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c.
PROBLEM 8.1B
DOBBINS SUPPLY, INC. (concluded)
Yes. As shown in part a, the LIFO method resulted in the highest cost of goods sold figure, whereas
Education.
30 Minutes, Strong
(1) Average-cost method:
(a) Cost of goods sold on April 28:
8
,
111
$
40
,
555
$
(b) Ending inventory (7 units) at June 30:
32
,
444
$
25
,
500
57
,
944
$
,
000$ 8
(b) Ending inventory (7 units) at June 30: 32
,
800
$
25
,
500 58
,
000
$
(b) Ending inventory (7 units) at June 30: 32
,
000
$
25
,
500 57
,
500
$
3 units from
p
urchase on Ma
y
8
@
$8
,
500
Endin
g
inventor
y,
June 30
4 units from A
p
ril 19
p
urchase
@
$8
,
200
3 units from Ma
y
8
p
urchase
@
$8
,
500
4 units from
p
urchase of A
p
ril 1
@
$8
,
000
Cost of
g
oods sold
(
5 units
)
Total
4 units from A
p
ril 1
p
urchase
@
$8,000
PROBLEM 8.2B
a. Cost of goods sold and ending inventory
SEA TRAVEL: PERPETUAL SYSTE
M
3 units
p
urchased on Ma
y
8 at $8
,
500 each
Avera
g
e cost
(
as of A
p
ril 28
;
$73
,
000 ÷ 9 units
)
Cost of
g
oods sold
(
5 units
@
$8
,
111
)
Avera
g
e unit cost followin
g
A
p
ril 19
p
urchase:
4 units at A
p
ril 19 avera
g
e cost of $8
,
111
Education.
b. (1)
income tax returns. However, tax laws do require that taxpayers using LIFO for tax purposes
must also use the LIFO method for financial reporting purposes.
Problem 8.2B
SEA TRAVEL: PERPETUAL SYSTE
M
The LIFO method will result in the lowest net income, as it assigns the most recent (highest)
costs to the cost of goods sold. LIFO will result in the lowest net income whenever the most
(concluded)
Education.
20 Minutes, Medium
(1) Average-cost method:
Ending inventory at June 30:
8
,
208
$
57
,
456
$
Cost of goods sold through June 30: 98
Avera
g
e cost
(
$98
,
500 ÷ 12 units
)
Endin
g
inventor
y
(
7 units
@
$8
,
208
)
PROBLEM 8.3B
a. Cost of goods sold and ending inventory
SEA TRAVEL: PERIODIC SYSTEM
Education.
20 Minutes, Medium
a. Shrinkage loss-one lawn mower
107
Inventor
y
107
17
,
910 3
,
390
$
c.
The only unethical act in this situation was committed by the employee against his employer. There
is nothing unethical about using a hidden security camera to protect one’s assets. The camera was
not used to entice (or entrap) the employee. In short, he made a conscious decision to steal lawn
mowers from his employer and should be held completely responsible for doing so.
Market
(
199 mowers
@
$90
p
er lawn mower
)
Loss from write-down to market value
(2) Write-down of inventory to the lower-of-cost-or-market:
Cost of Goods Sold
To record shrinka
g
e loss of one lawn mower usin
g
avera
g
e
cost of $107
(
$21
,
400 ÷ 200 mowers = $107
p
er mower
)
.
(
1
)
Avera
g
e-cost method:
PROBLEM 8.4B
SAM'S LAWN MAINTENANC
E
25 Minutes, Easy
U
n
it
s
U
n
it
C
os
t
T
o
t
a
l
C
os
t
a. Inventory and cost of goods sold:
(1) FIFO:
Fourth
p
urchase 16 108
$
1
,
728
$
Third
p
urchase
5
106 530
S
econ
d
P
urc
h
ase 5 103
$
515
$
26 2
,
773
$
PROBLEM 8.5B
RYAN SOUND
Endin
g
Inventor
y,
FIFO
Inventor
y
:
20 Minutes, Medium
a.
2015
2014
2013
Net sales 1,000,000$ 920,000$ 840,000$
PROBLEM 8.6B
CITY SOFTWARE
Cost of Goods Sold:
$546,000 - $20,000 = $526,000 2013:
Education.
25 Minutes, Medium
a.
330
,
000
$
600
,
000
b.
75
,
000
$
55%
41
,
250
$
44,000$
41
,
250
288
,
750
G
ross pro
fit
231
,
250
$
c.
Cost ratio
(p
er
p
art a
,
above
)
Endin
g
inventor
y
at cost
(
$75
,
000 x 55%
)
PROBLEM 8.7B
SONG MEISTE
R
(
1
)
Estimated cost of
g
oods sold:
Cost ratio for the current
y
ear:
Cost of
g
oods available for sale
Retail
p
rices of
g
oods available for sale
(
2
)
Estimated shrinka
g
e losses at cost:
Estimated endin
g
inventor
y
(p
er
p
art a
)
(
1
)
Restatin
g
p
h
y
sical inventor
y
from retail
p
rices to cost:
Ph
y
sical inventor
y
stated in retail
p
rices
CDs and recorded music in other formats can easily fit into someone’s pocket and “walk out of the
store.” Thus, it is important that effective controls be in place to reduce inventory shrinkage. Four
common controls Song Meister may want to consider include: (1) security cameras, (2) security
personnel, (3) storage for safeguarding employee handbags while they work, and (4) magnetic sensor
strips to sound an alarm if someone leaves the store in possession of merchandise. The sensor strips
would be deactivated when units of inventory are sold to customers.
Less: Endin
g
inventor
y
p
er
p
h
y
sical count
,
at cost
Education.
20 Minutes, Strong
a. Computations based on LIFO valuation of inventory:
(1) Inventory turnover rate:
Cost of Goods Sold = 8,919$ 3.39 times
Average inventor
y
2,629$
Gross Profit = 4,066$ 31.3%
Net Sales 12,985$
b.
c.
You would ex
p
ect the ratios to be different under FIFO as follows:
Inventory turnover rate: Cost of goods sold lower, inventory higher, turnover lower
receivable being very low relative to its sales. This is explained by the fact that most of the
company's sales are for cash or on bank credit cards which are quickly turned into cash for the
The company must have encountered increasing replacement costs for its merchandise during the
year.
PROBLEM 8.8B
J.C. Penne
y
Education.
30 Minutes, Strong
a.
b.
c.
SOLUTIONS TO CASES
OUR LITTLE SECRET
CASE 8.1
Lee confronts three related ethical issues. The first is that Our Little Secret’s past tax practices have
been both unethical and illegal. Lee should not be involved in such practices or, if she is in a position of
responsibility, allow them to continue.
Second, Lee has good reason to question the basic integrity of her prospective employer.
Is Frost’s statement that “no one knows how this all got started, or who was
responsible” really true? After all, Frost is suggesting that the fraud continue after Amy
accepts a position with Our Little Secret.
failing to report this income in prior years. Saying nothing and allowing the error to “flow through” is,
in essence, a scheme for evading these interest charges and penalties.
upon herself to notify the Internal Revenue Service or any other third party about the
company’s actions.
The solution proposed by Frost is unacceptable. To knowingly understate inventory in an income tax
A second course of action is to accept the position contingent upon the company agreeing to take
immediate steps to rectify the problem. This would include filing amended income tax returns for any
Third, there is the issue of confidentiality. Professionally accountants are ethically bound to treat as
Lee basically has two ethical courses of action to consider. First, she may decide that she does not wish
to associate herself with the company. Therefore, she simply may decline the job. If she chooses this
course, she should treat Frost’s disclosures during this interview as confidential information.
Education.
a.
b. (1) $188,000
28,000
If this sale can be delayed just two days , it will occur in 2016. Jackson Specialties then may use the
current $30 per-unit cost in determining the cost of this sale, regardless of when during 2016 the 8,000
units on order actually arrive. (The only limitation is that the year-end inventory must exceed the 5,000
units carried at the old acquisition costs.)
per unit, plus 2,000 units from Nov. 14, 1962 purchase at $6 per unit) ………………..
Note to instructor: Assuming a tax rate of 33%, this strategy could save the company more than $30,000 in
income taxes applicable to this sale. ($92,000 reduction in taxable gross profit x 33% = $30,360 tax savings.)
recent acquisition costs incurred during the fiscal year. If Jackson Specialties makes its 4,000-unit sale
on December 30, the cost of goods sold will be $120,000 only if the units on order arrive by year-end
(which is almost here). Otherwise, the cost of goods sold must be reported as only $28,000.
CASE 8.2
JACKSON SPECIALTIE
S
20 Minutes, Medium
Sales (4,000 units @ $47 per unit) ……………………………………………………..
While LIFO assigns old acquisition costs to inventory, it does not purport to coincide with the physical
movement of merchandise in and out of the business. Therefore, the units in inventory are not over 50
years old. In fact, they may have been purchased quite recently.
Gross profit if the units on order arrive before year-end:
Education.
