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145. Keck Co. had 300 units of product A on hand at January 1, 2020, costing $21 each.
Purchases of product A during January were as follows:
Date Units Unit Cost
Jan. 10 400 $22
18 500 23
28 200 24
A physical count on January 31, 2020 shows 400 units of product A on hand. The cost of
the inventory at January 31, 2020 under the LIFO method is
a. $9,400.
b. $8,900.
c. $8,500.
d. $8,200.
146. When the double-extension approach to the dollar-value LIFO inventory cost flow method
is used, the inventory layer added in the current year is multiplied by an index number.
How would the following be used in the calculation of this index number?
Ending inventory Ending inventory
at current year cost at base year cost
a. Numerator Denominator
b. Numerator Not used
c. Denominator Numerator
d. Not used Denominator
147. Farr Co. adopted the dollar-value LIFO inventory method on December 31, 2020. Farr’s
entire inventory constitutes a single pool. On December 31, 2020, the inventory was
$960,000 under the dollar-value LIFO method. Inventory data for 2021 are as follows:
12/31/21 inventory at year-end prices $1,320,000
Relevant price index at year end (base year 2020) 110
Using dollar value LIFO, Farr’s inventory at December 31, 2021 is
a. $1,056,000.
b. $1,224,000.
c. $1,200,000.
d. $1,320,000.
Test Bank for Intermediate Accounting, Seventeenth Edition
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Multiple Choice Answers—CPA Adapted
DERIVATIONS — Computational
Valuation of Inventories: A Cost-Basis Approach
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No. Answer Derivation
Test Bank for Intermediate Accounting, Seventeenth Edition
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No. Answer Derivation
Valuation of Inventories: A Cost-Basis Approach
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No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation
Test Bank for Intermediate Accounting, Seventeenth Edition
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No. Answer Derivation
BRIEF EXERCISES
BE. 8-148—Recording purchases at net amounts.
Flint Co. records purchase discounts lost and uses perpetual inventories. Prepare journal entries
in general journal form for the following:
(a) Purchased merchandise costing $3,500 with terms 2/10, n/30.
(b) Payment was made thirty days after the purchase.
BE. 8-149—Recording purchases at net amounts.
Dill Co. records purchases at net amounts and uses periodic inventories. Prepare entries for the
following:
June 11 Purchased merchandise on account, $15,000, terms 2/10, n/30.
15 Returned part of June 11 purchase, $800, and received credit on account.
30 Prepared the adjusting entry required for financial statements.
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BE. 8-150—Comparison of FIFO and LIFO.
During periods of rising prices, the use of FIFO (as compared with LIFO) will result in what effect
on the financial statements?
EXERCISES
Ex. 8-151—FIFO and LIFO inventory methods.
During June, the following changes in inventory item 27 took place:
June 1 Balance 1,400 units @ $36
14 Purchased 800 units @ $54
24 Purchased 700 units @ $45
8 Sold 400 units @ $75
10 Sold 1,000 units @ $60
29 Sold 500 units @ $66
Perpetual inventories are maintained.
Instructions
What is the cost of the ending inventory for item 27 under the following methods? (Show
calculations.)
(a) FIFO.
(b) LIFO.
Test Bank for Intermediate Accounting, Seventeenth Edition
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Ex. 8-152—FIFO and LIFO periodic inventory methods.
The Rock Shop shows the following data related to an item of inventory:
Inventory, January 1 300 units @ $5.00
Purchase, January 9 900 units @ $5.40
Purchase, January 19 210 units @ $6.00
Inventory, January 31 300 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?
Ex. 8-153—Perpetual LIFO.
A record of transactions for the month of May was as follows:
Purchases Sales
May 1 (balance) 400 @ $5.20 May 3 200 @ $7.00
4 1,300 @ $5.10 6 1,000 @ 7.00
8 800 @ $5.30 12 900 @ 7.50
14 700 @ $5.40 18 400 @ 7.50
22 1,200 @ $5.50 25 1,400 @ 8.00
29 500 @ $5.55
Assuming that perpetual inventory records are kept in dollars, determine the ending inventory
using LIFO.
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Ex. 8-154—Perpetual LIFO and Periodic FIFO.
Matlock Corporation sells item A as part of its product line. Information as to balances on hand,
purchases, and sales of item A are given in the following table for the first six months of 2020.
Quantities
Unit Price
Date Purchased Sold Balance of Purchase
January 11 — — 400 $4.65
January 24 1,300 — 1,700 $4.90
February 8 — 300 1,400 —
March 16 — 560 840 —
June 11 600 — 1,440 $5.10
Instructions
(a) Compute the ending inventory at June 30 under the perpetual LIFO inventory pricing
method.
(b) Compute the cost of goods sold for the first six months under the periodic FIFO inventory
pricing method.
Ex. 8-155—Analysis of gross profit.
During 2020, King’s Drug Company experienced a significant increase in the rate of gross profit
on sales, compared with the rate it has averaged in recent years. You are asked to determine the
most likely reason for this improvement. Support your answer.
The following data are from the records of the company:
2020 sales (at an average price of $50 a unit) were $2,300,000.
2020 purchases (at an average cost of $30 a unit) were $1,200,000.
The company uses the LIFO inventory method and has used it since 1991.
Test Bank for Intermediate Accounting, Seventeenth Edition
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Solution 8-155
Ex. 8-156—Dollar-value LIFO method.
Part A. Judd Company has a beginning inventory in year one of $1,400,000 and an ending
inventory of $1,694,000. The price level has increased from 100 at the beginning of
the year to 110 at the end of year one. Calculate the ending inventory under the dollar–
value LIFO method.
Part B. At the end of year two, Judd‘s inventory is $1,886,000 in terms of a price level of 115
which exists at the end of year two. Calculate the inventory at the end of year two
continuing the use of the dollar-value LIFO method.
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PROBLEMS
Pr. 8-157—Inventory cut–off.
Vogts Company sells TVs. The perpetual inventory was stated as $38,500 on the books at
December 31, 2020. At the close of the year, a new approach for compiling inventory was used
and apparently a satisfactory cut-off for preparation of financial statements was not made. Some
events that occurred are as follows.
1. TVs shipped to a customer January 2, 2021, costing $5,000 were included in inventory at
December 31, 2020. The sale was recorded in 2021.
2. TVs costing $15,000 received December 30, 2020, were recorded as received on January 2,
2021.
3. TVs received during 2020 costing $4,600 were recorded twice in the inventory account.
4. TVs shipped to a customer December 28, 2020, f.o.b. shipping point, which cost $10,000,
were not received by the customer until January, 2021. The TVs were included in the ending
inventory.
5. TVs on hand that cost $6,100 were never recorded on the books.
Instructions
Compute the correct inventory at December 31, 2020.
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Pr. 8-158—Analysis of errors.
(All sales and purchases are on credit.)
Indicate in each of the spaces provided the effect of the described errors on the various elements
of a company‘s financial statements. Use the following codes: O = amount is overstated; U =
amount is understated; NE = no effect. Assume a periodic inventory system.
Accounts Accounts Cost of
Receivable Inventory Payable Sales Goods Sold
EXAMPLE: Excluded goods in rented
warehouse from inventory NE U NE NE O
count.
____________________________________________________________________________
1. Goods in transit shipped “f.o.b.
destination” by supplier were
recorded as a purchase but were
excluded from ending inventory.
____________________________________________________________________________
2. Goods held on consignment were
included in inventory count and
recorded as a purchase.
____________________________________________________________________________
3. Goods in transit shipped “f.o.b.
shipping point” were not recorded
as a sale and were included in
ending inventory.
____________________________________________________________________________
4. Goods were shipped and appro-
priately excluded from ending
inventory but sale was not
recorded.
____________________________________________________________________________
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Pr. 8-159—Accounting for purchase discounts.
Otto Corp. purchased merchandise during 2020 on credit for $700,000; terms 2/10, n/30. All of
the gross liability except $100,000 was paid within the discount period. The remainder was paid
within the 30-day term. At the end of the annual accounting period, December 31, 2020, 90% of
the merchandise had been sold and 10% remained in inventory. The company uses a periodic
system.
Instructions
(a) Assuming that the net method is used for recording purchases, prepare the entries for the
purchase and two subsequent payments.
(b) What dollar amounts should be reported for the final inventory and cost of goods sold under
the (1) net method; (2) gross method? Assume that there was no beginning inventory.
Test Bank for Intermediate Accounting, Seventeenth Edition
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Pr. 8-160—Inventory methods.
Jones Company was formed on December 1, 2019. The following information is available from
Jones’s inventory record for Product X.
Units Unit Cost
January 1, 2020 (beginning inventory) 2,400 $18.00
Purchases:
January 5, 2020 3,900 $20.00
January 25, 2020 3,600 $21.00
February 16, 2020 1,500 $22.00
March 15, 2020 2,700 $23.00
A physical inventory on March 31, 2020, shows 3,000 units on hand.
Instructions
Prepare schedules to compute the ending inventory at March 31, 2020, under each of the
following inventory methods:
(a) FIFO.
(b) LIFO.
(c) Weighted-average.
Show supporting computations in good form.
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Solution 8-160 (cont.)
Pr. 8-161—Dollar-value LIFO.
Aber Company manufactures one product. On December 31, 2019, Aber adopted the dollar-value
LIFO inventory method. The inventory on that date using the dollar-value LIFO inventory method
was $900,000. Inventory data are as follows:
Inventory at Price index
Year year-end prices (base year 2019)
2020 $1,260,000 1.05
2021 1,840,000 1.15
2022 1,900,000 1.25
Instructions
Compute the inventory at December 31, 2020, 2021, and 2022, using the dollar-value LIFO
method for each year.
Test Bank for Intermediate Accounting, Seventeenth Edition
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Solution 8-161 (cont.)
Pr. 8-162—Dollar-value LIFO.
Gott Company adopted the dollar-value LIFO inventory method on 12/31/19. On this date, its
inventory consisted of the following items.
Item Number of Units Cost Per Unit Total Cost
X 300 $2.50 $ 750
Y 900 4.50 4,050
$4,800
Additional information: December 31
2020 2021
1. Units of X in inventory 450 600
2. Cost of each X unit $3.00 $3.25
3. Units of Y in inventory 1,200 1,800
4. Cost of each Y unit $5.50 $6.00
Instructions
(a) Compute the price index for 2020. Round to 2 decimal places.
(b) Calculate the 12/31/20 inventory. Label all numbers.
(c) Compute the price index for 2021. Round to 2 decimal places.
(d) Calculate the 12/31/21 inventory. Label all numbers.
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Solution 8-162 (cont.)
Short Answer:
1. As compared with the FIFO method of costing inventories, does the LIFO method result in a
larger or smaller net income in a period of rising prices? What is the comparative effect on
net income in a period of falling prices?
1. The LIFO method results in a smaller net income because later costs, which are higher
than earlier costs, are matched against revenue. Conversely, in a period of falling prices,
the LIFO method would result in a higher net income because later costs in this case
would be lower than earlier costs, and these later costs would be matched against
revenue.
2. Explain the following terms.
(a) LIFO layer (b) LIFO reserve (c) LIFO effect
2. (a) LIFO layer – a LIFO layer (increment) is formed when the ending inventory at base–
year prices exceeds the beginning inventory at base-year prices.
(b) LIFO reserve – the difference between the inventory method used for internal purposes
and LIFO.
(c) LIFO effect – the change in the LIFO reserve (Allowance to Reduce Inventory to LIFO)
from one period to the next.