M6m 4k6 | Course Paper

Kieso, Weygandt, Warfield, McConomy Intermediate Accounting, Twelfth Canadian Edition

Solutions Manual 8-1 Chapter 8

SOLUTIONS TO EXERCISES

EXERCISE 8.1

a.

1.

Raw Materials ……………………………………

8,100

Accounts Payable ………………………

8,100

2.

No adjustment necessary.

3.

Raw Materials ……………………………………

28,000

Accounts Payable ………………………

28,000

4.

Accounts Payable ………………………………

7,500

Raw Materials …………………………...

7,500

5.

Raw Materials ……………………………………

19,800

Accounts Payable ………………………

19,800

Item 6 represents a special sales agreement between the supplier

and Ogale Equipment Corporation. In this arrangement, the

supplier has simply ‘parked’ its inventory with Ogale for a short

time and has agreed to buy it back in January (presumably after

the supplier’s year end). The risks and rewards of ownership have

not passed to Ogale, and this inventory should remain in the

supplier’s books at December 31, 2020. See further discussion

below under (b) regarding the ethics.

Item 7 represents consignment inventory. Ogale does not record

this as inventory on its books at December 31, 2020. The

inventory belongs to P. Perry and should be recorded on its

books at December 31, 2020.

Item 1 should be reversed, since the journal entry was also made

on Jan 2. Item 4 also has to be reversed. The invoice was entered

in December in error, so the entry above reverses it. The original

entry therefore has to be re-established in January – a reversal of

the entry above.

Kieso, Weygandt, Warfield, McConomy Intermediate Accounting, Twelfth Canadian Edition

Solutions Manual 8-2 Chapter 8

EXERCISE 8.1 (CONTINUED)

b. With respect to item 4, it is possible that Ogale’s supplier

has made a clerical error in this case by issuing an invoice

dated December 30, 2020, prior to the shipment of the goods

on January 2, 2021. Ogale should point out this error,

particularly if discount terms apply to the purchase. One

must also consider the possibility that Ogale’s supplier is

trying to manipulate its financial results for its fiscal year

ended December 31, 2020. They may be attempting to

include a sale in their fiscal year while at the same time

including the merchandise inventory on their SFP. This

would indicate that the supplier is not acting legally and

ethically and Ogale should reconsider whether or not they

wish to do business with this supplier.

With respect to item 5, Ogale should contact its supplier

about the earlier-than-contracted delivery of materials. On

this occasion, Ogale has accepted delivery so it appears

that they are Ogale’s goods at December 31. However, the

supplier should be informed that this practice is not

acceptable in the future. Here the ethical issue may be with

the supplier: did they arrange for an early delivery in order

to increase their current year sales, for example, or was it in

error?

With respect to item 6, Ogale should ensure that there is a

valid business reason for holding these items (i.e., that the

supplier warehouse was indeed full). They should also

question why a sale and repurchase agreement has been

issued. If they are indeed just helping out with storing the

goods, there is no need to formally record a sale and

repurchase.

LO 2,3 BT: AP Difficulty: M Time: 25 min. AACSB: Ethics CPA: cpa-t001 cpa-e001 CM: Reporting and

Ethics

Kieso, Weygandt, Warfield, McConomy Intermediate Accounting, Twelfth Canadian Edition

Solutions Manual 8-3 Chapter 8

EXERCISE 8.2

a.

Inventory December 31, 2020 (unadjusted)

$234,890

Transaction 2

10,420

Transaction 3

-0-

Transaction 4

-0-

Transaction 5

8,540

Transaction 6

(10,438)

Transaction 7

(11,520)

Transaction 8

1,500

Transaction 9

12,500

Inventory December 31, 2020 (adjusted)

$245,892

Transaction 9 represents a special sales agreement. If Jaeco

cannot make a reasonable prediction for the amount of potential

returns from Simply, then the sale is not valid and the goods

cannot be considered sold, irrespective of the shipping terms.

The inventory will remain on Jaeco’s books at December 31, 2020.

b.

Transaction 3

Sales Revenue …………………………..

12,800

Accounts Receivable …………

12,800

(To reverse sale entry in 2020)

Transaction 4

Purchases …………………………………

15,630

Accounts Payable ………………

15,630

(To record purchase of merchandise in 2020)

Transaction 8

Refund Liability ………………………….

2,600

Accounts Receivable …………

2,600

(To record sales return)

Transaction 9

Sales Revenue …………………………... 21,000

Accounts Receivable ………… 21,000

(To reverse sale entry in 2020)

Kieso, Weygandt, Warfield, McConomy Intermediate Accounting, Twelfth Canadian Edition

Solutions Manual 8-4 Chapter 8

EXERCISE 8.2 (CONTINUED)

a. Transaction 3

Sales Revenue …………………………... 12,800

Accounts Receivable ………… 12,800

(To reverse sale entry in 2020)

Transaction 4

Purchases ………………………………….. 15,630

Accounts Payable ……………… 15,630

(To record purchase of merchandise in 2020)

Transaction 8

Sales Returns

and Allowances ……………………… 2,600

Accounts Receivable ………… 2,600

(To record sales return)

Transaction 9

Sales Revenue …………………………... 21,000

Accounts Receivable ………… 21,000

(To reverse sale entry in 2020)

LO 2,3,5,11 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Kieso, Weygandt, Warfield, McConomy Intermediate Accounting, Twelfth Canadian Edition

Solutions Manual 8-5 Chapter 8

EXERCISE 8.3

a. Items 1, 3, 5, 8

1

, 10, 13, 15, 16, 18, 19, 20, 22, 23, and 26

would be reported as inventory in the financial statements.

Explanations

23. Normal waste or spoilage of raw materials during

production would be included in the material cost of the

product; i.e., inventoriable cost.

26. These costs can be capitalized since storage is a

necessary part of the production process.

27. Under ASPE, decommissioning or restoration costs are

added to the cost of the related natural resource asset

(discussed further in Chapters 10 and 13).

These costs may be capitalized if a company elects to do so:

11. Interest costs incurred for inventories may be

capitalized.

The following items would not be reported as inventory:

2. Cost of goods sold in the income statement

4. Not reported in the financial statements as not yet

received

6. Cost of goods sold in the income statement

7. Cost of goods sold in the income statement

9. Selling expense for freight out

12. Advertising expense in the income statement

14. Supplies in the current asset section of the SFP

17. Not reported in the financial statements as not owned

1 Freight charges costs are not always allocated between inventory and

cost of goods sold. They are sometimes expensed completely in the year

incurred out of expediency.

Kieso, Weygandt, Warfield, McConomy Intermediate Accounting, Twelfth Canadian Edition

Solutions Manual 8-6 Chapter 8

EXERCISE 8.3 (CONTINUED)

a. (continued)

21. Temporary investments in the current asset section of the

SFP.

24. Abnormal levels of waste of raw materials cannot be

included in the carrying amount of inventory; i.e., these

must be expensed as incurred as a period cost.

25. Storage costs to store excess inventory cannot be

inventoried; i.e., these charges must be expensed as a

period cost.

b. Under IFRS, the treatment for borrowing costs differs from

ASPE. Interest expenses are considered product costs if the

inventory takes a long time to produce or manufacture.

Capitalization is not required for interest expenses relating

to inventories manufactured in large quantities or produced

on a repetitive basis; a company can choose to capitalize as

an accounting policy choice.

Additionally, under IFRS, decommissioning costs incurred

as part of the production process are treated as product

costs and are inventoriable.

LO 2,3,4,11 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Kieso, Weygandt, Warfield, McConomy Intermediate Accounting, Twelfth Canadian Edition

Solutions Manual 8-7 Chapter 8

EXERCISE 8.4

a.

Inventory per physical count.…………….……………... $441,000

Goods in transit to customer, f.o.b. destination …. + 33,000

Goods in transit from vendor, f.o.b. shipping point + 51,000

Inventory to be reported on SFP………………..………. $ 525,000

Item 1 – The consigned goods of $61,000 are not owned by Solaro

and were properly excluded.

Item 3 – The goods in transit to a customer of $46,000, shipped

f.o.b. shipping point, are properly excluded from the inventory

because the title to the goods passed when they left the seller and

therefore a sale and related cost of goods sold should be

recorded in 2020.

Item 4 – The goods in transit from a vendor of $73,000, shipped

f.o.b. destination, are properly excluded from the inventory

because the title to the goods does not pass to Solaro until the

buyer (Solaro) receives them.

Item 6 – Storage costs to store excess inventory cannot be

inventoried; i.e., these charges must be expensed as a period

cost. Storage costs can only be added to the cost of inventory if

they are necessary in the production process – i.e., wine-making

process).

Item 7 – Interest costs that are incurred from delayed purchase

plans for inventories that are ready for sale or use are not product

costs.

b. Private company:

Under ASPE, the only requirement is that the amount of interest

be disclosed if it is capitalized as part of the cost of inventory.

Therefore, Solaro can choose to add the interest costs to the

product costs. But, following basic principles, ordinary financing

costs would not qualify as an inventoriable product cost.

Therefore, it would have to be in similar circumstances to those

found under IFRS standards.

Kieso, Weygandt, Warfield, McConomy Intermediate Accounting, Twelfth Canadian Edition

Solutions Manual 8-8 Chapter 8

EXERCISE 8.4 (CONTINUED)

c. A public company:

Under IFRS, interest costs incurred for inventory are

capitalized if the inventory takes a long time to produce or

manufacture – such as wine production. Additionally, if the

interest costs relate to inventory manufactured in large

quantities on a repetitive basis, a choice is permitted for

capitalization.

d. To test inventory cut-off the auditor could perform the

following audit tests:

1. Take note of shipping document details at the time of the

inventory count, for incoming and outgoing inventory.

Follow up with the accounting treatment given for any

goods were shipped or received within 5 days before or

after the year end.

2. Determine that management’s procedures for taking

control of the inventory count and the related cut-off are

adequate and observe that the count procedures were

properly followed. Enquire of management how they

manage and control goods received or shipped within 5

days of year end.

3. Verify that goods that should be excluded from the

inventory count are not included in the year–end

inventory totals.

4. Verify that goods that should be included in the

inventory count are included in the year-end inventory

totals.

5. Scan the purchase journal and sales journal for any

unusual items that may impact cut-off and the inventory

totals at year end.

LO 2,4,11 BT: C Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Kieso, Weygandt, Warfield, McConomy Intermediate Accounting, Twelfth Canadian Edition

Solutions Manual 8-9 Chapter 8

EXERCISE 8.5

a.

Unit

Total

% of

Total

Per

No. of

Selling

Sales

Total

Allocated

Unit

Chairs

Price

Value

Cost *

Cost

Lounge chairs

400

$ 95

$38,000

37.3%

$22,324.05

$55.81

Armchairs

300

85

25,500

25.0%

14,962.50

49.88

Straight chairs

700

55

38,500

37.7%

22,563.45

32.23

$102,000

$59,850.00

* Percentage of total value applied to lump sum of $59,850 paid

Beginning Balance (cost above)

$59,850.00

Per

Cost of

No. of

Unit

Goods

Sales

Chairs

Cost

Sold

Lounge chairs

350

$55.81

$19,533.50

Armchairs

210

49.88

10,474.80

Straight chairs

120

32.23

3,867.60

$33,875.90

(33,875.90)

Cost of chairs remaining at end of 2020

$25,974.10

OR: Cost of chairs remaining:

Lounge chairs: (400 – 350) X $55.81 = $ 2,790.50

Armchairs: (300 – 210) X $49.88 = 4,489.20

Straight chairs: (700 – 120) X $32.23 = 18,693.40

Cost of ending inventory $25,973.10

*$1.00 difference due to rounding

Kieso, Weygandt, Warfield, McConomy Intermediate Accounting, Twelfth Canadian Edition

Solutions Manual 8-10 Chapter 8

EXERCISE 8.5 (CONTINUED)

a. (continued)

OR: Cost ratio:

$59,850

= 58.7%

$102,000

Beginning Balance (cost above)

$ 59,850.00

Less: Cost of Goods Sold:

No. of

Selling

Sales

Chairs

Price

Sales

Lounge chairs

350

$95

$33,250

Armchairs

210

85

17,850

Straight chairs

120

55

6,600

57,700

X 58.7%

(33,869.90)

Ending Inventory

$ 25,980.10

Difference is due to rounding.

b.

Discounted

Net

No. of

Selling

NRV

Realizable

Chairs

Price

Cost

Per Unit

Value

Lounge chairs

50

$71.25 *

$2.00

$69.25

$ 3,462.50

Armchairs

90

59.50 **

2.00

57.50

5,175.00

Straight chairs

580

33.00 ***

2.00

31.00

17,980.00

Net realizable value of chairs in inventory

$26,617.50

* $95 x 75% = $71.25

** $85 X 70% = $59.50

*** $55 X 60% = $33.00

Kieso, Weygandt, Warfield, McConomy Intermediate Accounting, Twelfth Canadian Edition

Solutions Manual 8-11 Chapter 8

EXERCISE 8.5 (CONTINUED)

c.

Per

Net

Lower

No. of

Unit

Realizable

of Cost

Chairs

Cost

Value

and NRV

Lounge chairs

50

$55.81

$2,790.50

$ 3,462.50

$2,790.50

Armchairs

90

49.88

4,489.20

5,175.00

4,489.20

Straight chairs

580

32.23

18,693.40

17,980.00

Inventory value at December 31, 2020 at LC and NRV

$25,259.70

LO 2,7 BT: AP Difficulty: S Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Kieso, Weygandt, Warfield, McConomy Intermediate Accounting, Twelfth Canadian Edition

EXERCISE 8.6

a. Under IFRS, if the unavoidable costs to complete a contract

are higher than the benefits expected from receiving the

goods under the contract, a loss provision is recognized as

an onerous contract. Although ASPE does not have a similar

requirement, practice in Canada has been to record the loss

and liability as well.

b. If the commitment is material in amount, there should be a

note to the financial statements stating the nature and

extent of the commitment. The note may also disclose the

market price of the materials. The excess of market price

over contracted price will not be realized as the ultimate

purchase cost will be at a maximum the contract price of

$2.00.

c. The drop in the market price of the commitment should be