978-1111823450 Chapter 9 Solution Manual Part 1

during which it receives services. All assets promise future economic

benefits, so all assets are prepayments.

future services. Costs that a firm must incur to obtain those expected

services are, therefore, included in the acquisition cost valuation of

the asset. In the case of merchandise inventory, this includes the

costs associated with obtaining the goods (purchase price,

transportation costs, insurance costs). For manufactured inventory,

acquisition costs include direct labor, direct materials, and

manufacturing overhead.

9.4 Depreciation on manufacturing equipment is a product cost and

remains in inventory accounts until the firm sells the

manufactured goods. Depreciation on selling and administrative

equipment is a period expense, because the use of such equipment

does not create an asset with future service potential.

9.5 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 acquisition cost. A manufacturing

firm incurs direct material, direct labor, and manufacturing overhead

costs in transforming the units to a finished, salable condition. The

Raw Materials Inventory and Work-in- Process Inventory accounts

include such costs until the completion of manufacturing operations.

Thus, the accountant debits the Finished Goods Inventory account for

the cost of producing completed units. The accountant

9.5 continued.

credits both the Merchandise Inventory and Finished Goods

Inventory accounts for the cost of units sold and reports the

inventory accounts as current assets on the balance sheet.

9.6 Accounting reports cost flows, not flows of physical quantities.

Cost-flow assumptions trace costs, not physical flows of goods.

With specific identification, management can manipulate cost flows

by controlling physical flow of goods.

9.7 Rising Purchase Prices

Higher Inventory Amount:

FIFO Lower Inventory Amount:

LIFO Higher Cost of Goods

Sold Amount: LIFO

Lower Cost of

Goods

Sold Amount: FIFO

9.8 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 interest cost. Suppliers who do not ofer

discounts for prompt payment often include an implicit interest

change in the selling price of the product. Customers in this second

category should delay payment as long as possible because they

are paying for the use of the funds. Firms should not delay payment

to such an extent that it hurts their credit rating and raises their

cost of financing.

9.9 The Parker School should accrue the salary in ten monthly

installments of

$360,000 each at the end of each month, September through June.

It will have paid $300,000 at the end of each of these months, so

that by the end of the reporting year, it reports a current liability of

$600,000 [= $3,600,000 – (10 X $300,000)].

9.10 It is cheaper (and, therefore, more profitable) to repair a few sets

than to have such stringent quality control that the manufacturing

process produces zero defectives. An allowance is justifed when

firms expect to have warranty costs. Manufacturers of TV sets for

use on space ships or heart pacemakers should strive for zero

defects.

Solutions9-2

9.11 Similarities: The accountant makes estimates of future events

in both cases. The accountant charges the cost of estimated

uncollectibles or warranties to income in the period of sale, not in

the later period when specific items become uncollectible or break

down. The income statement reports the charge against income

as an expense in both cases, although some accountants report

the charge for estimated uncollectibles as a revenue contra.

Differences: The balance sheet account showing the expected

costs of future uncollectibles reduces an asset account, whereas

that for estimated warranties appears as a liability.

9.12 A reversal implies that the previously accrued charge turned out

to be too high, in light of the new information (including realized

expenditures). Because the reversal lowers the amount of expense

reported in the current period, it increases income.

9.13 (Accounting for prepayments.) (amounts in millions of euros)

a. Journal entry to record insurance premium payments in 2012,

2011, and

2010:

Prepayments

…………………………………………………… 50.0

Cash ……………………………………………………………50.0 b.

Adjusting journal entries required each year.

2011:

Insurance Expense …………………………………………… 66.3

Prepayments

……………………………………………….. 66.3

To adjust Prepayments for the amount

consumed during 2011, of €66.3 million (=

€42.1 + €50.0 –

€25.8).

2012:

Insurance Expense …………………………………………… 45.1

Prepayments

……………………………………………….. 45.1

To adjust Prepayments for the amount

consumed during 2012, of €45.1 million (=

€25.8 + €50.0 –

€30.7).

9-3Solutions

9.14 (Liquid Crystal Display Corporation; accounting for prepayments

.) (amounts in millions of Korean won [KRW])

a. Adjusting journal entry to record portion of prepaid rent

consumed during each month, January–March

Rent Expense ………………………………………………….. 86,775

Prepaid R

en

t ………………………………………………..

86

,

77

5

Rent expense is KRW86,774.6667 million (= KRW260,324

million/

3 months). To correct rounding errors, use 86,774 for every third

month. b. March 31, 2012: To record prepayment of rent for

next 12 months.

Prepaid R

en

t

……………………………………………………

1,382,436

Cash …………………………………………………………… 1

,

382

,

43

6

To record cash prepayments for 12 months of

rent of KRW1,382,436 (= 345,609 X 4

quarters) million. The 2012 ending balance of

Prepayments of KRW345,609 million consists

of 3 months of prepaid rent. The total amount

prepaid as of March 31, 2012 is, therefore,

KRW345,609 X €4

= KRW1,382,436.

c. Adjusting journal entry to record portion of prepaid rent

consumed during each month, April–December.

Rent Expense ………………………………………………….. 115,203

Prepaid R

en

t ………………………………………………..115

,

203

Rent expense is KRW115,203 million

(= KRW1,382,436 million/12 months); alterna-

tively, note that the balance of Prepayments

at December 31, 2012 consists of 3 months of

prepaid rent (KRW115,203 = KRW345,609/3

months).

9.15 (Ringgold Winery; identifying inventory cost inclusions.) (amounts in

US$)

Ringgold 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 development. Thus, the cost of the wine

inventory (prior to its sale) is $3,673,000 (= $2,200,000 +

$50,000 + $145,000 + $100,000 +

$250,000 + $600,000 + $120,000 + $180,000 +

$28,000).

Solutions9-4

9.16 (Trembly Department Store; identifying inventory cost inclusions.

) (amounts in US$)

a. Purchase Price……………………………………………………………… $

300,000 b. Freight Cost

………………………………………………………………… 13,800 c.

Salary of Purchasing

M

a

n

age

r

……………………………………….

3,000 d. Depreciation, Taxes, Insurance, and Utilities on Ware-

house ……………………………………………………………………….

27,300 e.

Salary of Warehouse

M

a

n

age

r

……………………………………….

2,200 f.

Merchandise Returns ……………………………………………………

(18,500) g. Cash

Discounts Taken…………………………………………………..

(

4

, 90

0

)

Acquisition Cost ………………………………………………………. $

32

2

,90

0

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., c., f., and g.) provides the physical goods

to be sold, the freight cost (item b.) puts the inventory items in the

place most convenient for sale, and the storage costs (items d. and

e.) keep the inventory items until the time of sale. Economists

characterize these costs as providing form, place, and time utility, or

benefits. Although accounting theory suggests the inclusion of

each of these items in the valuation of inventory, some firms might

exclude items c., d., e., and g. on the basis of lack of materiality.

9.17 (ResellFast; efect of inventory valuation on the balance sheet

and net income.) (amounts in millions of US$)

Carrying Efect

o

n

Value

I

nc

om

e

Q1 …………………. $ 20.0 $ 0.0

Q2 …………………. 16.5 (3.5

) Q3 …………………. 16.5

0.0

Q4 …………………. 0.0 11.0

9.18 (Target Corporation; inventory and accounts payable journal

entries.) (amounts in millions of US$)

a. Beginning Balance in Merchandise Inventory + Purchases of

Inventory = Amount Sold (Cost of Goods Sold) + Ending

Balance in Merchandise Inventory.

$6,254 + Purchases = $41,895 + $6,780; solve for

Purchases. Purchases = $42,421.

9-5Solutions

9.18 continued.

b. Merchandise

Inventory

…………………………………….. 42,421

Accounts

P

ayab

l

e …………………………………………. 42

,

421

c. Beginning Balance in Accounts Payable + Purchases of

Merchandise Inventory = Payments to Vendors + Ending Balance

in Accounts Payable.

$6,575 + $42,421 = Payments to Vendors +

$6,721. Payments to Vendors = $42,275.

Accounts

P

ayab

l

e …………………………………………….. 42,275

Cash …………………………………………………………… 42

,

275

9.19 (Tesco Plc.; inventory and accounts payable journal entries.)

(amounts in millions of pounds sterling)

a. Trade Payables ……………………………………………….. 43,558

Cash …………………………………………………………… 43

,

558

b. Beginning Balance in Trade Payables + Purchases of

Merchandise

Inventory = Payments to Venders + Ending Balance in Trade

Payables.

£3,317 + Purchases of Merchandise Inventory = £43,558 (from

Part a.)

+ £3,936.

Purchases of Merchandise Inventory = £44,177.

Merchandise

Inventory

…………………………………….. 44,177

Accounts

P

ayab

l

e …………………………………………. 44

,

177

c. Beginning Balance in Merchandise Inventory + Purchases of

Inventory = Amount Sold (Cost of Goods Sold) + Ending

Balance in Merchandise Inventory.

£1,911 + £44,177 (from Part b.) = Cost of Goods Sold +

£2,420. Cost of Goods Sold = £43,668.

Cost of Goods

Sold

…………………………………………… 43,668

Merchandise

Inventory

…………………………………. 43

,

668

Solutions9-6

9.20 (Fun-in-the-Sun Tanning Lotion Company; income computation

for a manufacturing firm.) (amounts in US$)

Manufacturing Costs Incurred During the Year:

Raw

M

at

eri

a

ls

…………………………………………………………………… $

56,300

Direct

L

ab

or

……………………………………………………………………….

36,100

Manufacturing Overhead …………………………………………………….

2

6

, 80

0

Total Manufacturing Costs Incurred ……………………………… $

119,200

Less Manufacturing Costs Assigned to Work-in-Process

Inventory ……………………………………………………………………..

(

1

2

, 70

0

) Cost of Units Completed During the

Year…………………………….. $ 106,500

Less Cost of Ending Inventory of Finished Goods …………………..

(

2

8

, 50

0

) Cost of Goods

S

o

l

d

……………………………………………………………… $

7

8

, 00

0

9.21 (GenMet; income computation for a manufacturing firm.)

(amounts in

millions of US$)

Sales ………………………………………………………………………………… $

6,700.2

Less Cost of Goods Sold ………………………………………………………

(2,697.6) Less Selling and Administrative Expenses

………………………….. (2,903.7) Less Interest Expense

…………………………………………………………

(

15

1

. 9

) Income Before

Income Taxes ……………………………………………….. $ 947.0

Income Tax Expense at 35% …………………………………………………

(

33

1

. 5

) Net I

nc

ome

………………………………………………………………………… $

61

5

.5

Work-in-Process Inventory, October 31, 2012 ……………………….. $

100.8

Plus Manufacturing Costs Incurred During Fiscal Year 2013…. 2,752.0

Less Work-in-Process Inventory, October 31, 2013 …………………

(

11

9

. 1

)

Cost of Goods Completed During Fiscal Year 2013 ……………….. $

2,733.7

Plus Finished Goods Inventory, October 31, 2012…………………..

286.2

Less Finished Goods Inventory, October 31, 2013 ………………….

(

32

2

. 3

)

Cost of Goods

S

o

l

d ……………………………………………………………… $

2

, 69

7

.6

9.22 (Crystal Chemical Corporation; income computation for a

manufacturing firm.) (amounts in millions of euros)

Sales ………………………………………………………………………………… €

32,632

Less Cost of Goods Sold ………………………………………………………

(28,177) Less Marketing and Administrative Expenses

…………………….. (2,436) Less Interest Expense

…………………………………………………………

(

82

8

) Income Before

Income Taxes ……………………………………………….. € 1,191

Income Tax Expense at 35% …………………………………………………

(

41

7

) Net I

nc

ome

………………………………………………………………………… €

77

4

9-7Solutions

Work-in-Process Inventory, December 31, 2012 …………………….. €

843

Plus Manufacturing Costs Incurred During 2013 …………………..

28,044

Less Work-in-Process Inventory, December 31, 2013 ……………..

(

83

7

)

Cost of Goods Completed During

2013………………………………….

€ 28,050

Plus Finished Goods Inventory, December 31, 2012

……………….

2,523

Less Finished Goods Inventory, December 31, 2013

……………….

(

2

, 39

6

9.23

Cost of Goods

S

o

l

d

………………………………………………………………

(Warren Company; effect of inventory errors.)

€

2

8

, 17

7

a. NO/None. f. US/Understatement by

$1,000.

b. NO/None. g.

US/Understatement by

$1,000.

c.

US/Understatement by

$1,000.

h. NO/None.

d. OS/Overstatement by $1,000. i. NO/None.

e. OS/Overstatement by $1,000.

9.24 (Cemex S.A.; lower of cost or market for inventory.) (amounts in

millions of

Mexican pesos)

a. $20,187 million (= $19,631 + $556).

b. Journal entry to record impairment charge for inventory at the

end of the year:

Impairment Loss on

Inventory

………………………….. 131

Allowance for Impa

ir

m

en

t …………………………….. 131

9.25 (Ericsson; lower of cost or market for inventory.) (amounts in

millions of

Swedish kronor [SEK])

a. SEK22,475 million (= SEK25,227 – SEK2,752).

b. Journal entry to record impairment charge for inventory during

the year: Impairment Loss on

Inventory

…………………………..

1,276

Allowance for Impa

ir

m

en

t …………………………….. 1,276

The carrying value of the inventory is now

SEK2,224 (= SEK3,500 – SEK1,276).

9-8

c. January: Journal entry to record a reversal of a portion of

the impairment charge for inventory taken in the preceding year:

Allowance for Impa

ir

m

en

t ………………………………… 576

Reversal of Impairment Loss on Inventory………576

To reverse a portion of the impairment

loss; SEK576 = SEK2,800 – SEK2,224.

d. U.S. GAAP would not permit Ericsson to reverse a previous

impairment of inventory.

9.26 (Sun Health Foods; computations involving diferent cost-flo

w assumptions.) (amounts in US$)

a. b. c

.

W

ei

g

h

t

e

d

Units FIFO Average LIFO

Goods Available for

S

a

l

e ……….. 2,500 $10,439

$10,439 $ 10,439

Less Ending I

n

ve

n

to

r

y ……………

(

4

2

0

)

(

1

, 72

2

)a

(

1

, 75

4

)c (

1

, 80

6

)e

Goods Sold ……………………………

2

,

0

8

0

$

8

, 717

b$

8

, 68

5

d$

8

, 63

3

f

a(420 X $4.10) = $1,722.

b(460 X $4.30) + (670 X $4.20) + (500 X $4.16) + (450 X $4.10)

= $8,717. c($10,439/2,500) X 420 = $1,754.

d($10,439/2,500) X 2,080 =

$8,685. e(420 X $4.30) =

$1,806.

f(870 X $4.10) + (500 X $4.16) + (670 X $4.20) + (40 X $4.30) =

$8,633.

9-9Solutions

9.27 (Arnold

Company; computations involving diferent cost-flow assumptions.) (amounts

in US$)

Raw Materials Available

for

a. b. c

.

W

ei

g

h

t

e

d

Pounds FIFO Average LIFO

Us

e …………………………………. 10,700 $24,384 $24,384

$ 24,384

Less Ending I

n

ve

n

to

r

y ……………

(

3

, 50

0

)

(

8

, 11

0

)a

(

7

, 97

6

)c

(

7

, 81

8

)e

Raw Materials Issued to

Production ……………………….

7 , 2

0

0 $1

6

, 274

b$

1

6

, 40

8

d$

1

6

, 56

6

f

a(3,000 X $2.32) + (500 X $2.30) = $8,110.

b(1,200 X $2.20) + (2,200 X $2.25) + (2,800 X $2.28) + (1,000

X $2.30) =

$16,274.

c($24,384/10,700) X 3,500 =

$7,976. d($24,384/10,700) X

7,200 = $16,408.

e(1,200 X $2.20) + (2,200 X $2.25) + (100 X $2.28)

= $7,818. f(3,000 X $2.32) + (1,500 X $2.30) +

(2,700 X $2.28) = $16,566.

9.28 (Harmon Corporation; efect of LIFO on financial statements over

several periods.) (amounts in US$)

a. Year Ending Inventory

2011 19,000 X $20 ………………………………………..

$ 38

0

,00

0

2012 10,000 X $20 ………………………………………..

$ 20

0

,00

0

2013 (10,000 X $20) + (10,000 X $30) ……………..

$ 50

0

,00

0

b. Year Cost of Goods Sold

2011 64,000 X $20 …………………………………….. $

1

,28

0

,00

0

2012 (92,000 X $25) + (9,000 X $20) ……………. $

2

,48

0

,00

0

2013 110,000 X $30 …………………………………… $

3

,30

0

,00

0

Solutions9-10

9.28 b. continued.

Year

I

nc

om

e

2011

$2,048,000 – $1,280,000

……………………

$

76

8

, 00

2012 $4,040,000 – $2,480,000

……………………

$

1

, 56

0

, 00

0

2013 $5,280,000 – $3,300,000

……………………

$

1

, 98

0

, 00

0

9.29 (EKG Company; LIFO provides opportunity for income

manipulation.) (amounts in US$)

a. Largest cost of goods sold results from producing 70,000

(or more)

additional units at a cost of $22 each, giving cost of goods

sold of

$1,540,000.

b. Smallest cost of goods sold results from producing no

additional units, giving cost of goods sold of $980,000 [= ($8 X

10,000) + ($15 X 60,000)].

c. I n c o

m

e Re

p o r t e

d

Minimum

Maximum

Revenues ($30 X 70

,

000) ………………………… $

2,100,000 $ 2,100,000

Less Cost of Goods Sold …………………………

(

1

, 54

0

, 00

0

)

(

98

0

, 00

0

) Gross

Margin ……………………………………….. $

56

0

, 00

0 $

1

, 12

0

, 00

0

9.30 (Cat Incorporated; conversion from LIFO to FIFO.) (amounts in

millions of

US$)

LIFO Difference FIFO

Beginning

Inventory…………………

$ 6,351 $ 2,403 $ 8,754

Production Costs

(Plug)……………

3

,

47

9

—

3

, 47

9

Goods Available for Sale

(Plug)

..

$ 39,830 $ 2,403 $ 42,233

Less Ending I

n

ve

n

to

r

y

……………..

(

7

,

20

4

)

(

2

,

61

7

)

(

9

, 82

1

Cost of Goods

S

o

l

d

…………………..

$

3

2

, 62

6 $ (

21

4

) $

3

2

, 41

2

9.31 (Falcon Motor Company; analysis of LIFO and FIFO disclosures.)

(amounts in millions of US$)

a. Falcon Motor Company uses LIFO, so the carrying value

of its inventories would be $10,121 million as of December

31, 2013, and

$10,017 as of December 31, 2012.

9-11Solutions

b. LIFO Difference FIFO

Beginning I

n

ve

n

to

r

y

…………..

$ 10,017 $ 1,015

$

11,032

Production Costs (

Plu

g)

……..

14

2

,

69

1

—

14

2

, 69

1

Goods Available for Sale

(

Plu

g) …………………………

…

$ 152,708 $ 1,015

$

153,723

Less Ending Inventory

……….

(

1

0

,

12

1

)

(

1

,

10

0

)

(

1

, 22

1

)

Cost of Goods

Sold

…………….

$ 14

2

, 58

7 $ (