9-31
From 2016 production [70,000 @ $4]
280,000
(560,000)
Variable contribution margin
840,000
Less: Fixed production costs
(500,000)
Variable cost gross margin
340,000
Gross margin %
24.3%
Ending inventory [45,000 @ $4]
Requirement 3:
As plant manager, I would prefer absorption costing assuming bonus
achievement/maximization is my goal. As explained in Requirement (2),
gross margin under variable costing depends entirely on sales volume. As
9-32
P9-5. Determining items to be included in inventory ((LO 3)
Inventory
Accounts payable
Net sales
Initial amounts
$1,700,000
$1,150,000
$9,500,000
Adjustments—increase (decrease)
a. Off-site Work-in-process
30,000
-0-
-0-
b. Excluded invoice
-0-
43,000
-0-
c. Goods omitted from count
83,000
-0-
-0-
d. F. O. B. shipping point
-0-
-0-
(35,000)
e. F. O. B. destination
40,000
-0-
-0-
f. Returned goods
27,000
-0-
(39,000)
Total adjustments
180,000
43,000
(74,000)
Adjusted amounts
$1,880,000
$1,193,000
$9,426,000
P9–6. Choosing a cost flow assumption (LO 5, 8, 9)
Responses to each of the issues raised follow.
a. Use of FIFO will produce both higher income and higher working
capital and, thus, help satisfy the covenants.
9-33
P9–7. Choosing a cost flow assumption (LO 5, 9)
Requirement 1:
Units in ending inventory = units purchased – units sold = 72,000 –
62,000 = 10,000.
Ending Inventory under Periodic FIFO
Units Cost/Unit Total
Requirement 2:
Ending Inventory under Periodic LIFO
Units Cost/Unit Total
9-34
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
FIFO COGS = LIFO COGS + Beginning LIFO reserve – Ending
LIFO reserve
= $678,000 + 0 – $80,000
= $598,000
Requirement 3:
Current Output Current Input True Operating
Date Units Sold Price Price Margin
March 2, 2014 24,000 $14/unit $9/unit $120,000
Requirement 4:
a) The LIFO inventory accounting method does a good job of
9-35
inventory accounting can be “tailored” to show the lowest profit in
9-36
P 9-8. Computing dollar-value LIFO (LO 13)
Date
Inventory @
current year
costs
Inventory @
base year costs
Inventory layers @
base year costs
Inventory layers restated
using appropriate indexes
Dollar-value
LIFO inventory
6/30/10
(base)
$345,000
$345,000 ÷ 1.00
= $345,000
$345,000 (base)
$345,000 x 1.00 = $345,000
$345,000
6/30/2014
$340,000
$340,000 ÷ .96 =
$354,167
$345,000 (base)
$9,167 (2014)
$345,000 x 1.00 = $345,000
$9,167 x .96 = 8,800
$353,800
6/30/2015
$385,000
$385,000 ÷ 1.04
= $370,192
$345,000 (base)
$9,167 (2014)
$16,025 (2015)
$345,000 x 1.00 = $345,000
$9,167 x .96 = 8,800
$16,025 x 1.04 = 16,666
$370,466
6/30/2016
$398,000
$398,000 ÷ 1.09
= $365,138
$345,000 (base)
$9,167 (2014)
$10,971 (2015)
$345,000 x 1.00 = $345,000
$9,167 x .96 = 8,800
$10,971 x 1.04 = 11,410
$365,210
6/30/2017
$410,000
$410,000 ÷ 1.10
= $372,727
$345,000 (base)
$9,167 (2014)
$10,971 (2015)
$7,589 (2017)
$345,000 x 1.00 = $345,000
$9,167 x .96 = 8,800
$10,971 x 1.04 = 11,410
$7,589 x 1.10 = 8,348
$373,558
P9-9. Correcting inventory errors (LO 1)
Effect on
Error
12/31/2014
Ending
inventory
12/31/2015
Ending
inventory
2014 Cost
of goods
sold
2015 Cost
of goods
sold
12/31/2014
Accounts
payable
12/31/2015
Accounts
payable
a)
Overstate
No effect
Understate
Overstate
No effect
No effect
b)
No effect
No effect
Understate
Overstate
Understate
No effect
c)
Understate
No effect
No effect
No effect
Understate
No effect
d)
Understate
No effect
Overstate
Understate
No effect
No effect
e)
Understate
No effect
Overstate
Understate
No effect
No effect
P9–10. Analyzing gross margins and cash flow sustainability (LO 12)
Requirement 1:
FIFO income for 2013 is:
Sales revenues:
End. Inv. 350,000 @ $8.10 (2,835,000)
(19,865,000)
9-38
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Requirement 2:
Parque Corporation did not earn a profit from its operating activities
in 2013. This becomes evident after computing the amount of
realized holding gains that are automatically included in the
$190,000 FIFO net income figure in part 1. The computation is:
Date of Yelpin Amount of Pounds Realizable
2013) totaled $340,000. On a FIFO basis, all of these gains were
realized in 2013 and included in income. (Since 4th-quarter sales of
650,000 lbs. exceeded the 10/1/07 inventory of 400,000, FIFO
considers all of the 10/1/07 inventory to have been sold in the 4th
9-39
masked by historical cost FIFO accounting since the operating loss
of $150,000 was more than offset by the realized holding gains of
P9–11. Evaluating inventory cost-flow changes
Requirement 1:
“Better matching of revenues and expenses . . .”
• Matching does not refer to the physical flow of goods, but rather
• Under specific identification, financial statement users will not
know whether the inventory balance contains new costs, old
costs, or a mixture.
9-40
Requirement 2:
“Conform all inventories . . . to the same method of valuation.”
• This would simplify the analyst’s task.
9-41
P9–12. Assessing managerial opportunism (LO 7, 9)
Requirement 1:
JKW Corporation
Projected Income Statement
For the Year Ended December 31, 2014
Projected
Income
Sales ($13,284,000 ÷ .7)
$ 18,977,143
Cost of goods sold ($18,977,143 x .6)
11,386,286
Gross margin
7,590,857
Operating expenses ($18,977,143 x .18)
3,415,886
Income before taxes
4,174,971
Income tax expense ($4,174,971 x .35)
1,461,240
Net income
$ 2,713,731
Earnings per share
$ 2.71
Requirement 2:
Projected net income
$2,713,731
Income required ($2.75 EPS x 1,000,000 shares)
2,750,000
Shortfall in after-tax income
$ (36,269)
1 – tax rate = (1 – .35)
0.65
Shortfall divided by 1– tax rate equals:
Minimum LIFO liquidation needed to reach EPS
target
$ (55,798)
9-42
P9-13. Computing LIFO and ratio effects (LO 1, 6)
Requirement 1:
Cost of goods manufactured:
Finished Goods Inventory
Beginning inventory
$2,420
$65,37
4
Cost of goods
sold
Cost of goods
manufactured
?
Ending inventory
$2,684
Therefore, cost of goods manufactured = $2,684 – $2,420 + $65,374
= $65,638
Finished goods inventory turnover:
Cost of goods sold
Average finished goods inventory
=
$65,374
0.5($2,684 +$2,420)
= 25.62
365
25.62
Work-in-process inventory turnover:
Cost of goods manufactured
Average work –in – process inventory
=
$65,638
0.5($40,285 +$39,921)
= 1.64
365
1.64
Comments:
Yes. We know that Bacardi ages its rum for 1–3 years, so we would
Requirement 2:
FIFO income (estimate):
FIFO net income = LIFO net income + Change in LIFO reserve