. c. 38. 29. b. b a b c d d 57.000.8 . 32. 41. 28. 46.000. 49. 63. $158. $96. 22. $162. Assets and liabilities were understated but stockholders’ equity was not affected. . Twelfth Edition Multiple Choice Answers—Conceptual Item 21. a a d b d b Item 39.000 What amount should TJones report as inventories in its balance sheet? a. 60. 36. Ans. 24. 61.000. b a b a b a Item Ans. 65. Inc. On March 9.000 of inventory.000 overstated 66. $2. inventory for $200. b. 2007 be overstated or understated? a. On March 1.000 understated b. On March 3. 2007 and that no additional errors occurred in 2008.000 overstated d.000 overstated $8. terms 2/10. inventory for $600. is a calendar-year corporation.000 overstated 67. 2006. b. Briggs returned goods that cost $1. n/30. it purchased $30. Harder paid the supplier.000. or December 31. $1. 2006. Harder should credit a.000 overstated Depreciation expense $2.000 understated $6. $5. Assume that no correcting entries were made at December 31. By how much will 2007 income before taxes be overstated or understated? a.000 understated 68.000 of inventory.000 overstated c. Briggs Corporation uses the perpetual inventory method. purchase discounts for $540.000 understated d. terms 2/10. Assume that no correcting entries were made at December 31. 2006. d.000 understated b.000 overstated c. Ignoring income taxes. $9.000 understated .Valuation of Inventories: A Cost-Basis Approach 8 . $2. Use the following information for questions 66 through 68. purchase discounts for $600. Dexter. $5. On March 1.000 overstated c. 2008 be overstated or understated? a. by how much will retained earnings at December 31. $5. c. $5. Harder Corporation uses the perpetual inventory method. On March 9. Its financial statements for the years 2007 and 2006 contained errors as follows: 2007 2006 Ending inventory $3. inventory for $540. inventory for $180. Ignoring income taxes. Briggs paid the supplier. On March 9. $2. $1.000. $0 b.000 understated d. On March 3. $1. purchase discounts for $180. by how much will working capital at December 31.15 64. n/30. On March 9. d. Harder returned goods that cost $3. Briggs should credit a. it purchased $10. purchase discounts for $200. c. Assume that the proper correcting entries were made at December 31. b.77 2.000. $12. records purchases at net amounts.176. $344. c. Twelfth Edition The following information is available for Kerr Company for 2007: Freight-in Purchase returns Selling expenses Ending inventory $ 30. Richey returned $1. Use the following information for questions 72 and 73.500) (4. The following information was available from the inventory records of Neer Company for January: Balance at January 1 Purchases: January 6 January 26 Sales: January 7 January 31 Balance at January 31 72. b. What is the cost of goods available for sale? a.000) 1.000 Unit Cost $9. rounded to the nearest dollar? a. $600. $12. $0.000.310 20. 70.700 10. $12. Test Bank for Intermediate Accounting.71 Total Cost $29.000. b. $16. $1. By how much should the account payable be adjusted on May 31? a.30 10. $1.8 .000 75. $320.000 2.432. b.000 260. $890.000 The cost of goods sold is equal to 400% of selling expenses. 71.312. $296. $1. c.200 Assuming that Neer does not maintain perpetual inventory records.917 (2. $860. On May 5 Richey purchased merchandise on account. d.606.16 69. n/30.284. c. $12.000.080. d. The amount to be recorded as a purchase return is a. using the weighted-average inventory method. Units 3. $815.224. what should be the inventory at January 31. d. At May 31 the balance had not been paid. Richey Co. terms 2/10. d.600 28. Use the following information for questions 70 and 71.000. $1.000 150.200 of the May 5 purchase and received credit on account. .200. c. $546. 8 . what should be the inventory at January 31. $552.312.50 1. March 31 130 units 74. Transactions for the month of June were: Purchases June 1 (balance) 800 @ $3.284.000. since it began operations.50 1.Valuation of Inventories: A Cost-Basis Approach 73. The value assigned to cost of goods sold if Kiner uses FIFO is a. $579. b. Kiner Co. $12.40 Purchase.10 7 1.200 @ 3. $20. $552.000 if FIFO had been used. b. if FIFO had been used. d. b.20 Purchase. Its 2007 ending inventory was $40.17 Assuming that Neer maintains perpetual inventory records. $12. $20. d. using the moving-average inventory method.723. Thus.50 June 2 6 9 10 18 25 Sales 600 @ $5.00 200 @ 6. 75. Use the following information for questions 77 through 80.432. March 16 70 units @ $4. c.40 22 500 @ 3. but it would have been $60.000 greater in 2007. March 1 100 units @ $4. c. rounded to the nearest dollar? a. $585.20 3 2.696.30 15 1. March 7 350 units @ $4. c.000 @ 5. $12. Use the following information for questions 74 and 75. Baker's income before income taxes would have been a.800 @ 3. $1.50 400 @ 6. Baker Company has been using the LIFO method of inventory valuation for 10 years. $20. d.000 less over the 10-year period.200 @ 3.000 greater over the 10-year period. $20. $1.000 less in 2007.600 @ 5.00 . has the following data related to an item of inventory: Inventory. d.00 1. $579.50 Inventory. $12.400 @ 6.606. c. The value assigned to ending inventory if Kiner uses LIFO is a. b. 76. for $2. $4. b.800.096. is LIFO. c. d. is FIFO. b. $4. 81.470. c.110. is weighted average. $4. d. d. 300 more units of “Dink”. b. $4. Kingman then sold 600 units at a selling price of $10 each. Assuming that perpetual inventory records are kept in dollars. the ending inventory on a FIFO basis is a. $4.160.110. c. b. Johnson then sold 400 units at a selling price of $10 each.18 Test Bank for Intermediate Accounting. Brown Corporation uses the FIFO method for internal reporting purposes and LIFO for external reporting purposes. $4. b.238. resulting in a gross profit of $1. Johnson Company had 500 units of “Tank” in its inventory at a cost of $4 each.400. Assuming that perpetual inventory records are kept in units only. $4.470. 83. The cost flow assumption used by Johnson a. 79. The balance in the LIFO Reserve account at the end of 2007 was $60.160. is FIFO. is weighted average. $4. cannot be determined from the information given. for $2. the ending inventory on a LIFO basis is a.290.110. Twelfth Edition 77. It purchased. $4. b. c. is a.000 from sales transactions recorded during the year. $4. $4. rounded to the nearest dollar. What amount should Brown report as Cost of Goods Sold in the 2008 income statement? . is LIFO. d. d. d.290. Assuming that perpetual inventory records are kept in units only. 78.000. the ending inventory on a LIFO basis is a.470. Brown’s Cost of Goods Sold account has a balance of $450. Kingman Company had 500 units of “Dink” in its inventory at a cost of $5 each.290. $4.600. $4. c. $4.100. c. $4. The cost flow assumption used by Kingman a. the ending inventory on an average-cost basis. resulting in a gross profit of $2.8 . 82.160. cannot be determined from the information given.290.322. The balance in the same account at the end of 2008 is $90. 80. It purchased. $4. Assuming that perpetual inventory records are kept in dollars.000. 300 more units of “Tank”. and the price index was 112. $100.000. 85.000. b. Johnson Company had 400 units of “Tank” in its inventory at a cost of $4 each. $600. What is AJ Company’s ending inventory? a. The balance in the same account at the end of 2008 is $120. December 31 inventory at year-end prices was $143. $ -0b. c. $540. $443. d. Green Corporation uses the FIFO method for internal reporting purposes and LIFO for external reporting purposes.460. . $143.000. It purchased 600 more units of “Dink” at a cost of $9 each. $ -0b. $720. d.19 $420. b.Valuation of Inventories: A Cost-Basis Approach a. $600.000 from sales transactions recorded during the year. $640. c. $560. 8 . $431. $480. $200. The LIFO liquidation overstated normal gross profit by a.000.000. It purchased 600 more units of “Tank” at a cost of $6 each.000. c. d. 86.360. 88.000. Kingman Company had 400 units of “Dink” in its inventory at a cost of $6 each. Kingman then sold 700 units at a selling price of $15 each. $868. c.000.360. $900.000. d. d. What is AJ Company’s gross profit? a. During the year. Johnson then sold 700 units at a selling price of $10 each.360. The balance in the LIFO Reserve account at the end of 2007 was $80. 84. $600.000. $400.000.640. What amount should Green report as Cost of Goods Sold in the 2008 income statement? a.000. b. Use the following information for 87 and 88 AJ Company had January 1 inventory of $100.000. d. $450. $428.360.000. 87.000 when it adopted dollar-value LIFO. c. $300.000.000 and sales were $1. c. purchases were $600. $131. b. Green’s Cost of Goods Sold account has a balance of $600. The LIFO liquidation overstated normal gross profit by a. $128. 000 units of Item A @ $5. The inventory at December 31.000. Twelfth Edition Use the following information for 89 and 90 Ely Company had January 1 inventory of $100. $883. 93. 2007 December 31. 2008 Inventory at Current Prices $256. d. 2005. 2007. 2006 under dollar-value LIFO? a.400. $256. What is Ely Company’s ending inventory? a.500. $232. 90. $263. During the year.500.500. c. b. at which time its inventory consisted of 6. 2007 consisted of 12.000.000 units of Item B. $241. Dolan Corporation adopted the dollar-value LIFO method of inventory valuation on December 31. $426. $240.800.000 units of Item A and 7. 92. 2008 under dollar-value LIFO? a.00 each.000 and sales were $1. Use the following information for questions 91 through 93.20 Test Bank for Intermediate Accounting.500.500.000 when it adopted dollar-value LIFO. What is the cost of the ending inventory at December 31.240. c. d. $115. 94.400. Information regarding inventory for subsequent years is as follows: Date December 31.400. $232. $126. Its inventory at that date was $220. $254.000 and the relevant price index was 100.000.400. 2006 December 31.000. $235. d.000. purchases were $600. December 31 inventory at year-end prices was $126. $415. $416. $240.000 units of Item B @ $16.500. 89. The most recent actual purchases related to these items were as follows: . $231. Tate Company adopted the dollar-value LIFO method on January 1. c.8 . $256. and the price index was 110. c.000.00 each and 3. b. $116.800. c.000.800 290. b.000 325.000 Current Price Index 107 125 130 91. b. 2007 under dollar-value LIFO? a.000.840.000. $110. b. What is the cost of the ending inventory at December 31. $250. What is Ely Company’s gross profit? a. d. d. What is the cost of the ending inventory at December 31. 71. 64.000. Ans. Ans. Ans.000 Grey's 2007 inventoriable cost was a. 65. Item Ans.75 17. a c d b c Item 82.21 Cost Per Unit $ 6. what is the price index for 2007 that should be computed by Tate Company? a.000 Freight-out 5. 69. c. $303. $306. 108. b d b d a Item 77. 85. 88. Item Ans.000. 78. 93.000 10. 83. 111. c a b MULTIPLE CHOICE—CPA Adapted 95. 75. c c d d d Item Ans. 73. 68.Valuation of Inventories: A Cost-Basis Approach Items A A B Quantity Purchased 2. . 86. 63.33% b.000 Purchase returns 2. Freight-in Increase Increase No effect No effect Interest on Inventory Loan No effect Increase Increase No effect The following information applied to Grey.000.000 10. 89. 80. 220. How should the following costs affect a retailer's inventory valuation? a.000 Purchase Date 12/7/07 12/11/07 12/15/07 8 . for 2007: Merchandise purchased for resale $300. 81.000. d. 94.59% c. b. Inc.51% Multiple Choice Answers—Computational Item Ans. 62. 76. 96. 74. 90. $311. 109. 84. b c c b b 87. 67. 66. c b c b c 92. a a d d d Item 72.00 5. d. 70.000 Freight-in 8. b. $300. c. 79.05% d.00 Using the double-extension method. 91. The checks were mailed out on January 10. 98.Test Bank for Intermediate Accounting.000. At December 31. The invoice cost was $40. $600. d.000 causing an overdraft of $100. .000 Ending inventory 145.000.000 before any necessary year-end adjustments relating to the following transactions: On December 27. The invoice cost was $25. $1.o. $740.000 8. The following information was derived from the 2007 accounting records of Logan Co. 2007. Cole records purchases and accounts payable at net amounts. The balance in Hill Co. Cole Corp. $950. destination on December 20.000.000. In Hill's December 31. 2007. 2008. shipping point on December 29. what amount should Cole report as total accounts payable? a. $770.b. 2007 balance sheet. d. 2008. b. $730.297.000 b. n/30. 2008. $1. 2007 from a vendor to Cole were received January 2. $634.000 $ 14. Goods shipped f. c.000. 2008. c. 2007 was $700. Cole purchased and received goods for $150. $1. $639. Goods shipped f. terms 2/10. Hill wrote and recorded checks to creditors totaling $30.000 20.'s accounts payable at December 31. On December 27.000. $570. 2007 and were received on January 4.000.000 70. The invoice cost was $65.000 Freight-in 10. d.000 in Cole 's bank account at December 31. $765. c. totaled $800.000. 2007.o. 99. destination on December 21. 2007. The goods were shipped f.000.000.000.000 Transportation to consignees 5.000 Logan 's 2007 cost of sales was a.000 that were mailed on January 10.050. 2007 from a vendor to Hill were received on January 6. 2007. The invoice was recorded and paid January 3.000 Purchases 575. 2008.000.b.000. the accounts payable should be a.000. 2008. b.22 97.000 Freight-out 30. 2007.o.000.362. 2007. Cole wrote and recorded checks to creditors totaling $350.000 before any necessary year-end adjustments relating to the following: Goods were in transit to Hill from a vendor on December 31. On December 28.'s accounts payable account at December 31.b. Twelfth Edition 8 .: Logan 's Goods Logan 's Central Warehouse Held by Consignees Beginning inventory $130. $50. $8.00 3.000. The invoice price was $50.976.000 claim against the common carrier. On January 5.196. Gear filed a $50. d. $11. 2007. 103.o. and the goods were shipped f.570.o. On June 1. Tysen should record the cost of this merchandise as a. 2007. 101.b. The invoice price was $70.000 to Linn on account.600 1/22/07 Purchase 4. 102.000. recorded the following data pertaining to raw material X during January 2007: Units Date Received Cost Issued On Hand 1/1/07 Inventory $8. $1.000. Tysen Retailers purchased merchandise with a list price of $50. 2008. b.00. Mills allowed trade discounts of 30% and 20%. d.Valuation of Inventories: A Cost-Basis Approach 100. shipping point on December 20.376. shipping point on December 29. $10. Credit terms were 2/15.40. 2007. b. $8. $36. b.550. $1. Mills received from Linn a remittance in full payment amounting to a. 2007.000. from a vendor were lost in transit. Dark Co. f. with no cash discounts allowable. shipping point. $39.b. d. subject to trade discounts of 20% and 10%. $1. 2007 was $1. Mills Corp.000.000.b. c. b.000. c.23 Gear Co. $11.620.40 5.200 1/11/07 Issue 1.85. c. $9.600 The moving-average unit cost of X inventory at January 31. In its December 31. On June 12.500. Goods shipped to Gear. c.o.000. The goods were received on January 4. 8 . 2007 is a.000 before considering the following transactions: Goods were in transit from a vendor to Gear on December 31.500. $35.000 $9. Gear should report accounts payable of a. Mills prepaid $400 of delivery costs for Linn as an accommodation.70. d. sold merchandise with a list price of $20. $9.'s accounts payable balance at December 31. $11. n/40 and the sale was made f.000. . 2007 balance sheet. 2008.000. 2007.368. $1.000.600 1. 10 600 $44 18 750 46 28 300 48 A physical count on January 31. $26.500. LIFO FIFO b. the inventory layer added in the current year is multiplied by an index number. Assuming the periodic inventory system. d. Noll Co. The cost of the inventory at January 31.200. Earl Co. the inventory cost method which reports the highest amount of each of the following is Inventory Cost of Sales December 31. 107. to sell a single product. $28. c. Earl's acquisition costs have increased steadily. LIFO LIFO c. b. 2007. 2007 under the LIFO method is a. Physical quantities held in inventory were equal to three months' sales at December 31. FIFO LIFO 106. Over a two-year period. $24. had 450 units of product A on hand at January 1. 2007 2008 a. FIFO FIFO d. was formed on January 2. b. 2007. c. Twelfth Edition 104. Yes Yes c. When the double extension approach to the dollar-value LIFO inventory cost flow method is used. 2007 shows 600 units of product A on hand. a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory cost flow methods? FIFO LIFO a. $25. 2007. No Yes d. No No 105. Ending inventory at current year cost Numerator Numerator Denominator Not used Ending inventory at base year cost Denominator Not used Numerator Denominator . Purchases of product A during January were as follows: Date Units Unit Cost Jan. 2008.700. Yes No b. How would the following be used in the calculation of this index number? a. d.600.24 Test Bank for Intermediate Accounting.8 . costing $42 each. During periods of rising prices. and zero at December 31. a b DERIVATIONS — Computational No.000 110 Using dollar value LIFO.000.917) ÷ (3.000.000 = $158. 70.000) = $1.25 Carr Co. 71.000 – $1. Item Ans. $408. 65.000. adopted the dollar-value LIFO inventory method on December 31.200 × .176.000 – ($3.000.000.000 + $72. d $3. 96.200 = $12.200) × .02] = $540.000 = $5. 98. 67.02 = $296.237 × 1.284. 2007. d $260.000) = $860. d b 99. Item a c 97. d a 101. Answer Derivation 62. Multiple Choice Answers—CPA Adapted Item 95. a The effect of the errors in ending inventories reverse themselves in the following year. Ans. 104.000. On December 31. d [($30. $352.000 – $3. Inventory data for 2008 are as follows: 12/31/08 inventory at year-end prices Relevant price index at year end (base year 2007) $440.000 = $178. 108. . d. d [($10. c a 105.600 + $28. 63. Ans. c c 107.000 under the dollar-value LIFO method. Carr's inventory at December 31. Item Ans. d $1.237/unit $10.000. b ($29.000 + $59. Item Ans. b. Carr's entire inventory constitutes a single pool. $440.000.000 + (4 × $150. b c 103. the inventory was $320.000 + $59.000 + 2.310 + $20.000 + $92. Item Ans. 2008 is a.200 – ($1. Item Ans. 8 .Valuation of Inventories: A Cost-Basis Approach 108. c.000.02) = $1. $400.02] = $180.000 – $1.700) = $10. 69.000) × .000) × . 106. c $27.000 + $2. 2007. 68. d ($16. a $6. 66. 72. c $27. 100. 64.000 + $2. 102.000 + 2. 1) (200 @ 3.26 × 1.2) (400 @ 3. d Avg.200 @ 3.1) (400 @ 3.4) (200 @ 3.2) (200 @ 3.210 ÷ 6.4) (300 @ 3.3) (200 @ 3.4) 3.290 .760 (500 @ 3.000 = $9.120 6/18 6/22 6/25 1.3) (1.000) = $20.200 @ 3.880 8.1) (200 @ 3. d (500 × $3.200 = $12.1) (200 @ 3.8 .26 No.5) 700 79.200 units EI = 6.1) (200 @ 3.300 1.872 ÷ 5.470.1) + (400 × $3. 80.200 = $10.5) (200 @ 3. 75.36/unit $10.000 3.3) 6/10 (200 @ 3.10) = $4.20) + (30 × $4.990 4.200 = 1.4) + (300 × $3.110.560 (2. 76.560 640 7.200 @ 3.750 (200 @ 3.500 units Sales = 5.3) (200 @ 3.1) (1.2) (400 @ 3.5) 1. c (200 × $3.820 6/6 6/7 Sold (1.1) 4.2) (600 @ 3.160 1.500 units = $3. on 1/6 $49.20) + (290 × $4.300 = $4.500 6.5) = $4.290.920 3.2) (2. b (100 × $4.2) + (400 × $3. 74. 77. a ($60.600 @ 3.500 – 5.982/unit 1/26 $53.1) (1.2) 6.1) (400 @ 3.910 ÷ 5.960 6/9 6/15 (600 @ 3.460 3.238.432.5) + (800 × $3.2) (600 @ 3.960 (1. Date 6/1 6/2 6/3 Purchase (800 @ 3. a Available (purchases) = 6. b $21.280 6.3) (200 @ 3.5) 2.800 @ 3.36 × 1.2) (200 @ 3.300 units (800 × $3.000.800 @ 3.4) = $4.4) (500 @ 3. Test Bank for Intermediate Accounting.2) (400 @ 3. Twelfth Edition Answer Derivation 73.1) (1.240 4.4) 4.200 @ 3.2) (600 @ 3.696.000 – $40. Balance (800 @ 3.40) = $552. 78.40) = $1.460 2.000 @ 3.26 $3.2) (400 @ 3.400 @ 3.2) 2.1) (1.20) + (500 × $3. d 100 + 350 + 70 – 130 = 390 units (100 × $4. 25 = $232.000. ($4.000 + [(240. Answer Derivation 81.000 = $639. 85.400.000 – $100.900 = $1.900 COGS [(500 $5) + $2. b [(700 – 600) × ($6 – $4)] = $200. under weighted avg.000 × 1. 89.000 × $5.I.400 E. $100.000 – $20.000 + ($120.800 ÷ 1.400] – $3.000 × 1.59%.30 = $250.000 = $28.000 + $70.400 COGS [(500 × $4) + $2.000 ÷ 1.000 + $575.3) = $256.07] = $241.000. b [(2.240. 97.640 = $431. 84. d $130.000 × 1.360.I.800] – $2.500 = $416.600 = $2. c $300.000 = $306.Valuation of Inventories: A Cost-Basis Approach No. 90. c $290.000 + ($15.000. 88.000.000.07) = $232. 8 .840.000 + ($28.000 + $600.000 – $80.000 – $220.75) + (7.10) = $116. b (600 $10) – $2.500. c $600.000 × 1.000 – $100.000 E.640 COGS $1. c $256.500 COGS $1.I. b $100.000) × 1. under LIFO.500 = $583.27 .400 = $2.000 – $145.000 × $17)] ÷ [(12.000 ÷ 1. a Conceptual.400 E. 93.000 + $14.360 = $568.000 + $5.500 ÷ 1.000. 83.000 ÷ 1.000. 86.000 + $600.000 – $2.000) = $480. b [(700 – 600) × ($9 – $6)] = $300. 200 × $5 = $1.000 – $568. c $450. c $126. DERIVATIONS — CPA Adapted No. c (400 × $10) – $1. a $325.12) = $131. $100. 82.000 + $8.000 × 1) + ($12.000 × 1) + ($12.000 ($220.000 $220. b $100.360.000.I.000 – $583.000 – $131.07) + ($18.100 = $3. 87. 96.500.360 ÷ 1.000 × $5) + (7.000 + ($90.800 ÷ 800) × 400 units = $2.000 × $16)] = 1.000 = $15.000 + $10. 94.000 – $116.000 E. 91. 92.0959 = 109.000 × $6) + (10. Answer Derivation 95. c $143.000 ($220.10 = $115.07 = $240.000 – $60.12 = $128.000) = $640. ...8 ......7 × .......8 = $11.......000 × 1.......600 × $8........00....000............... c Conceptual..000....000 + $30...000 ÷ 1............................ Test Bank for Intermediate Accounting..98) + 400 = $11....9 = $36.......000 + $70... b $800. Twelfth Edition Answer Derivation 98....... 882 (b) Accounts Payable.. Cash. a Conceptual......000 = $770..000 × $9. (b) Payment was made thirty days after the purchase... 882 18 882 900 . entries in general journal form for the following: Prepare journal (a) Purchased merchandise costing $900 with terms 2/10..... b $50............ b $440.. Solution 8-109 (a) Inventory (. a $1. Accounts Payable......8 × .000 + ($80.000 + $40............... EXERCISES Ex.1) = $408...........00) + (4... 99. 100.. c $20..98 × $900).... 105...1 = $400.500...000 = $1... 103.. 101....000 × . c (450 × $42) + (150 × $44) = $25......500. n/30.......28 No.... c [(1. 8-109—Recording purchases at net amounts.......... 108.....600 = $9....... 104..000 $320..40)] ÷ 5.000........000 = $1. 107................. records purchase discounts lost and uses perpetual inventories.... 102.........000 × .. Purchase Discounts Lost..200 × ....................000................200 ($11.........000 + $147.000....... 106... Colaw Co........000 + $350......... a Conceptual....620......376. d $700....297...000 + $50... Accounts Payable..98 × $5...... Instructions What is the cost of the ending inventory for item 27 under the following methods? calculations....29 Valuation of Inventories: A Cost-Basis Approach Ex.... net income......................98 × $800).. and higher gross profit....... and retained earnings..900 784 784 84 84 Ex.... During June.......200).....400 units @ $24 800 units @ $36 700 units @ $30 400 units @ $50 1.... $5...02 × $4...900 4.............. records purchases at net amounts and uses periodic inventories. $800. 15 Accounts Payable (.................. n/30..........000 units @ $40 500 units @ $44 Perpetual inventories are maintained. the use of FIFO (as compared with LIFO) will result in what effect on the financial statements? Solution 8-111 During periods of rising prices. (Show ......... 4........ and received credit on account. the following changes in inventory item 27 took place: June 1 14 24 8 10 29 Balance Purchased Purchased Sold Sold Sold 1.... 8-110—Recording purchases at net amounts.. 8-112—FIFO and LIFO inventory methods..) (a) FIFO....000... 8-111—Comparison of FIFO and LIFO. income taxes... 30 Purchase Discounts Lost (......... Solution 8-110 June 11 Purchases (..... terms 2/10.... 30 Prepared the adjusting entry required for financial statements.. Prepare entries for the following: June 11 Purchased merchandise on account..8 ........ Ex......... During periods of rising prices.... Purchase Returns and Allowances......000)..................... lower cost of goods sold....... Accounts Payable.. the use of FIFO will result in higher inventory....... 15 Returned part of June 11 purchase............. (b) LIFO.... Alco Co.... 00 Inventory. A record of transactions for the month of May was as follows: Purchases May 1 (balance) 400 @ $4. 8-113—FIFO and LIFO periodic inventory methods.000 10.000 $34. January 19 70 units @ $6.55 Sales 300 1.40 = 1.40 Purchase.50 25 29 500 @ $4.30 12 14 700 @ $4. determine the inventory using LIFO. Twelfth Edition Solution 8-112 (a) 700 @ $30 = 300 @ $36 = $21.30 Test Bank for Intermediate Accounting.00 Purchase.50 @ 8.50 @ 7.800 6.800 Ex.400 @ $7.00 Assuming that perpetual inventory records are kept in dollars.200 @ $4.800 $31. January 9 300 units @ $5. 8-114—Perpetual LIFO. .800 (b) 800 @ $36 = 200 @ $30 = $28.000 900 400 1. The Pine Shop shows the following data related to an item of inventory: Inventory.8 . January 31 120 units Instructions (a) What value should be assigned to the ending inventory using FIFO? (b) What value should be assigned to cost of goods sold using LIFO? Solution 8-113 (a) 70 @ $6.00 @ 7. January 1 100 units @ $5.300 @ $4.932 Ex.00 = 50 @ $5.512 $1.40 18 22 1.20 May 3 4 1.10 6 8 800 @ $4.00 = $ 420 280 @ $5.40 = (b) $420 270 $690 70 @ $6.00 @ 7. You are asked to determine the most likely reason for this improvement.60 — — $2.55 = 2. The company uses the LIFO inventory method and has used it since 1982.440 Unit Price of Purchase $2.50 = 440 @ $2.275 $3. 8-115—Perpetual LIFO and Periodic FIFO. . Solution 8-115 (a) 400 @ $2.800.700 1.50 $2. and sales of item A are given in the following table for the first six months of 2007. 8-116—Analysis of gross profit.000. Hill’s Drug Company experienced a significant increase in the rate of gross profit on sales. Quantities Date January 11 January 24 February 8 March 16 June 11 Purchased — 1. The following data are from the records of the company: 2007 sales (at an average price of $40 a unit) were $1. During 2007.31 Solution 8-114 100 @ $4.Valuation of Inventories: A Cost-Basis Approach 8 .75 = 1.60 = 860 $1.60 = 600 @ $2.196 Ex.50 = 460 @ $2. (b) Compute the cost of goods sold for the first six months under the periodic FIFO inventory pricing method.000 1.794 (b) 400 @ $2.440 $1.000.400 840 1. Information as to balances on hand.955 Ex.300 — — 600 Sold — — 300 560 — Balance 400 1.75 Instructions (a) Compute the ending inventory at June 30 under the perpetual LIFO inventory pricing method.40 = 440 500 @ $4. Support your answer. compared with the rate it has averaged in recent years.144 1. purchases.000 1.10 = 820 100 @ $4.650 $3.196 $2. 2007 purchases (at an average cost of $24 a unit) were $960.20 = $ 420 200 @ $4. Seitzer Corporation sells item A as part of its product line. Computations Units sold: $1. Part A. Twelfth Edition Solution 8-116 Five thousand more units were sold than were purchased.000 $300.000 ÷ $40 = 45.10 = $50.00 = $30. Calculate the inventory at the end of year two continuing the use of the dollar-value LIFO method.000 Units purchased: $960.15 = Ending Inventory at Dollar-Value LIFO $300.000 and an ending inventory of $363.000 33.000 $300.800.500 .000 57. Computation of Ending Inventory.000 33. 8-117—Dollar-value LIFO method.000 × 1. Year Two Ending Inventory Layers at at Base-Year Price Base-Year Prices Price Index $437.000 Part B. Assuming rising prices.000 $333.15 = $380.000.000 × 1. Gant Company has a beginning inventory in year one of $300.000 × 1. Gant's inventory is $437.000 ÷ 1. the increased rate of gross profit is most likely due to the matching of old. Year One Ending Inventory Layers at at Base-Year Price Base-Year Prices Price Index $363.000 Ex.000 × 1.10 = Ending Inventory at Dollar-Value LIFO $300.000 ÷ 1.000 in terms of a price level of 115 which exists at the end of year two.10 = $330.000 ÷ $24 = 40.8 . Calculate the ending inventory under the dollarvalue LIFO method. Solution 8-117 Part A.000 × 1. The price level has increased from 100 at the beginning of the year to 110 at the end of year one. lower inventory costs against current sales.32 Test Bank for Intermediate Accounting.500 $390.00 = $30. Part B. This has resulted in the partial liquidation of the beginning LIFO inventory layers. At the end of year two. Computation of Ending Inventory. 2007. At the close of the year. The perpetual inventory was stated as $28. TVs shipped to a customer December 28. TVs on hand that cost $6. TVs shipped to a customer January 2.100 46.000 6. 2006. The TVs were included in the ending inventory.33 PROBLEMS Pr. 2.000 18. 2007. shipping point. Slone Company sells TVs. TVs costing $12. 2006. 2006.100 were never recorded on the books. 2007. 4. 2006. 8-118—Inventory cut-off. Instructions Compute the correct inventory at December 31. 5. costing $5.600 were recorded twice in the inventory account.000 were included in inventory at December 31. The sale was recorded in 2007.000.000 .Valuation of Inventories: A Cost-Basis Approach 8 .600 14. 1.000 received December 30.100 4.500 $12. Some events that occurred are as follows. f. were recorded as received on January 2.600 $32.500 on the books at December 31. which cost $10.600 10. 3. a new approach for compiling inventory was used and apparently a satisfactory cut-off for preparation of financial statements was not made. Solution 8-118 Inventory per books Add: Shipment received 12/30/06 TVs on hand Deduct: TVs recorded twice TVs shipped 12/28/06 Correct inventory 12/31/06 $28. TVs received during 2006 costing $4. were not received by the customer until January.b.o. 2006. b. NE NE U U NE O O NE O O NE NE NE NE U U O NE U NE . _____________________________________________________________________________ Solution 8-119 1. Twelfth Edition Pr. Accounts Receivable EXAMPLE: Excluded goods in rented warehouse from inventory count. Goods were shipped and appropriately excluded from ending inventory but sale was not recorded. Goods in transit shipped "f. (All sales and purchases are on credit.o. _____________________________________________________________________________ 4. 2. Assume a periodic inventory system.b. destination" by supplier were recorded as a purchase but were excluded from ending inventory. 3.) Indicate in each of the spaces provided the effect of the described errors on the various elements of a company's financial statements.o.8 . shipping point" were not recorded as a sale and were included in ending inventory. 8-119—Analysis of errors. Goods held on consignment were included in inventory count and recorded as a purchase. NE = no effect. Use the following codes: O = amount is overstated. Goods in transit shipped "f. 4. _____________________________________________________________________________ 3. U = amount is understated.34 Test Bank for Intermediate Accounting. _____________________________________________________________________________ 2. NE Inventory U Accounts Payable Sales NE NE Cost of Goods Sold O _____________________________________________________________________________ 1. ... (To record payment within the discount period: $300........... Solution 8-120 (a) Purchases. Neer Corp.....) Accounts Payable...... 10%.......800 295.000 = $235...200 58..000 = Cost of goods sold: $295..520 $265............200 (Assuming that the $4..000 = $300..............800 discount is prorated between the cost of goods sold.....200 discount lost is reported in the other expense section of the income statement.......000 Accounts Payable....200 = Cost of goods sold: 90% × $295. (To record the purchase at net amount: . Final inventory is carried at the gross amount........200 – $30......... .... 90% of the merchandise had been sold and 10% remained in inventory.....600 (The $1..... December 31..... and the final inventory.............000 $294......000 4......000 = 294...) (b) (1) Net method: Purchases: Final inventory: 10% × $294............................... terms 2/10...............200 30........ The company uses a periodic system............200 = $300...............000 = Goods available Final inventory: 10% × $295...........35 Pr............. 90%..................000 $265..............000..... n/30...) OR Purchases: Less purchase discounts: ...) .... (2) gross method? Assume that there was no beginning inventory...............000 235...................................200........200 60.....000 – $60.. Instructions (a) Assuming that the net method is used for recording purchases.....000 = Goods available Final inventory: 10% × $300............400 $264.............. The remainder was paid within the 30-day term............. (To record the final payment....... Purchase Discounts Lost..200 29. At the end of the annual accounting period.................) Accounts Payable. 235.......... (b) What dollar amounts should be reported for the final inventory and cost of goods sold under the (1) net method........02 × $240.. purchased merchandise during 2007 on credit for $300....800 discount is used to reduce cost of goods sold............................................680 (Assuming that the $4.. All of the gross liability except $60......02 × $240......... 8-120—Accounting for purchase discounts.....000.....000....) (2) Gross method: Purchases: Less purchase discounts: .000 = $240.. prepare the entries for the purchase and two subsequent payments.........98 × $300...........................000 = $294.... 2007........ 294.........800 1..200 Cash.... Cash..000 = Cost of goods sold: 90% × $294..............98 × $240...000 was paid within the discount period..000 4.....800 295........000 29..Valuation of Inventories: A Cost-Basis Approach 8 .......... 00 A physical inventory on March 31.800 . 2007 2. under each of the following inventory methods: (a) FIFO. 2007 2.800 Flynt Company COMPUTATION OF INVENTORY FOR PRODUCT X UNDER LIFO INVENTORY METHOD March 31. Twelfth Edition Pr.00 20.00 March 15. inventory Units 1.800 700 2. 2007 Beginning inventory January 5. (c) Weighted-average. 2007 March 31.00 22. Show supporting computations in good form.400 15. 2007 (beginning inventory) 1. 2007 February 16.600 900 2. 2007.500 Unit Cost $18.000 $46. 8-121—Inventory methods. (b) LIFO.800 18.800 $23.500 Unit Cost $23.36 Test Bank for Intermediate Accounting.00 Purchases: January 5.400 $56. 2007. Instructions Prepare schedules to compute the ending inventory at March 31.00 Total Cost $28.00 Total Cost $41. 2007 1.500 units on hand. 2007.400 $21.600 $18. 2006.00 January 25.000 $22. 2007 1.8 . inventory (b) Units 1. 2007 (portion) March 31. 2007 March 15. Units Unit Cost January 1. shows 2. The following information is available from Flynt 's inventory record for Product X.00 February 16.600 $20. 2007. Solution 8-121 (a) Flynt Company COMPUTATION OF INVENTORY FOR PRODUCT X UNDER FIFO INVENTORY METHOD March 31. Flynt Company was formed on December 1. 000 ÷ 1. 2006. 2006: Ending Inventory at Base-Year Price $252.15 = = = Ending Inventory Dollar-Value LIFO $180.750 Pr.600 $20.70 $51. Dent Company manufactures one product. 2007 February 16.000 Layers at Base-Year Prices $180.000 $335.000 50.000 368.00 21.00 1.Valuation of Inventories: A Cost-Basis Approach 8 .400 22.400 $194.05 1.00 = 1.600 2. 2007 January 25.25 Instructions Compute the inventory at December 31.500 $20. Inventory data are as follows: Inventory at year-end prices $252. Dent adopted the dollar-value LIFO inventory method.00 Weighted average cost ($194.500 Year 2006 2007 2008 Price index (base year 2005) 1. 2007: $368.000 $243.600 2.800 9.000 ÷ 1.15 1.000 63.400 1.000 $60. 2007. 2007. and 2008 At 12/31.000 1.000 63.000 $180.15 = $320. 2007 Unit Cost $18. On December 31.00 22.37 Solution 8-121 (cont. 2007.000 × × At 12/31.000.000 $60.000 × × × Price Index 1. 2006.400) Total Cost $ 28.000 $180. inventory 2. 8-122—Dollar-value LIFO.05 1.000 92.000 41.000 387. The inventory on that date using the dollar-value LIFO inventory method was $180.70 March 31. Solution 8-122 Dent Company Dollar-Value LIFO Computations At December 31.) (c) Flynt Company COMPUTATION OF INVENTORY FOR PRODUCT X UNDER WEIGHTED-AVERAGE INVENTORY METHOD March 31.00 23.000 $80. using the dollar-value LIFO method for each year.400 Beginning inventory January 5. 2007 Units 1. 2007 March 15. and 2008. 2005.00 20.600 ÷ 9.800 52.05 = 1.000 .05 = $240. 00 4.200 = 1.000 $180. On this date. 3.000 80.200 × $6.00 = Y 800 × $5.) At 12/31.Test Bank for Intermediate Accounting.500 ÷ $6. 2.400 $6.500 $323.50 $6.200 Index = $5.200 .486 $ 800 5.00 1.00 = Y 800 × $4.200 $8. its inventory consisted of the following items.700 $3.300 $ 600 3.25 = Y 1. (d) Calculate the 12/31/08 inventory. 4.600 $4. (b) Calculate the 12/31/07 inventory.50 = Ending Inventory In Base Dollars X 300 × $2.37 × × 1.25 = $310.100 1. Day Company adopted the dollar-value LIFO inventory method on 12/31/06.50 = $3.00 = Y 1.000 $70.200 $5.400 $5. Twelfth Edition 8 .05 1. (c) Compute the price index for 2008.38 Solution 8-122 (cont.371 or 1.300 ÷ $4. Label all numbers.00 $3.000 63.100 December 31 2007 2008 300 400 $3.26 (b) Base Layer Incremental Layer 2007 Ending Inventory (c) Ending Inventory In End of Year Dollars: X 400 × $3.200 × $4. Round to 2 decimal places.100 $4.200 = 1. Total Cost $ 400 2.50 = $ 900 4.25 800 1. 2008: $387.00 Units of X in inventory Cost of each X unit Units of Y in inventory Cost of each Y unit Instructions (a) Compute the price index for 2007.386 $4.00 = 1. Item X Y Number of Units 200 600 Cost Per Unit $2.262 or 1.15 = = = $180.500 ÷ 1.00 = $3.200 $1. Round to 2 decimal places. Solution 8-123 (a) Ending Inventory In End of Year Dollars: X 300 × $3.26 = Ending Inventory In Base Dollars X 400 × $2.50 Additional information: 1. Label all numbers.000 $60. 8-123—Dollar-value LIFO.000 × × × 1.500 Pr.100 1.500 Index = $8.300 7. 000 $6.100 1.386 2.26 = 1.200 × × × 1.) (d) Base Layer Incremental Layer 2008 Ending Inventory $3.37 = $3.00 = 1.39 .Valuation of Inventories: A Cost-Basis Approach Solution 8-123 (cont.100 2.226 8 .740 $7.100 1.