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Impairment Loss on
FIFO LIFO Average
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ization.
Inventory, 1/1/2011
………………….
$ 0 $ 0 $ 0
Purchases During 2011
……………
1
4
,
40
0
1
4
,
40
0
1
4
,
40
0
Goods Available for Sale During
2011………………………………
…
$14,400 $14,400 $ 14,400
Less Inventory, 12/31/2011
………
(
3
,00
0
)1
(
2
,40
0
)3
Cost of Goods Sold for 2011
……..
$1
1
, 40
0 $
1
2
, 40
0 $
1
2
, 00
0
Inventory, 1/1/2012
………………….
$ 3,000 1$ 2,000 2
$ 2,400
3
Purchases During 2012
……………
2
1
,
00
0
2
1
,
00
0
2
1
,
00
0
Goods Available for Sale During
2012………………………………
…
$24,000 $23,000 $ 23,400
Less Inventory, 12/31/2012
………
(
5
,00
0
)4
(
5
,85
0
)6
Cost of Goods Sold for 2012
……..
$1
9
, 00
0 $
1
6
, 80
0 $
1
7
, 55
0
1200 X $15 = $3,000.
2200 X $10 = $2,000.
3($14,400/1,200) X 200 = $2,400.
4500 X $10 = $5,000.
5(200 X $10) + (300 X $14) = $6,200.
6($23,400/2,000) X 500 = $5,850.
a. $11,400. d
.
$19,
000
.
b. $12,400. e
.
$16,800
.
c. $12,000. f
.
$17,550
.
g. FIFO results in higher net income for 2011. Purchase
prices for inventory items increased during 2011. FIFO uses
older, lower purchase prices to measure cost of goods sold,
whereas LIFO uses more recent, higher prices.
h. LIFO results in higher net income for 2012. Purchase
prices for inventory items decreased during 2012. LIFO uses
more recent, lower prices to measure cost of goods sold,
whereas FIFO uses older, higher prices.
Solutions9-22
9.44 (Hanover Oil Products; efect of FIFO and LIFO on income statement
and balance sheet.) (amounts in US$)
a. FIFO LIFO
Beginning
Inventory…………………………………..
$ 0 $ 0
Purchases:
1/1: 4,000 @ $1.40
…….
…………………………….
$ 5,600 $ 5,600
1/13: 6,000 @ $1
.
46
…….
…………………………….
8,760 8,760
1/28: 5,000 @ $1
.
50
…….
…………………………….
7
,
50
0
7
,
50
0
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ization.
Total
Purch
a
s
e
s
…..…….…….……..…….…..
$
2
1
, 86
0 $
2
1
, 86
0
Available for
S
a
l
e
$ 21,860 $ 21,860
Less Ending Inventory:
FIFO: 2,000 X $1.50
…..…….…….……..……...
(
3
,
00
0
)
LIFO: 2,000 X $1.40
…..…….…….……..……...
(
2
, 80
0
Cost of Goods
Sold…………………………………….
$
1
8
, 86
0 $
1
9
, 06
0
b.FIFO LIFO
Beginning Inventory………………………………….. $
3
, 00
0
$
2
, 80
0
Purchases:
2/5: 7,000 @ $1.53
…..
……………………………. $ 10,710 $
10,710
2/14: 6,000 @ $1.47
…..
……………………………. 8,820
8,820
2/21: 10,000 @ $1
.
42
…..
…………………………….
1
4
,
20
0
1
4
,
20
0
Total
Purch
a
s
e
s
………………………………… $
3
3
, 73
0
$
3
3
, 73
0
Available for
S
a
l
e …………………………………….. $ 36,730 $
36,530
Less Ending Inventory:
FIFO: 3,000 X $1.42 ……………………………..
(
4
,
26
0
)
LIFO: (2,000 X $1.40) + (1,000 X $1.53)……
(
4
, 33
0
) Cost of
Goods Sold……………………………………. $
3
2
, 47
0 $
3
2
, 20
0
c. FIFO LIFO
Beginning Inventory………………………………….. $
4
, 26
0
$
4
, 33
0
Purchases:
3/2: 6,000 @ $1.48
…….
……………………………. $ 8,880 $
8,880
3/15: 5,000 @ $1
.
54
…….
……………………………. 7,700
7,700
3/26: 4,000 @ $1
.
60
…….
…………………………….
6
,
40
0
6
, 40
0
Total
Purch
a
s
e
s
………………………………… $
2
2
, 98
0
$
2
2
, 98
0
Available for
S
a
l
e …………………………………….. $ 27,240 $
27,310
Less Ending Inventory:
FIFO: 1,000 X $1.60 ………………………………
(
1
,
60
0
)
LIFO: 1,000 X $1.40 ………………………………
(
1
, 40
0
) Cost of
Goods Sold……………………………………. $
2
5
, 64
0 $
2
5
, 91
0
9-23Solutions9.44 continued.
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d. Acquisition costs increased during January. During such periods,
LIFO generally provides larger cost of goods sold amounts than
FIFO because LIFO uses the most recent higher cost. Acquisition
costs decreased during February. Under these circumstances,
FIFO generally results in higher cost of goods sold because it
uses the higher older cost. During March, acquisition costs
increased. There was a liquidation of LIFO layers, however,
which makes it more dificult to generalize about which cost-flow
assumption results in the higher cost of goods sold. LIFO
results in the higher cost of goods sold in this case because the
efect of increasing purchase costs dominated the efect of the
LIFO liquidation.
e. January February March
FIFO LIFO FIFO LIFO FIFO LIFO
(1)
S
a
l
e
s
………
$20,84
0
$20,840
$35,490
$35,49
0
$28,64
8
$28,64
8
(2) Cost of
Goods Sold
..
18,860 19,060 32,470 32,200 25,640
25,91
0
(2)/
(1)…………..
90.5% 91.5% 91.5% 90.7% 89.5% 90.4%
f. LIFO provides the most stable cost of goods sold to sales
percentage because LIFO cost of goods sold amounts reflect
current replacement cost more fully than FIFO. The firm
prices its gasoline at a 10% markup on current replacement
cost, so the cost of goods sold to sales percentage under LIFO
will be closer to 90.9% (= 1/1.1) than FIFO.
g. Available for Sale (from Part
c.)……………….
$ 27,240 $ 27,310
Plus Additional Purchases: 2,000 X $1.60
..
3,200 3,200
Less Ending Inventory:
FIFO: 3,000 X $1
.
60
………….……..…….…….
(
4
,
80
0
)
LIFO: (2,000 X $1.40) + (1,000 X $1.53)
….
(
4
, 33
0
Cost of Goods
Sold
…..…….…….……..…….……
$
2
5
, 64
0 $
2
6
, 18
0
Costs of goods sold will not change under FIFO because the
additional purchases simply increase both the quantity and
valuation of the ending inventory. Cost of goods sold increases
under LIFO because the additional purchases increase the
quantity of ending inventory but the purchase price paid
substitutes for the LIFO layers liquidated in measuring cost of
goods sold.
Solutions 9-24
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9.45 (Burch Corporation; reconstructing underlying events from ending
inventory amounts [adapted from CPA examination].) (amounts in
US$)
a. Down. Notice that lower of cost or market is lower than
acquisition
cos
t
(FIFO); current market price is less than
cost.
b. Up. FIFO means last-in, still-here. The last purchases (FIFO =
LISH) cost $44,000 and the earlier purchases (LIFO = FISH) cost
$41,800. Also, lower-of-cost-or-market basis shows acquisition
costs, which are greater than or equal to current cost.
c. LIFO Cost. Other things being equal, the largest income
results from the method that shows the largest increase in
inventory during the year.
Margin = Revenues – Cost of Goods
Sold
= Revenues – Beginning Inventory – Purchases + Ending
Inventory
= Revenues – Purchases + Increase in Inventory.
Because the beginning inventory in 2010 is zero, the method
with the largest closing inventory amount implies the largest
increase and hence the largest income.
d. Lower of Cost or Market. The method with the “largest increase
in inventory” during the year in this case is the method with the
smallest decrease, because all methods show declines in
inventory during 2011. Lower of cost or market shows a
decrease in inventory of only $3,000 during 2011—the other
methods show larger decreases ($3,800; $4,000).
e. Lower of Cost or Market. The method with the largest increase
in inventory: $10,000. LIFO shows a $5,400 increase,
whereas FIFO shows $8,000.
f. LIFO Cost. The lower income for all three years results
from the method that shows the smallest increase in inventory
over the three years. Because all beginning inventories were
zero under all methods, we need merely find the method with
the smallest ending inventory at
2012
year-end.
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9-25Solutions
g. FIFO lower by $2,000. Under FIFO, inventories increased $8,000
during
2012. Under lower of cost or market, inventories increased
$10,000 during 2012. Lower of cost or market has a bigger
increase—$2,000— and therefore lower of cost or market shows
a $2,000 larger income than FIFO for 2012.
9.46 (Wilson Company; LIFO layers influence purchasing behavior and
provide opportunity for income manipulation.) (amounts in US$)
Cost
Beginning
of
Inventory + Purchases – Ending Inventory =
Goods
Cost
Cost Cost Cost
Sold
per Pound Layer ($000) ($000) Pounds ($000)
($000)
a. (Controller) 2003 $ 60.0 — 2,000 $ 60.0 —
2008 9.2 — 200 9.2 —
2009 19.2 — 400 19.2 —
2012 72.8 — 1,400 72.8 —
7,000 @
$62/lb 2013
—
$
43
4
.0
—
—
43
4
.0
$
16
1
.2 $
43
4
.0 4
,00
0 $
16
1
.2 $
43
4
.0
Cost
Beginning
of
Inventory + Purchases – Ending Inventory =
Goods
Cost
Cost Cost Cost
Sold
per Pound Layer ($000) ($000) Pounds ($000)
($000)
b. (Purchasing 2003 $ 60.0 — 600 $ 18.0 $ 42.0
Agent) 2008 9.2 — — — 9.2
2009 19.2 — — — 19.2
2012 72.8 — — — 72.8
3,600 @
$62/lb 2013
—
$
22
3
.2
—
—
22
3
.2
$
16
1
.2 $
22
3
.2 60
0 $
1
8
.0 $
36
6
.4
c. Controller’s Policy COGS $62/lb
…..…….…….……..…….…….
$ 434.00
Less Purchasing Agent’s COGS
…..…….…….……..…….……..
(
36
6
. 4
0
)
Controller’s Extra
Deductions
…..…….…….……..…….…….….
$ 67.60
Tax Rate: 40%
…..…….…….……..…….…….…….…….……..……
X
0
.
4
0
Controller’s Tax Savings
…..…….…….……..…….…….…….…..
$
2
7
. 0
4
Controller’s Extra Cash Costs for Inventory: 3,400 @
$10/lb…….……..…….…….…….…….……..…….…….…..
……….
$
3
4
. 0
0
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Solutions9-26
d. The economically sound action is to follow the purchasing agent’s
advice.
The controller’s policy does save taxes but not as much in taxes
as the extra inventory costs. This response presumes that
allowing inventory quantities to decrease to 600 pounds does
not negatively afect operations prior to replenishing the
inventory. A quality of earnings issue arises because the
increase in net income that results from the LIFO liquidations is
nonrecurring. Except for the older costs in the base layer of 600
units, new LIFO layers will use higher current costs. Liquidating
those new layers in later years will not likely increase earnings
as much as the current year’s liquidations produced. One might
argue that following the purchasing agent’s advice does not
raise an ethical issue because it is the economically sound
action. However, management does have some discretion (see
Part e.) as to whether to deplete inventories to 600 units or to
stop short of that amount of depletion. To the extent that
management has an earning target in mind and can choose the
amount of inventory depletion to achieve that level of earnings,
some would argue that ethical issues arise.
e. To maximize income for 2013, liquidate all our LIFO inventory
layers,
4,000 lb with total cost $161,200, and purchase only 3,000 lb
at $62 each during 2013. To minimize income, acquire 7,000 lb
at $62 each.
Cost
o
f
G
ood
s
Sold
f
o
r
P
o
l i
c
y
201
3
Minimum
Income:
7,000 lb X $62 …….……..…….…….…….…….……..…….…….….
$
434
,
000
Maximum
Income:
4,000 lb of Old Layers………………………………………………..
(161,200
)
3,000 lb at $62 ………………………………………………………….
(
18
6
, 00
0
) Income Spread Before Taxes
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………….……..…….…….…….……. $
86,800
Taxes at 40%………………………………………………………………..
(
3
4
,72
0
)
Income Spread After Taxes …………………………………………… $
5
2
,08
0
By manipulating purchases of expensium, Wilson Company
reports after-tax income anywhere in the range from $50,000
(by following the controller’s policy) up to $102,080 (= $50,000
+ $52,080) by acquiring only 3,000 lb and liquidating all LIFO
layers.
9-27Solutions9.47 (Sedan
Corporation; interpreting inventory disclosures.)
(amou
nts in millions of Japanese yen)
a. March 31, 2013:
If Sedan had used FIFO, inventory values would have been
¥13,780 less than LIFO amounts.
Ending Balance of Total Inventory (FIFO) = (¥374,210 +
¥239,937 +
¥1,211,569) – ¥13,780 = ¥1,825,716 – ¥13,780 = ¥1,811,936
million.
March 31, 2012:
If Sedan had used FIFO, inventory values would have been
¥30,360 less than LIFO amounts.
Ending Balance of Total Inventory (FIFO) = (¥362,686 +
¥236,749 +
¥1,204,521) – ¥30,360 = ¥1,803,956 – ¥30,360 = ¥1,773,596
million.
b. Beginning Balance in Finished Goods (FIFO) + Cost of
Units Completed = Cost of Products Sold (FIFO) + Ending
Balance in Finished Goods (FIFO).
Beginning Balance of Finished Goods Inventory (FIFO) =
¥1,204,521 –
¥30,360 = ¥1,174,161 million.
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ization.
Ending Balance of Finished Goods Inventory (FIFO) =
¥1,211,569 –
¥13,780 = ¥1,197,789 million.
¥1,174,161 + ¥20,459,386 (from Problem 9.40, Part b.) =
Cost of
Products Sold (FIFO) + ¥1,197,789.
Cost of Goods Sold (FIFO) = ¥20,435,758
million. Also, could calculate as follows:
Cost of Goods Sold (
L
I
FO
) ……….…….…….…….……..…….. ¥
20,452,338
Change in LIFO reserve (¥30,360 – ¥13,780) …………….
(
1
6
, 58
0
)
Cost of Goods Sold (FIFO) ………………………………………. ¥
2
0
, 43
5
, 75
8
Solutions9-28
9.48 (Central Appliance; allowance method for warranties;
reconstructing transactions.) (amounts in US$)
a. $720,000 = $820,000 (Goods Available for Sale) – $100,000
(Beginning
Inventory).
b. $700,000 = $820,000 (Goods Available for Sale) – $120,000
(Ending
Inventory).
c. $21,000 = $6,000 (Cr. Balance) + $15,000 (Dr. Balance).
d. $20,000 = $5,000 (Required Cr. Balance) + $15,000
(Existing Dr.
Balance).
e. Warranty Liability ………………………………………….. 21,000
Various Assets Used for Repairs …………………. 21,000
Repairs made during 2013.
Warranty Expense …………………………………………… 20,000
Warranty
Li
ab
ili
ty ……………………………………… 20,000
Expense recognition for 2013.
Cost of Goods
Sold
…………………………………………… 700,000
Merchandise Inventory………………………………… 700,000
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ization.
Cost of goods sold is goods available for
sale less ending inventory.
9.49 (Bayer Group; interpreting restructuring disclosures.) (amounts in
millions of euros)
a. Restructuring Provision…………………………………….134
Ca
sh
….…….…….…….……..…….…….…….…….……. 134
To record utilizations.
Restructuring Provision……………………………………. 31
Reversal of
Restructuring
Expense……………….. 31
To record reversal.
9-2Solutions
9.49 continued.
b. Journal entry to record additions to Restructuring Provision
during the year:
Restructuring
Expense ……………………………………..
128
Restructuring Provision ………………………………. 128
To record €128 million of restructuring
charges made during the year.
Beginning Balance of Restructuring Provision + Additions =
Utilizations + Net Other Efects + Reversals + Ending Balance
of Restructuring Provision €196 + Additions = €134 + €5 + €31
+ €154.
Additions = €128
million.
Solutions9-30
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ization.
Inventory, 1/1/2011
………………….
$ 0 $ 0 $ 0
Purchases During 2011
……………
1
4
,
40
0
1
4
,
40
0
1
4
,
40
0
Goods Available for Sale During
2011………………………………
…
$14,400 $14,400 $ 14,400
Less Inventory, 12/31/2011
………
(
3
,00
0
)1
(
2
,40
0
)3
Cost of Goods Sold for 2011
……..
$1
1
, 40
0 $
1
2
, 40
0 $
1
2
, 00
0
Inventory, 1/1/2012
………………….
$ 3,000 1$ 2,000 2
$ 2,400
3
Purchases During 2012
……………
2
1
,
00
0
2
1
,
00
0
2
1
,
00
0
Goods Available for Sale During
2012………………………………
…
$24,000 $23,000 $ 23,400
Less Inventory, 12/31/2012
………
(
5
,00
0
)4
(
5
,85
0
)6
Cost of Goods Sold for 2012
……..
$1
9
, 00
0 $
1
6
, 80
0 $
1
7
, 55
0
1200 X $15 = $3,000.
2200 X $10 = $2,000.
3($14,400/1,200) X 200 = $2,400.
4500 X $10 = $5,000.
5(200 X $10) + (300 X $14) = $6,200.
6($23,400/2,000) X 500 = $5,850.
a. $11,400. d
.
$19,
000
.
b. $12,400. e
.
$16,800
.
c. $12,000. f
.
$17,550
.
g. FIFO results in higher net income for 2011. Purchase
prices for inventory items increased during 2011. FIFO uses
older, lower purchase prices to measure cost of goods sold,
whereas LIFO uses more recent, higher prices.
h. LIFO results in higher net income for 2012. Purchase
prices for inventory items decreased during 2012. LIFO uses
more recent, lower prices to measure cost of goods sold,
whereas FIFO uses older, higher prices.
Solutions9-22
9.44 (Hanover Oil Products; efect of FIFO and LIFO on income statement
and balance sheet.) (amounts in US$)
a. FIFO LIFO
Beginning
Inventory…………………………………..
$ 0 $ 0
Purchases:
1/1: 4,000 @ $1.40
…….
…………………………….
$ 5,600 $ 5,600
1/13: 6,000 @ $1
.
46
…….
…………………………….
8,760 8,760
1/28: 5,000 @ $1
.
50
…….
…………………………….
7
,
50
0
7
,
50
0
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ibution allowed without express
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hor
ization.
Total
Purch
a
s
e
s
…..…….…….……..…….…..
$
2
1
, 86
0 $
2
1
, 86
0
Available for
S
a
l
e
$ 21,860 $ 21,860
Less Ending Inventory:
FIFO: 2,000 X $1.50
…..…….…….……..……...
(
3
,
00
0
)
LIFO: 2,000 X $1.40
…..…….…….……..……...
(
2
, 80
0
Cost of Goods
Sold…………………………………….
$
1
8
, 86
0 $
1
9
, 06
0
b.FIFO LIFO
Beginning Inventory………………………………….. $
3
, 00
0
$
2
, 80
0
Purchases:
2/5: 7,000 @ $1.53
…..
……………………………. $ 10,710 $
10,710
2/14: 6,000 @ $1.47
…..
……………………………. 8,820
8,820
2/21: 10,000 @ $1
.
42
…..
…………………………….
1
4
,
20
0
1
4
,
20
0
Total
Purch
a
s
e
s
………………………………… $
3
3
, 73
0
$
3
3
, 73
0
Available for
S
a
l
e …………………………………….. $ 36,730 $
36,530
Less Ending Inventory:
FIFO: 3,000 X $1.42 ……………………………..
(
4
,
26
0
)
LIFO: (2,000 X $1.40) + (1,000 X $1.53)……
(
4
, 33
0
) Cost of
Goods Sold……………………………………. $
3
2
, 47
0 $
3
2
, 20
0
c. FIFO LIFO
Beginning Inventory………………………………….. $
4
, 26
0
$
4
, 33
0
Purchases:
3/2: 6,000 @ $1.48
…….
……………………………. $ 8,880 $
8,880
3/15: 5,000 @ $1
.
54
…….
……………………………. 7,700
7,700
3/26: 4,000 @ $1
.
60
…….
…………………………….
6
,
40
0
6
, 40
0
Total
Purch
a
s
e
s
………………………………… $
2
2
, 98
0
$
2
2
, 98
0
Available for
S
a
l
e …………………………………….. $ 27,240 $
27,310
Less Ending Inventory:
FIFO: 1,000 X $1.60 ………………………………
(
1
,
60
0
)
LIFO: 1,000 X $1.40 ………………………………
(
1
, 40
0
) Cost of
Goods Sold……………………………………. $
2
5
, 64
0 $
2
5
, 91
0
9-23Solutions9.44 continued.
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ization.
d. Acquisition costs increased during January. During such periods,
LIFO generally provides larger cost of goods sold amounts than
FIFO because LIFO uses the most recent higher cost. Acquisition
costs decreased during February. Under these circumstances,
FIFO generally results in higher cost of goods sold because it
uses the higher older cost. During March, acquisition costs
increased. There was a liquidation of LIFO layers, however,
which makes it more dificult to generalize about which cost-flow
assumption results in the higher cost of goods sold. LIFO
results in the higher cost of goods sold in this case because the
efect of increasing purchase costs dominated the efect of the
LIFO liquidation.
e. January February March
FIFO LIFO FIFO LIFO FIFO LIFO
(1)
S
a
l
e
s
………
$20,84
0
$20,840
$35,490
$35,49
0
$28,64
8
$28,64
8
(2) Cost of
Goods Sold
..
18,860 19,060 32,470 32,200 25,640
25,91
0
(2)/
(1)…………..
90.5% 91.5% 91.5% 90.7% 89.5% 90.4%
f. LIFO provides the most stable cost of goods sold to sales
percentage because LIFO cost of goods sold amounts reflect
current replacement cost more fully than FIFO. The firm
prices its gasoline at a 10% markup on current replacement
cost, so the cost of goods sold to sales percentage under LIFO
will be closer to 90.9% (= 1/1.1) than FIFO.
g. Available for Sale (from Part
c.)……………….
$ 27,240 $ 27,310
Plus Additional Purchases: 2,000 X $1.60
..
3,200 3,200
Less Ending Inventory:
FIFO: 3,000 X $1
.
60
………….……..…….…….
(
4
,
80
0
)
LIFO: (2,000 X $1.40) + (1,000 X $1.53)
….
(
4
, 33
0
Cost of Goods
Sold
…..…….…….……..…….……
$
2
5
, 64
0 $
2
6
, 18
0
Costs of goods sold will not change under FIFO because the
additional purchases simply increase both the quantity and
valuation of the ending inventory. Cost of goods sold increases
under LIFO because the additional purchases increase the
quantity of ending inventory but the purchase price paid
substitutes for the LIFO layers liquidated in measuring cost of
goods sold.
Solutions 9-24
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9.45 (Burch Corporation; reconstructing underlying events from ending
inventory amounts [adapted from CPA examination].) (amounts in
US$)
a. Down. Notice that lower of cost or market is lower than
acquisition
cos
t
(FIFO); current market price is less than
cost.
b. Up. FIFO means last-in, still-here. The last purchases (FIFO =
LISH) cost $44,000 and the earlier purchases (LIFO = FISH) cost
$41,800. Also, lower-of-cost-or-market basis shows acquisition
costs, which are greater than or equal to current cost.
c. LIFO Cost. Other things being equal, the largest income
results from the method that shows the largest increase in
inventory during the year.
Margin = Revenues – Cost of Goods
Sold
= Revenues – Beginning Inventory – Purchases + Ending
Inventory
= Revenues – Purchases + Increase in Inventory.
Because the beginning inventory in 2010 is zero, the method
with the largest closing inventory amount implies the largest
increase and hence the largest income.
d. Lower of Cost or Market. The method with the “largest increase
in inventory” during the year in this case is the method with the
smallest decrease, because all methods show declines in
inventory during 2011. Lower of cost or market shows a
decrease in inventory of only $3,000 during 2011—the other
methods show larger decreases ($3,800; $4,000).
e. Lower of Cost or Market. The method with the largest increase
in inventory: $10,000. LIFO shows a $5,400 increase,
whereas FIFO shows $8,000.
f. LIFO Cost. The lower income for all three years results
from the method that shows the smallest increase in inventory
over the three years. Because all beginning inventories were
zero under all methods, we need merely find the method with
the smallest ending inventory at
2012
year-end.
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9-25Solutions
g. FIFO lower by $2,000. Under FIFO, inventories increased $8,000
during
2012. Under lower of cost or market, inventories increased
$10,000 during 2012. Lower of cost or market has a bigger
increase—$2,000— and therefore lower of cost or market shows
a $2,000 larger income than FIFO for 2012.
9.46 (Wilson Company; LIFO layers influence purchasing behavior and
provide opportunity for income manipulation.) (amounts in US$)
Cost
Beginning
of
Inventory + Purchases – Ending Inventory =
Goods
Cost
Cost Cost Cost
Sold
per Pound Layer ($000) ($000) Pounds ($000)
($000)
a. (Controller) 2003 $ 60.0 — 2,000 $ 60.0 —
2008 9.2 — 200 9.2 —
2009 19.2 — 400 19.2 —
2012 72.8 — 1,400 72.8 —
7,000 @
$62/lb 2013
—
$
43
4
.0
—
—
43
4
.0
$
16
1
.2 $
43
4
.0 4
,00
0 $
16
1
.2 $
43
4
.0
Cost
Beginning
of
Inventory + Purchases – Ending Inventory =
Goods
Cost
Cost Cost Cost
Sold
per Pound Layer ($000) ($000) Pounds ($000)
($000)
b. (Purchasing 2003 $ 60.0 — 600 $ 18.0 $ 42.0
Agent) 2008 9.2 — — — 9.2
2009 19.2 — — — 19.2
2012 72.8 — — — 72.8
3,600 @
$62/lb 2013
—
$
22
3
.2
—
—
22
3
.2
$
16
1
.2 $
22
3
.2 60
0 $
1
8
.0 $
36
6
.4
c. Controller’s Policy COGS $62/lb
…..…….…….……..…….…….
$ 434.00
Less Purchasing Agent’s COGS
…..…….…….……..…….……..
(
36
6
. 4
0
)
Controller’s Extra
Deductions
…..…….…….……..…….…….….
$ 67.60
Tax Rate: 40%
…..…….…….……..…….…….…….…….……..……
X
0
.
4
0
Controller’s Tax Savings
…..…….…….……..…….…….…….…..
$
2
7
. 0
4
Controller’s Extra Cash Costs for Inventory: 3,400 @
$10/lb…….……..…….…….…….…….……..…….…….…..
……….
$
3
4
. 0
0
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Solutions9-26
d. The economically sound action is to follow the purchasing agent’s
advice.
The controller’s policy does save taxes but not as much in taxes
as the extra inventory costs. This response presumes that
allowing inventory quantities to decrease to 600 pounds does
not negatively afect operations prior to replenishing the
inventory. A quality of earnings issue arises because the
increase in net income that results from the LIFO liquidations is
nonrecurring. Except for the older costs in the base layer of 600
units, new LIFO layers will use higher current costs. Liquidating
those new layers in later years will not likely increase earnings
as much as the current year’s liquidations produced. One might
argue that following the purchasing agent’s advice does not
raise an ethical issue because it is the economically sound
action. However, management does have some discretion (see
Part e.) as to whether to deplete inventories to 600 units or to
stop short of that amount of depletion. To the extent that
management has an earning target in mind and can choose the
amount of inventory depletion to achieve that level of earnings,
some would argue that ethical issues arise.
e. To maximize income for 2013, liquidate all our LIFO inventory
layers,
4,000 lb with total cost $161,200, and purchase only 3,000 lb
at $62 each during 2013. To minimize income, acquire 7,000 lb
at $62 each.
Cost
o
f
G
ood
s
Sold
f
o
r
P
o
l i
c
y
201
3
Minimum
Income:
7,000 lb X $62 …….……..…….…….…….…….……..…….…….….
$
434
,
000
Maximum
Income:
4,000 lb of Old Layers………………………………………………..
(161,200
)
3,000 lb at $62 ………………………………………………………….
(
18
6
, 00
0
) Income Spread Before Taxes
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………….……..…….…….…….……. $
86,800
Taxes at 40%………………………………………………………………..
(
3
4
,72
0
)
Income Spread After Taxes …………………………………………… $
5
2
,08
0
By manipulating purchases of expensium, Wilson Company
reports after-tax income anywhere in the range from $50,000
(by following the controller’s policy) up to $102,080 (= $50,000
+ $52,080) by acquiring only 3,000 lb and liquidating all LIFO
layers.
9-27Solutions9.47 (Sedan
Corporation; interpreting inventory disclosures.)
(amou
nts in millions of Japanese yen)
a. March 31, 2013:
If Sedan had used FIFO, inventory values would have been
¥13,780 less than LIFO amounts.
Ending Balance of Total Inventory (FIFO) = (¥374,210 +
¥239,937 +
¥1,211,569) – ¥13,780 = ¥1,825,716 – ¥13,780 = ¥1,811,936
million.
March 31, 2012:
If Sedan had used FIFO, inventory values would have been
¥30,360 less than LIFO amounts.
Ending Balance of Total Inventory (FIFO) = (¥362,686 +
¥236,749 +
¥1,204,521) – ¥30,360 = ¥1,803,956 – ¥30,360 = ¥1,773,596
million.
b. Beginning Balance in Finished Goods (FIFO) + Cost of
Units Completed = Cost of Products Sold (FIFO) + Ending
Balance in Finished Goods (FIFO).
Beginning Balance of Finished Goods Inventory (FIFO) =
¥1,204,521 –
¥30,360 = ¥1,174,161 million.
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ization.
Ending Balance of Finished Goods Inventory (FIFO) =
¥1,211,569 –
¥13,780 = ¥1,197,789 million.
¥1,174,161 + ¥20,459,386 (from Problem 9.40, Part b.) =
Cost of
Products Sold (FIFO) + ¥1,197,789.
Cost of Goods Sold (FIFO) = ¥20,435,758
million. Also, could calculate as follows:
Cost of Goods Sold (
L
I
FO
) ……….…….…….…….……..…….. ¥
20,452,338
Change in LIFO reserve (¥30,360 – ¥13,780) …………….
(
1
6
, 58
0
)
Cost of Goods Sold (FIFO) ………………………………………. ¥
2
0
, 43
5
, 75
8
Solutions9-28
9.48 (Central Appliance; allowance method for warranties;
reconstructing transactions.) (amounts in US$)
a. $720,000 = $820,000 (Goods Available for Sale) – $100,000
(Beginning
Inventory).
b. $700,000 = $820,000 (Goods Available for Sale) – $120,000
(Ending
Inventory).
c. $21,000 = $6,000 (Cr. Balance) + $15,000 (Dr. Balance).
d. $20,000 = $5,000 (Required Cr. Balance) + $15,000
(Existing Dr.
Balance).
e. Warranty Liability ………………………………………….. 21,000
Various Assets Used for Repairs …………………. 21,000
Repairs made during 2013.
Warranty Expense …………………………………………… 20,000
Warranty
Li
ab
ili
ty ……………………………………… 20,000
Expense recognition for 2013.
Cost of Goods
Sold
…………………………………………… 700,000
Merchandise Inventory………………………………… 700,000
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ization.
Cost of goods sold is goods available for
sale less ending inventory.
9.49 (Bayer Group; interpreting restructuring disclosures.) (amounts in
millions of euros)
a. Restructuring Provision…………………………………….134
Ca
sh
….…….…….…….……..…….…….…….…….……. 134
To record utilizations.
Restructuring Provision……………………………………. 31
Reversal of
Restructuring
Expense……………….. 31
To record reversal.
9-2Solutions
9.49 continued.
b. Journal entry to record additions to Restructuring Provision
during the year:
Restructuring
Expense ……………………………………..
128
Restructuring Provision ………………………………. 128
To record €128 million of restructuring
charges made during the year.
Beginning Balance of Restructuring Provision + Additions =
Utilizations + Net Other Efects + Reversals + Ending Balance
of Restructuring Provision €196 + Additions = €134 + €5 + €31
+ €154.
Additions = €128
million.
Solutions9-30