8-1 Solutions
CHAPTER 8
WORKING CAPITAL
Questions, Exercises, and Problems: Answers and Solutions
8.3 The underlying principle is that acquisition cost includes all costs required to
prepare an asset for its intended use. Assets provide future services. Costs
8.4 Depreciation on manufacturing equipment is a product cost and remains in
8.5 Both the Merchandise Inventory and Finished Goods Inventory accounts
include the cost of completed units ready for sale. A merchandising firm
acquires the units in finished form and debits Merchandise Inventory for their
Solutions 8-2
8-3 Solutions
8.6 Accounting reports cost flows, not flows of physical quantities. Cost flow
8.7 Rising Purchase Prices
Higher Inventory Amount: FIFO
8.8 Suppliers often grant a discount if customers pay within a certain number of
days after the invoice date, in which case this source of funds has an explicit
8.9 The Parker School should accrue the salary in ten monthly installments of
8.10 It is cheaper (and, therefore, more profitable) to repair a few sets than to have
8.11 Similarities: The accountant makes estimates of future events in both cases.
The accountant charges the cost of estimated uncollectibles or warranties to
Solutions 8-4
8.12 A reversal implies that the previously accrued charge turned out to be too high,
8-5 Solutions
8.13 (Delhaize Group; accounting for prepayments.)
a. Journal entry to record insurance premium payments in 2007, 2006, and
2005:
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+50.0
–50.0
b. Adjusting journal entries required each year.
2006:
Prepayments ………………………………………………… 66.3
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–66.3
–66.3
IncSt → RE
To adjust Prepayments for the amount consumed dur-
ing 2006, of 66.3 million (= 42.1 + 50.0 – 25.8).
2007:
Insurance Expense …………………………………………… 45.1
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–45.1
–45.1
IncSt → RE
To adjust Prepayments for the amount consumed dur-
ing 2007, of 45.1 million (= 25.8 + 50.0 – 30.7).
8.14 (LG Corporation; accounting for prepayments.)
a. Adjusting journal entry to record portion of prepaid rent consumed during
each month, January–March:
Solutions 8-6
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–86,775
–86,775
IncSt → RE
8-7 Solutions
8.14 a. continued.
b. March 31, 2007: To record prepayment of rent for next 12 months.
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,382,436
–1,382,436
To record cash prepayments for 12 months of rent of
KRW1,382,436 million. The 2007 ending balance of
c. Adjusting journal entry to record portion of prepaid rent consumed during
each month, April–December.
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–115,203
–115,203
IncSt → RE
8.15 (Harnet Winery; identifying inventory cost inclusions.)
Harnet should include the costs to acquire the grapes, process them into wine,
and mature the wine, but not the expenditures on advertising or research and
Solutions 8-8
8-9 Solutions
8.16 (Trembly Department Store; identifying inventory cost inclusions.)
a. Purchase Price …………………………………………………………….. $ 300,000
The underlying principle is that inventories should include all costs required to
get the inventory ready for sale. The purchase of the inventory items (items
a
.,
8.17 (ResellFast; effect of inventory valuation on the balance sheet and net
income.) (Amounts in Millions)
Carrying Effect on
Value Income
Q1 …………………. $ 20.0 $ 0.0
8.18 (Target Corporation; inventory and accounts payable journal entries.)
a. Beginning Balance in Merchandise Inventory + Purchases of Inventory =
Amount Sold (Cost of Goods Sold) + Ending Balance in Merchandise
Inventory.
Solutions 8-10
b. Merchandise Inventory ………………………………………. 42,421
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+42,421
+42,421
8-11 Solutions
8.18 continued.
c. Beginning Balance in Accounts Payable + Purchases of Merchandise
Inventory = Payments to Venders + Ending Balance in Accounts Payable.
Accounts Payable …………………………………………….. 42,275
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–42,275
–42,275
8.19 (Tesco Plc.; inventory and accounts payable journal entries.)
a. Trade Payables ………………………………………………… 43,558
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–43,558
–43,558
b. Beginning Balance in Trade Payables + Purchases of Merchandise
Inventory = Payments to Venders + Ending Balance in Trade Payables.
Merchandise Inventory ………………………………………. 44,177
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+44,177
+44,177
IncSt → RE
c. Beginning Balance in Merchandise Inventory + Purchases of Inventory =
Solutions 8-12
8-13 Solutions
8.19 c. continued.
Cost of Goods Sold …………………………..………………. 43,668
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–43,668
–43,668
IncSt → RE
8.20 (Fun-in-the-Sun Tanning Lotion Company; income computation for a
manufacturing firm.)
Manufacturing Costs Incurred during the Year:
Raw Materials ……………………………………………………………………. $ 56,300
Less Manufacturing Costs Assigned to Work-in-Process Inven-
tory …………………………………………………………………………….. (12,700)
Cost of Units Completed during the Year……………………………….. $ 106,500
8.21 (GenMet; income computation for a manufacturing firm.)
Sales ………………………………………………………………………………… $ 6,700.2
Less Cost of Goods Sold …………………………..………………………… (2,697.6)
Work-in-Process Inventory, October 31, 2007 ………………………… $ 100.8
Plus Manufacturing Costs Incurred during Fiscal Year 2008 …….. 2,752.0
Solutions 8-14
8.22 (Crystal Chemical Corporation; income computation for a manufacturing firm.)
Sales ………………………………………………………………………………… 32,632
Less Cost of Goods Sold …………………………..………………………… (28,177)
Work-in-Process Inventory, December 31, 2007 …………………….. 843
8.23 (Warren Company; effect of inventory errors.)
a. None. f. Understatement by $1,000.
c. Understatement by $1,000. h. None.
8.24 (Cemex; lower of cost or market for inventory.)
b. Journal entry to record impairment charge for inventory during 2007:
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–131
–131
IncSt → RE
8.25 (Ericsson; lower of cost or market for inventory.)
8-15 Solutions
b. Journal entry to record impairment charge for inventory during 2007:
Impairment Loss on Inventory …………………………….. 1,276
Solutions 8-16
8.25 b. continued.
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–1,276
–1,276
IncSt → RE
c. January 2008: Journal entry to record a reversal of a portion of the
impairment charge for inventory taken in 2007:
Allowance for Impairment …………………………………… 576
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+576
+576
IncSt → RE
inventory.
8.26 (Sun Health Foods; computations involving different cost flow assumptions.)
a. b. c.
Weighted
Units FIFO Average LIFO
Goods Available for Sale ………… 2,500 $ 10,439 $ 10,439 $ 10,439
a(420 X $4.10) = $1,722.
c($10,439/2,500) X 420 = $1,754.
8-17 Solutions
8.27 (Arnold Company; computations involving different cost flow assumptions.)
a. b. c.
Weighted
Pounds FIFO Average LIFO
Raw Materials Available for
a(3,000 X $2.32) + (500 X $2.30) = $8,110.
c($24,384/10,700) X 3,500 = $7,976.
8.28 (Harmon Corporation; effect on LIFO on financial statements over several
periods.)
a. Year Ending Inventory
2008 19,000 X $20 ………………………………………. $ 380,000
b. Year Cost of Goods Sold
2008 64,000 X $20 …………………………………….. $ 1,280,000
Year Income
2008 $2,048,000 – $1,280,000…………………….. $ 768,000
Solutions 8-18
8-19 Solutions
8.29 (EKG Company; LIFO provides opportunity for income manipulation.)
a. Largest cost of goods sold results from producing 70,000 (or more)
c. Income Reported
MinimumMaximum
Revenues ($30 X 70,000) ………………………… $ 2,100,000 $ 2,100,000
Gross Margin …………………………………………. $ 560,000 $ 1,120,000
8.30 (Caterpillar Incorporated; conversion from LIFO to FIFO.) (Amounts in
Millions)
LIFO Difference FIFO
Beginning Inventory …………………. $ 6,351 $ 2,403 $ 8,754
Production Costs (Plug) ……………. 33,479 — 33,479
8.31 (Ford Motor Company; analysis of LIFO and FIFO disclosures.)
a. Ford Motor Company uses LIFO, so the carrying value of its inventories
b. LIFO Difference FIFO
Beginning Inventory …………… $ 10,017 $ 1,015 $ 11,032
Solutions 8-20
8.32 (McGee Associates; journal entries for payroll.)
a. Wage and Salary Expense …………………………………. 700,000
Withholding and FICA Taxes Payable ………………. 210,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+210,000
–700,000
IncSt → RE
+490,000
Amounts payable to and for employees.
Wage and Salary Expense …………………………………. 114,800
Taxes Payable ……………………………………………… 70,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+70,000
–114,800
IncSt → RE
+28,000
+16,800
Employer’s additional wage expense; estimated vaca–
8.33 (Hurley Corporation; accounting for uncollectible accounts and warranties.)
a. Allowance for Uncollectible Accounts
Balance, December 31, 2008 ………………………………………. $ 355
b. Estimated Warranty Liability