978-1259722660 Chapter 8 Solution Manual Part 1

Question 8–1

Question 8–2

Question 8–3

Perpetual System Periodic System

(1) Purchase of merchandise debit inventory debit purchases

Solutions Manual, Vol.1, Chapter 8 8–1

of McGraw-Hill Education.

Chapter 8 Inventories: Measurement

QUESTIONS FOR REVIEW OF KEY TOPICS

Inventory for a manufacturing company consists of (1) raw materials, (2) work in

process, and (3) finished goods. Raw materials represent the cost, primarily purchase

price plus freight charges, of goods purchased from suppliers that will become part of

Beginning inventory plus net purchases for the period equals cost of goods

available for sale. The main difference between a perpetual and a periodic

Answers

to Questions (continued)

Question 8–4

Question 8–5

Question 8–6

Question

8–7

8–2 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Inventory shipped f.o.b. shipping point is included in the inventory of the

purchaser when the merchandise reaches the common carrier. Laetner

A consignment is an arrangement under which goods are physically transferred to

another company (the consignee), but the transferor (consignor) retains legal title. If

By the gross method, purchase discounts not taken are viewed as part of

Answers to Questions (continued)

Question 8–8

Question 8–9

Question 8–10

Solutions Manual, Vol.1, Chapter 8 8–3

of McGraw-Hill Education.

1. Beginning inventory — increase

2. Purchases — increase

Four methods of assigning cost to ending inventory and cost of goods sold are (1)

specific identification, (2) first-in, first-out (FIFO), (3) last-in, first-out (LIFO), and

(4) average cost. The specific identification method requires each unit sold during the

When costs are declining, LIFO will result in a lower cost of goods sold and

Answers

to Questions (continued)

Question 8–11

Question 8–12

Question 8–14

8–4 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Proponents of LIFO argue that it provides a better match of revenues and

expenses because cost of goods sold includes the costs of the most recent

purchases. These are matched with sales that reflect a current selling price.

Many companies choose the LIFO inventory method to reduce income taxes in

periods when prices are rising. In periods of rising prices, LIFO results in a higher

cost of goods sold and therefore a lower net income than the other methods. The

The gross profit, inventory turnover, and average days in inventory ratios are

designed to monitor inventories. The gross profit ratio is calculated by dividing

Answers to Questions (concluded)

Question 8–15

Beginning inventory $186,000

To record the purchase of inventory on account.

To record sales on account and cost of goods sold.

Solutions Manual, Vol.1, Chapter 8 8–5

of McGraw-Hill Education.

The dollar-value LIFO method has important advantages. First, it simplifies the

recordkeeping procedures compared to unit LIFO because no information is needed

about unit flows. Second, it minimizes the probability of the liquidation of LIFO

After determining ending inventory at year-end cost, the following steps remain:

1. Convert ending inventory valued at year-end cost to base year cost.

2. Identify the layers in ending inventory with the years they were created.

3. Convert each layer’s base year cost measurement to layer year cost measurement

using the layer year’s cost index and then sum the layers.

Question 8–16

BRIEF EXERCISES

Brief Exercise 8–1

Brief Exercise 8–2

Accounts receivable………………………………………………..1,420,000

Both shipments should be included in inventory. The goods shipped to a

customer f.o.b. destination did not arrive at the customer’s location until after the

December 28, 2018

January 6, 2019

Accounts payable…………………………………………………… 250,000

8–6 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Brief Exercise 8–3

December 28, 2018

January 6, 2019

Cost of goods available for sale:

Beginning inventory (200 x $25) $5,000

Purchases:

First-in, first-out (FIFO)

Cost of ending inventory:

Date of

purchase Units Unit cost Total cost

January 8 75 $28 $2,100

Solutions Manual, Vol.1, Chapter 8 8–7

of McGraw-Hill Education.

Brief Exercise 8–5

Brief Exercise 8–6

Average cost

Cost of goods available for sale (500 units) $13,800

Cost of ending inventory:

* Alternatively, could be determined by multiplying the units sold by the average

First-in, first-out (FIFO)

Cost of goods sold:

Date of Cost of

Sale Units Sold Units Sold Total Cost

Ending inventory:

Date of

Purchase Units Unit Cost Total Cost

8–8 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Brief Exercise 8–7

Brief Exercise 8–7 (concluded)

Average cost

Date Purchased Sold Balance

inventory

$7,800

Solutions Manual, Vol.1, Chapter 8 8–9

of McGraw-Hill Education.

Cost of goods available for sale:

Cost of goods sold without year-end purchase:

Units purchased during the year: 60,000 x $18 $1,080,000

If FIFO were used instead of LIFO, the year-end purchase would have no effect

on income before income taxes. FIFO cost of goods sold with or without the purchase

would consist of the 10,000 units from beginning inventory and 54,000 units

purchased during the year at $18:

8–10 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Brief Exercise 8–8

Brief Exercise 8–9

Cost of goods sold for the year ended August 31, 2015, would have been $200

million lower had Walgreens used FIFO for its LIFO inventory. While beginning

inventory would have been $2,300 million higher, ending inventory also would have

been higher by $2,500 million. An increase in beginning inventory causes an increase

in cost of goods sold, but an increase in ending inventory causes a decrease in cost of

goods sold. Purchases for the year are the same regardless of the inventory valuation

method used.

Cost of goods sold  Average inventory = Inventory turnover

Solutions Manual, Vol.1, Chapter 8 8–11

of McGraw-Hill Education.

Brief Exercise 8–11

Ending Inventory Inventory Layers Inventory Layers Inventory

Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost

8–12 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Brief Exercise 8–13

1. To record the purchase of inventory on account and the payment

of freight charges.

2. To record purchase returns.

3. To record cash sales and cost of goods sold.

1. To record the purchase of inventory on account and the payment

of freight charges.

Solutions Manual, Vol.1, Chapter 8 8–13

of McGraw-Hill Education.

EXERCISES

Exercise 8–1

Exercise 8–2

2. To record purchase returns.

3. To record cash sales.

NO ENTRY IS MADE FOR THE COST OF GOODS SOLD.

Requirement 1

Beginning inventory $ 32,000

Plus net purchases:

Purchases $240,000

Requirement 2

Cost of goods sold (above) ……………………………………….. 233,000

Inventory (ending) …………………………………………………… 40,000

8–14 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Exercise 8–3

Exercise 8–4

PERPETUAL SYSTEM PERIODIC SYSTEM

($ in 000s)

Purchases

Freight

Returns

Sales

End of period

No entry Cost of goods sold (below) 148

Cost of goods sold:

Beginning inventory $25

Purchases $155

2018 2019 2020

Beginning inventory 275 (1) 249 (3) 225

Solutions Manual, Vol.1, Chapter 8 8–15

of McGraw-Hill Education.

Exercise 8–5

Net purchases = Purchases (gross) – Purchase returns – Purchase discounts + Freight-in

Beginning inventory + Net purchases = Cost of goods available for sale

Cost of goods available for sale – Ending inventory = Cost of goods sold

2018:

(1) Cost of goods available for sale – Net purchases = Beginning inventory

(2) Cost of goods available for sale – Cost of goods sold = Ending inventory

2019:

(3) 2019 beginning inventory = 2018 ending inventory = 249

(4) Cost of goods sold + Ending inventory = Cost of goods available for sale

(5) Cost of goods available for sale – Beginning inventory = Net purchases

Net purchases + Purchases discounts + Purchase returns – Freight-in = Purchases(gross)

2020:

(6) Cost of goods available for sale – Ending inventory = Cost of goods sold

8–16 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Exercise 8–5 (concluded)

(7) Cost of goods available for sale – Beginning inventory = Net purchases

Purchases (gross) – Purchase returns + Freight-in – Net purchases = Purchase discounts

Inventory balance before additional transactions

$165,000

Add:

Inventory balance before additional transactions

$210,000

Add:

1. Excluded

2. Included

3. Included

Requirement 1

Solutions Manual, Vol.1, Chapter 8 8–17

of McGraw-Hill Education.

Exercise 8–6

Exercise 8–7

Exercise 8–8

Exercise 8–9

July 15, 2018

July 23, 2018

Requirement 2

August 15, 2018

Requirement 3

The July 15 entry would include a debit to the inventory account instead of to

purchases, and the July 23 entry would include a credit to the inventory account

instead of to purchase discounts.

Requirement 1

July 15, 2018

July 23, 2018

8–18 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Exercise 8–10

Requirement 2

August 15, 2018

Requirement 3

The July 15 entry would include a debit to the inventory account instead of to

purchases.

Requirement 1

November 17, 2018

November 26, 2018

Requirement 2

December 15, 2018

Solutions Manual, Vol.1, Chapter 8 8–19

of McGraw-Hill Education.

Exercise 8–11

Exercise 8–11 (concluded)

Requirement 3

Requirement 1:

November 17, 2018

November 26, 2018

Requirement 2:

December 15, 2018

The FASB Accounting Standards Codification® represents

the single source of authoritative U.S. generally accepted

accounting principles. The specific citation for each of the following items

is:

1. Define the meaning of cost as it applies to the initial measurement of

inventory.

FASB ASC 330–10–30–1: “Inventory–Overall–Initial Measurement.”

The primary basis of accounting for inventories is cost, which has been

8–20 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Exercise 8–12

2. Indicate the circumstances when it is appropriate to initially

measure agricultural inventory at fair value.

FASB ASC 905–330–30–1: “Agriculture–Inventory–Initial

Measurement.”

Exceptional cases exist in which it is not practicable to determine an

appropriate cost basis for products. A market basis is acceptable if the

products meet all of the following criteria:

a. They have immediate marketability at quoted market prices that

cannot be influenced by the producer.

Solutions Manual, Vol.1, Chapter 8 8–21

of McGraw-Hill Education.

Exercise 8–12 (concluded)

3. What is a major objective of accounting for inventory?

FASB ASC 330–10–10–1: “Inventory–Overall–Objectives.”

4. Are abnormal freight charges included in the cost of inventory?

FASB ASC 330–10–30–7: “Inventory–Overall–Initial Measurement.”

Unallocated overheads shall be recognized as an expense in the period in which

Cost of goods available for sale:

Beginning inventory (2,000 x $6.10) $12,200

Purchases:

First-in, first-out (FIFO)

Cost of ending inventory:

Date of

purchase Units Unit cost Total cost

Last-in, first-out (LIFO)

8–22 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Exercise 8–13

Cost of ending inventory:

Date of

purchase Units Unit cost Total cost

Solutions Manual, Vol.1, Chapter 8 8–23

of McGraw-Hill Education.

Exercise 8–13 (concluded)

Average cost

Cost of ending inventory:

* Alternatively, could be determined by multiplying the units sold by the average

First-in, first-out (FIFO)

Cost of goods sold:

Date of Cost of

Sale Units Sold Units Sold Total Cost

Last-in, first-out (LIFO)

Date Purchased Sold Balance

8–24 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Exercise 8–14

Beginning

inventory

2,000 @ $6.10 = $12,200 2,000 @ $6.10 $12,200

August 8 10,000 @ $5.50 = $55,000 2,000 @ $6.10

10,000 @ $5.50 $67,200

Solutions Manual, Vol.1, Chapter 8 8–25

of McGraw-Hill Education.

Exercise 8–14 (concluded)

(Note: the perpetual inventory LIFO results in this exercise are the same as

periodic LIFO results, due to the timing of sales and purchases. The same LIFO layers

are on hand at the end of the period under each method. This is unusual. LIFO

perpetual and LIFO periodic normally produce different results for ending inventory

and cost of goods sold.)

Average cost

Date Purchased Sold Balance

Beginning

inventory

2,000 @ $6.10 = $12,200 2,000 @ $6.10 $12,200

August 8

Available

10,000 @ $5.50 = $55,000

$67,200

= $5.60/unit

12,000 units

August 14 8,000 @ $5.60 = $44,800 4,000 @ $5.60 $22,400

Requirement 1

LIFO will result in the highest cost of goods sold figure because both the cost of

merchandise and the quantity of merchandise rose during the period. FIFO will result

in the highest ending inventory balance for the same reasons.

Requirement 2

Cost of goods available for sale:

Beginning inventory (600 x $80) $ 48,000

Purchases:

8–26 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Exercise 8–15

First-in, first-out (FIFO)

Cost of ending inventory:

Date of

purchase Units Unit cost Total cost

Last-in, first-out (LIFO)

Cost of ending inventory:

Date of

purchase Units Unit cost Total cost

Requirement 1

Cost of goods available for sale:

Beginning inventory (5,000 x $10.00) $ 50,000

Purchases:

Solutions Manual, Vol.1, Chapter 8 8–27

of McGraw-Hill Education.

Exercise 8–16

Cost of ending inventory:

* Alternatively, could be determined by multiplying the units sold by the average

8–28 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Exercise 8–16 (concluded)

Requirement 2

Date Purchased Sold Balance

Beginning

inventory

5,000 @ $10.00 = $50,000 5,000 @ $10.00 $50,000

Requirement 1

FIFO cost of goods sold:

Requirement 2

LIFO cost of goods sold:

Calculations to determine cost per unit of year 2018 purchases:

Cost of goods sold

Solutions Manual, Vol.1, Chapter 8 8–29

of McGraw-Hill Education.

Exercise 8–17

= Weighted-average cost per unit

Number of units sold

= $6 = Cost per unit of year 2018 purchases

Cost of goods available for sale:

Requirement 1

January 31, 2016 ($ in

thousands)

Requirement 2

8–30 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Exercise 8–18

Requirement 1

Cost of goods sold:

Requirement 2

When inventory quantity declines during a reporting period, liquidation of LIFO

inventory layers carried at different costs prevailing in prior year’s results in

noncurrent costs being matched with current selling prices. If the resulting effect on

Units liquidated multiplied by the difference between

their current cost and acquisition cost:

When inventory quantity declines during a reporting period, liquidation of LIFO

inventory layers carried at different costs that prevailed in prior year’s results in

noncurrent costs being matched with current selling prices. If the resulting effect on

Solutions Manual, Vol.1, Chapter 8 8–31

of McGraw-Hill Education.

$209,826 + $4,438 = $214,264 thousand cost of goods sold under FIFO.

Exercise 8–19

Requirement 2

The specific citation that describes the disclosure requirements that must be made

by publicly traded companies for a LIFO liquidation is FASB ASC 330–10–S99–3:

“Inventory–Overall–SEC Materials–LIFO Liquidations.”

Requirement 3

When a company using LIFO liquidates a substantial portion of its LIFO

Such disclosure would be required in order to make the financial statements not

($ in millions)

HOME DEPOT LOWE’S

The gross profit ratios for the two companies are similar and both slightly exceed

the industry average of 33%. On average, Lowe’s turns over its inventory 15 days

Ending

Ending Inventory Inventory Layers Inventory Layers Inventory

Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost

8–32 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Exercise 8–21

Exercise 8–22

Exercise 8–23

1.00

12/31/2018 $690,000

12/31/2019 $760,000

Ending

Ending Inventory Inventory Layers Inventory Layers Inventory

Date at Base Year Cost at Base Year CostConverted to Cost DVL Cost

12/31/2018 $200,000

12/31/2019 $231,000

12/31/2020 $299,000

Index

12/31/2021 $300,000

= $250,000 Index = 1.20

Index

Set the base year, 1/1/2018, equal to 1.00.

Ending Inventory Inventory Layers Inventory Layers Inventory

Date at Base Year Cost at Base Year CostConverted to Cost DVL Cost

1/1/2018 $720,000

Solutions Manual, Vol.1, Chapter 8 8–33

of McGraw-Hill Education.

Exercise 8–24

Exercise 8–25

1.00

12/31/2018 $880,000

List A List B

i 1. Perpetual inventory a. Legal title passes when goods are

system delivered to common carrier.

l 2. Periodic inventory system b. Goods are transferred to another company

but title remains with transferor.

8–34 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Exercise 8–26

Requirement 1

a. To record the purchase of inventory on account and the payment of freight

charges.

October 12, 2018

Purchases (98% x $22,000) ………………………………………… 21,560

b. To record payment of accounts payable.

October 31, 2018

Solutions Manual, Vol.1, Chapter 8 8–35

of McGraw-Hill Education.

PROBLEMS

Problem 8–1

Problem 8–1 (continued)

c. To record sales on account.

October 2018

No entry is made for the cost of goods sold.

Cost of goods sold:

Beginning inventory $15,000

Plus net purchases:

Adjusting entry:

October 31, 2018

Cost of goods sold (above) ……………………………………….. 18,000

8–36 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Problem 8–1 (concluded)

Requirement 2

a. To record the purchase of inventory on account and the payment of freight

charges.

October 12, 2018

Inventory (98% x $22,000) ………………………………………… 21,560

b. To record payment of accounts payable.

October 31, 2018

Accounts payable …………………………………………………… 21,560

c. To record sales on account.

October 2018

Accounts receivable ……………………………………………….. 28,000

1. The transaction is not correctly accounted for. Inventory held on

consignment by another company should be included in the

inventory of the consignor. Rasul should include this

merchandise in its 2018 ending inventory.

2. The transaction is not correctly accounted for. Legal title to merchandise shipped

Solutions Manual, Vol.1, Chapter 8 8–37

of McGraw-Hill Education.

Problem 8–2

3. The transaction is not correctly accounted for. Since the merchandise was shipped

4. The transaction is correctly accounted for. Merchandise held on consignment from

5. The transaction is correctly accounted for. Since the merchandise was shipped

Accounts

Inventory Payable Sales

Initial amounts $1,250,000 $1,000,000 $9,000,000

Adjustments – increase (decrease):

1. (155,000) (155,000) NONE

2. (22,000) NONE NONE

3. NONE NONE 40,000

Requirement 1

Beginning inventory (10,000 x $8.00) $ 80,000

Net purchases:

Purchases (50,000* units x $10.00) $500,000

* The 5,000 units purchased on December 28 are not included. The

merchandise was shipped f.o.b. destination and did not arrive at Johnson’s

warehouse until 2019.

8–38 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Problem 8–3

Problem 8–4

Cost of ending inventory:

Date of

purchase Units Unit cost Total cost

Requirement 2

Sales (45,000 units x $18.00) $810,000

Less:

Cost of goods available for sale for periodic system:

Purchases:

1. FIFO, periodic system

Cost of ending inventory:

Date of

purchase Units Unit cost Total cost

Alternatively, cost of goods sold can be determined by adding the cost of the 6,000

units in beginning inventory ($48,000) and the 3,000 units from the January 10

Solutions Manual, Vol.1, Chapter 8 8–39

of McGraw-Hill Education.

Problem 8–5

Problem 8–5 (continued)

2. LIFO, periodic system

Cost of ending inventory:

Date of

purchase Units Unit cost Total cost

Alternatively, cost of goods sold can be determined by adding the cost of the 6,000

8–40 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Problem 8–5 (continued)

3. LIFO, perpetual system

Date Purchased Sold Balance

Beginning

inventory

6,000 @ $8.00 = $48,000 6,000 @ $8.00 $48,000

January 5 3,000 @ $8.00 = $24,000 3,000 @ $8.00 $24,000

January 10 5,000 @ $9.00 = $45,000 3,000 @ $8.00

4. Average cost, periodic system

Cost of goods available for sale (17,000 units) $153,000

Cost of ending inventory:

Alternatively, cost of goods sold could be determined by multiplying the units

Solutions Manual, Vol.1, Chapter 8 8–41

of McGraw-Hill Education.

Problem 8–5 (concluded)

5. Average cost, perpetual system

Date Purchased Sold Balance

$69,000

Ending

inventory

Requirement 1

Cost of goods available for sale for periodic system:

Purchases:

5,000 x $4.00 $20,000

a. FIFO

8–42 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Problem 8–6

Cost of ending inventory:

Date of

purchase Units Unit cost Total cost

b. LIFO

Cost of ending inventory:

Date of

purchase Units Unit cost Total cost

Solutions Manual, Vol.1, Chapter 8 8–43

of McGraw-Hill Education.

Problem 8–6 (concluded)

c. Average cost

Cost of ending inventory:

* Alternatively, could be determined by multiplying the units sold by the average

Gross Profit ratio:

*Sales less cost of goods sold

Requirement 2

In situations when costs are rising, LIFO results in a higher cost of goods sold

and, therefore, a lower gross profit ratio than FIFO.

Requirement 1

Purchases:

211 $63,000

8–44 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Problem 8–7

Ending inventory:

Requirement 2

Cost of ending inventory (3 autos):

Car ID Cost

219 $ 75,000

Solutions Manual, Vol.1, Chapter 8 8–45

of McGraw-Hill Education.

Problem 8–7 (concluded)

Requirement 3

Cost of ending inventory (3 autos):

Car ID Cost

203 $ 60,000

Requirement 4

Cost of goods available for sale (12 units) $798,300

Cost of ending inventory:

* Alternatively, could be determined by multiplying the units sold by the average

8–46 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Requirement 1

The note indicates that if the company had used FIFO, inventory would have

been higher by $2,498 million and $2,430 million at the end of 2015 and 2014,

increased cost of goods sold by $68 million under LIFO. Therefore, we subtract

Requirement 3

The information might be useful to a financial analyst interested in comparing

Requirement 1

Beginning inventory $ 450,000

Purchases:

Cost of ending inventory:

Date of

purchase Units Unit cost Total cost

Requirement 2

Cost of goods sold assuming all units purchased at the year 2018 price:

Solutions Manual, Vol.1, Chapter 8 8–47

of McGraw-Hill Education.

Problem 8–8

Problem 8–9

Requirement 3

Requirement 1

Cost of goods sold:

2018: 1,000 x $16 = $ 16,000

2019: 1,500 x $16 = $ 24,000

2020: 1,000 x $12 = $ 12,000

Requirement 2

LIFO liquidation before-tax profit or loss:

2018: 1,000 units x $2 ($18 – 16) = $2,000 profit

Requirement 3

Disclosure note:

During fiscal 2020, 2019, and 2018, inventory quantities in certain LIFO layers were

reduced. These reductions resulted in a liquidation of LIFO inventory quantities

8–48 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Problem 8–10

Requirement 1

Sales (27,000 units x $2,000) $54,000,000

Requirement 2

Sales (27,000 units x $2,000) $54,000,000

*Cost of goods sold:

15,000 units x $1,000 = $15,000,000

Solutions Manual, Vol.1, Chapter 8 8–49

of McGraw-Hill Education.

Problem 8–11

Problem 8–11 (concluded)

Requirement 3

The gross profit and gross profit ratio are higher applying the requirement 2

assumption of 15,000 units purchased because of the LIFO liquidation profit that

The profit difference ($2,000,000 in this case), if material, must be disclosed in a

6,000 units x $100 ($1,000 – 900) $ 600,000

Requirement 4

Cost of goods sold:

5,000 units x $700 $ 3,500,000

27,000 units

If only 15,000 units are purchased, cost of goods sold, gross profit, and the gross

profit ratio would be exactly the same as when 28,000 units are purchased.

Requirement 5

The number of units purchased has no effect on FIFO cost of goods sold. When

8–50 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Requirement 1

Allowance for uncollectible accounts

Balance, beginning of year $7

Requirement 2

Accounts receivable analysis:

Balance, beginning of year ($583 + 7) $ 590

Requirement 3

Cost of goods sold for 2018 would have been $130 million lower had Inverness

used the average cost method for its entire inventory. While beginning inventory

would have been $350 million higher, ending inventory also would have been higher

Requirement 4

Solutions Manual, Vol.1, Chapter 8 8–51

of McGraw-Hill Education.

Problem 8–12

Problem 8–12 (concluded)

Requirement 5

If inventory costs are increasing, when inventory quantity declines during a

The liquidation caused 2018 cost of goods sold to be lower by $9.23 million [$6

million  (1 – .35)]

Ending

Ending Inventory Inventory Layers Inventory Layers Inventory

Date at Base Year Cost at Base Year CostConverted to Cost DVL Cost

1/1/2018 $400,000

= $400,000 $400,000 (base) $400,000 x 1.00 = $400,000 $400,000

1.00

12/31/2018 $441,000

Ending

Ending Inventory Inventory Layers Inventory Layers Inventory

Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost

1/1/2018 $150,000

= $150,000 $150,000 (base) $150,000 x 1.00 = $150,000 $150,000

1.00

12/31/2018 $200,000

= $185,185 $150,000 (base) $150,000 x 1.00 = $150,000

1.08 35,185 (2018) 35,185 x 1.08 = 38,000 188,000

12/31/2019 $245,700

8–52 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Problem 8–13

Problem 8–14

12/31/2021 $228,800

Solutions Manual, Vol.1, Chapter 8 8–53

of McGraw-Hill Education.

Ending

Ending Inventory Inventory Layers Inventory Layers Inventory

Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost

1/1/2018 $260,000

= $260,000 $260,000 (base) $260,000 x 1.00 = $260,000 $260,000

1.00

12/31/2018 $340,000

8–54 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Problem 8–15

Ending

Ending Inventory Inventory Layers Inventory Layers Inventory

Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost

1/1/2018 $84,000

= $84,000 $84,000 (base) $84,000 x 1.00 = $84,000 $84,000

1.00

12/31/2018 $100,800

= $96,000 $84,000 (base) $84,000 x 1.00 = $84,000

1.05 12,000 (2018) 12,000 x 1.05 = 12,600 96,600

12/31/2019 $136,800

(1) $150,000  $125,000 = 1.20 (2020 cost index)

(2) $133,710 – 129,960 = $3,750

Solutions Manual, Vol.1, Chapter 8 8–55

of McGraw-Hill Education.

Problem 8–16

Advance warning of the company’s impending

bankruptcy existed at the date of the financial statements.

As a rule, inventories should rise in tandem with sales. If

inventories rise faster, it may be because the goods simply aren’t selling. This is

particularly true of companies in faddish or seasonal businesses—Merry-Go-Round’s

world.

The company’s report showed that inventories on January 30 were $82.2 million,

up 37 percent from $60 million a year earlier. That’s well above the 15 percent sales

growth in the same period, to $877.5 million from $761.2 million. This alone should

have been a major cause for concern. It indicated the company’s goods simply weren’t

selling as rapidly as it expected, causing its inventories to bulge. The increase in

receivables from $6,195 to over $6 million should also have been cause for concern.

Requirement 1

Identifying items that should be included in inventory is difficult due to goods in

transit, goods on consignment, and sales returns.

Goods in transit. Inventory shipped f.o.b. shipping point is included in the

purchaser’s inventory as soon as the merchandise is shipped. On the other hand,

Goods on consignment. Goods held on consignment are included in the

Sales returns. When the right of return exists, a seller must be able to estimate

Requirement 2

In addition to the direct acquisition costs such as the price paid and transportation

Requirement 3

Sport Chalet considers cost to include the direct cost of merchandise and inbound

8–56 Intermediate Accounting, 8/e

of McGraw-Hill Education.

CASES

Judgment Case 8–1

Real World Case 8–2

1. a. The specific identification method requires each

unit to be clearly distinguished from similar units either by

description, identification number, location, or other

characteristic. Costs are accumulated for specific units and expensed as the units are

b. It is appropriate for Happlia to use the specific identification method

because each appliance is expensive, and easily identified by number and description.

2. a. Happlia should include in inventory carrying amounts all necessary and

reasonable costs to get an appliance into a useful condition and place for sale.

b. Examples of inventoriable costs include the unit invoice price, plus an

3. The 2018 income statement should report in cost of goods sold all

Suggested Grading Concepts and Grading

Scheme:

Content (70%)

________ 20 Describes the differential effect on ending inventory

________ 25 Discusses the various motivating factors that

Solutions Manual, Vol.1, Chapter 8 8–57

of McGraw-Hill Education.

Judgment Case 8–3

Communication Case 8–4

_______ The better match of expenses with revenues

________ 10 Discusses briefly the methods available to

simplify LIFO.

________ 15 Discusses the IRS conformity rule with respect to

_______

Writing (30%)

________ 6 Terminology and tone appropriate to the audience of

a company president.

LIFO produces a higher cost of goods sold,

lower taxable income, and therefore lower income

taxes currently payable than FIFO only in periods

when the costs of the company’s products are

rising. When costs are decreasing, LIFO results in

lower cost of goods sold, higher taxable income, and a higher current tax liability than

FIFO. In the case of the electronics client, you would explain this to the intern

concluding that the costs of the client’s products must be decreasing, as frequently

occurs in this industry.

At the end of a reporting period it is important to

ensure that a proper inventory cutoff is made. A proper

cutoff involves the determination of the ownership of goods

that are in transit between the company and its customers as well as the company and

its suppliers. If the shipment is made f.o.b. shipping point, then ownership is

transferred to the buyer when the goods reach the common carrier. If the shipment is

8–58 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Communication Case 8–5

Judgment Case 8–6

made f.o.b. destination, then ownership is transferred to the buyer when the goods

arrive at the buyer’s location.

In this case, John is incorrect if the goods were shipped f.o.b. destination. If so,

even though the company is not in physical possession of the goods, they should be

included in ending inventory because the shipment had not reached the buyer’s

location by the end of the reporting period.

Requirement 1

Without purchase of the additional units:

Sales (35,000 @ $60) $2,100,000

With purchase of the additional units:

Sales $2,100,000

Cost of goods sold:

Requirement 2

Discussion should include these elements.

Facts:

If Moncrief purchases the additional units at the end of the year under a periodic

LIFO inventory system, the transaction results in a reduced payment to Jim Lester,

reduced profits to shareholders, and reduced income tax payments to government

Ethical Dilemma:

Should Moncrief exercise its right to purchase inventory at will, resulting in a

Solutions Manual, Vol.1, Chapter 8 8–59

of McGraw-Hill Education.

Ethics Case 8–7

Requirement 1

The LIFO conformity rule permits LIFO users to present disclosures that report,

Requirement 2

January 2, 2016

Ending Beginning

Inventory Inventory

($ in millions)

Requirement 3

Cost of goods sold for the fiscal year ended January 2, 2016, would have been

Requirement 3

The following is based on Whole Foods’ 2015 financial statements. Answers

will vary depending on the financial statement dates chosen.

a. Whole Foods uses the last-in, first-out (LIFO) method for approximately 92.2%

b. Assuming that current cost approximates FIFO cost, the inventory disclosure

note indicates that, if FIFO had been used to value LIFO inventories, inventories

would have been higher than reported by $49 million at the end of 2015 and $48

c. Inventory turnover = cost of goods sold divided by average inventory

8–60 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Real World Case 8–8

Real World Case 8–9

($ in millions)

The dollar-value LIFO inventory estimation

technique begins with the determination of the

current year’s ending inventory valued in terms

of year-end costs. It is not necessary for a company using DVL to track the cost of

purchases during the year. All that is needed is to take the physical quantities of goods

on hand at the end of the year and apply year-end costs.

The next step is to convert the ending inventory from year-end costs to base year

costs. This usually is accomplished by dividing the ending inventory at year-end costs

by the year’s cost index. The cost index reflects the change in cost from a base year to

the current year. The ending inventory has been deflated for cost changes from the

base year to the end of the current year.

The next step in the procedure is to identify the layers in ending inventory with

the years they were created by comparing ending inventory at base year cost to the

beginning inventory at base year cost. Applying the LIFO concept, if inventory has

increased, ending inventory at base year cost consists of the beginning inventory layer

plus a current year layer.

The final step converts the layers identified to cost by multiplying the layers at

base year cost by the layer’s cost index. The costs are totaled to obtain ending

inventory at DVL cost.

Requirement 1

The FASB’s codification citation that provides guidance for determining whether

Requirement 2

The FASB’s codification citation that addresses the recognition of a product

Requirement 3

The appropriate accounting treatment for this type of arrangement is for the

Solutions Manual, Vol.1, Chapter 8 8–61

of McGraw-Hill Education.

Communication Case 8–10

Research Case 8–11

Requirement 4

Journal entry to record the “sale” (cash receipt):

Journal entry to record the repurchase:

8–62 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Research Case 8–11 (concluded)

*The treatment of these costs depends on the accounting policies of the sponsor. For

example, if these costs normally are expensed as period costs, then the debit in this

case would be to an expense account (or accounts).

Requirement 1

($ in millions)

KOHL’S DILLARDS

The gross profit ratios for the two companies are similar, as are their turnover

ratios.

Requirement 2

The objective of this requirement is to motivate students to obtain hands-on

familiarity with actual annual reports and to apply the techniques learned in the

Requirement 1

Target uses the retail inventory method to account for the majority of its inventory

Solutions Manual, Vol.1, Chapter 8 8–63

of McGraw-Hill Education.

Analysis Case 8–12

Target Case

Requirement 2

The cost of inventory includes the amount Target pays to its suppliers to acquire

Requirement 3

($ in millions)

Target’s gross profit ratio is above the industry average, and its inventory turnover

ratio is lower than the industry average. This means that Target, compared to its

industry, earns more profit on each dollar of sales, but sells its inventory less

frequently.

Per note 4.16, AF uses the weighted-average method to value

its inventory. Under IFRS, the FIFO (first-in, first-out)

method also can be used. However, the LIFO (last-in,

first-out) method, which can be used under U.S. GAAP in addition to the average cost method and

the FIFO method, is prohibited under IFRS.

8–64 Intermediate Accounting, 8/e

of McGraw-Hill Education.

Air France–KLM Case