8-41
PROBLEM 8-4
(a)
Purchases
Total Units
Sales
Total Units
April 1 (balance on hand)
April 5
300
April 4
April 12
200
Assuming costs are not computed for each withdrawal:
1. First-in, first-out.
Date of Invoice
No. Units
Unit Cost
Total Cost
2. Last-in, first-out.
Date of Invoice
No. Units
Unit Cost
Total Cost
April 11
300
April 27
800
April 18
200
April 28
April 30
Total units
Total units sold
8-42
PROBLEM 8-4 (Continued)
3. Average cost.
Cost of Part X available.
Date of Invoice
No. Units
Unit Cost
Total Cost
April 1
100
$5.00
$ 500
(b) Assuming costs are computed for each withdrawal:
1. First-in, first out.
The inventory would be the same in amount as in part (a),
$2,000.
April 4
400
April 26
600
8-43
PROBLEM 8-4 (Continued)
2. Last-in, first-out.
Purchased
Sold
Balance*
Date
No. of
units
Unit
cost
No. of
units
Unit
cost
No. of
units
Unit
cost
Amount
April 1
100
$5.00
100
$5.00
$ 500
April 4
400
5.10
100
5.00
2,540
400
5.10
April 18
200
5.35
100
5.00
100
5.10
2,610
100
5.30
200
5.35
April 26
600
5.60
100
5.00
100
5.10
100
5.30
200
5.35
600
5.60
April 27
600 @
5.60
800
200 @
5.35
100
5.00
1,540
100
5.10
100
@
5.30
April 28
100 @
5.30
100
5.00
755
150
50 @
5.10
50
5.10
April 30
200
5.80
100
5.00
50
5.10
200
5.80
April 5
300
$5.10
100
5.00
100
5.10
April 11
300
5.30
100
5.00
100
5.10
300
5.30
April 12
200
100
5.00
100
5.10
100
5.30
8-44
PROBLEM 8-4 (Continued)
3. Average cost.
Purchased
Sold
Balance
Date
No. of
units
Unit
cost
No. of
units
Unit
cost
No. of
units
Unit
cost*
Amount
April 1
100
$5.00
100
$5.0000
$ 500.00
April 4
400
5.10
500
5.0800
2,540.00
April 5
300
$5.0800
200
5.0800
1,016.00
April 11
300
5.30
500
5.2120
2,606.00
April 12
200
5.2120
300
5.2120
1,563.60
April 18
200
5.35
500
5.2672
2,633.60
April 26
600
5.60
1,100
5.4487
5,993.60
April 27
800
5.4487
300
5.4487
1,634.72
April 28
150
5.4487
150
5.4487
817.33
April 30
200
5.80
350
5.6495
1,977.33
PROBLEM 8-5
(a) Assuming costs are not computed for each withdrawal (units received,
5,700, minus units issued, 4,700, equals ending inventory at 1,000 units):
1. First-in, first-out.
Date of Invoice
No. Units
Unit Cost
Total Cost
$3.50
2. Last-in, first-out.
$3.00
3. Average cost.
Cost of goods available:
Date of Invoice
No. Units
Unit Cost
Total Cost
Jan. 2
1,200
$3.00
$ 3,600
Jan. 23
1,300
4,420
PROBLEM 8-5 (Continued)
Under Average Cost—No. A new average cost would be computed
each time a withdrawal was made instead of only once for all items
purchased during the year.
The calculations to determine the inventory on this basis are given below.
2. Last-in, first-out.
Received
Issued
Balance
Date
No. of
units
Unit
cost
No. of
units
Unit
cost
No. of
units
Unit
cost*
Amount
Jan. 2
1,200
$3.00
1,200
$3.00
$3,600
Jan. 7
700
$3.00
500
3.00
1,500
Jan. 10
600
3.20
500
3.00
600
Jan. 13
500
3.20
500
3.00
1,820
100
3.20
100
4,130
700
3.30
Jan. 20
700
3.30
100
3.20
300
3.00
200
3.00
600
Jan. 23
1,300
3.40
200
3.00
5,020
1,300
3.40
Jan. 26
800
3.40
200
500
3.40
Jan. 28
1,600
3.50
200
3.00
500
3.40
7,900
1,600
Jan. 31
1,300
3.50
200
3.00
500
3.40
3,350
300
Inventory, January 31 is $3,350.
PROBLEM 8-5 (Continued)
3. Average cost.
Received
Issued
Balance
Date
No. of
units
Unit
cost
No. of
units
Unit
cost
No. of
units
Unit
cost*
Amount
Jan. 2
1,200
$3.00
1,200
$3.0000
$3,600
Jan. 7
700
$3.0000
500
3.0000
1,500
Jan. 10
600
3.20
1,100
3.1091
3,420
Jan. 13
500
3.1091
600
3.1091
1,865
Jan. 18
300
1,300
3.2281
4,197
Jan. 20
3.2281
200
3.2281
646
Jan. 23
1,300
3.40
1,500
3.3773
5,066
Jan. 26
800
700
3.3773
2,364
Jan. 28
1,600
3.50
2,300
3.4626
7,964
Jan. 31
1,300
3.4626
1,000
3.4626
3,463
Inventory, January 31 is $3,463.
*Four decimal places are used to minimize rounding errors.
8-48
PROBLEM 8-6
(a)
Beginning inventory ………………….
1,000
Purchases (2,000 + 3,000) ………….
5,000
Units available for sale ……………..
6,000
Sales (2,500 + 2,200) …………………
(4,700)
Goods on hand …………………………
1,300
(b)
Perpetual FIFO
Same as periodic:
$87,100
(c)
Periodic LIFO
3,000 X $23 =
1,700 X $18 =
4,700
$99,600
(d)
Perpetual LIFO
Date
Purchased
Sold
Balance
1/1
1,000 X $12
=
$12,000
2/4
2,000 X $18 = $36,000
1,000 X $12
}
$48,000
2,000 X $18
2/20
2,000 X $18
}
$42,000
500 X $12
500 X $12
=
$ 6,000
4/2
3,000 X $23 = $69,000
500 X $12
}
$75,000
3,000 X $23
11/4
2,200 X $23
=
$50,600
500 X $12
Periodic FIFO
1,000 X $12 =
1,700 X $23 =
4,700
$87,100
PROBLEM 8-6 (Continued)
(f)
Perpetual moving average
Date
Purchased
Sold
Balance
1/1
1,000 X $12 =
$12,000
2/4
2,000 X $18 = $36,000
3,000 X $16 =
48,000
2/20
2,500 X $16 =
$40,000
500 X $16 =
8,000
4/2
3,000 X $23 = $69,000
3,500 X $22a =
77,000
11/4
2,200 X $22 =
48,400
1,300 X $22 =
28,600
$88,400
3,000 X $23 = 69,000
8-50
PROBLEM 8-7
The accounts in the 2013 financial statements which would be affected by
a change to LIFO and the new amount for each of the accounts are as
follows:
Account
New amount
for 2013
(1)
Cash
$176,400
The calculations for both 2012 and 2013 to support the conversion to LIFO
are presented below.
Income for the Years Ended
12/31/12
12/31/13
Sales revenue
$900,000
$1,350,000
Less: Cost of goods sold
525,000
792,000
Other expenses
205,000
304,000
730,000
Income before taxes
170,000
254,000
Income taxes (40%)
68,000
101,600
Net income
Cost of Goods Sold and
Ending Inventory for the Years Ended
12/31/12
12/31/13
Beginning inventory
( 40,000 X $3.00)
$120,000
( 40,000 X $3.00)
$120,000
Purchases
(150,000 X $3.50)
525,000
(180,000 X $4.40)
792,000
Cost of goods available
645,000
912,000
Ending inventory
( 40,000 X $3.00)
( 40,000 X $3.00)
Cost of goods sold
Determination of Cash at
12/31/12
12/31/13
Income taxes under FIFO
$ 76,000
$116,000
Income taxes as calculated under LIFO
68,000
101,600
Increase in cash
8,000
14,400
difference
8,000
Total increase in cash
8,000
22,400
(2)
Inventory
(3)
Retained earnings
(4)
Cost of goods sold
PROBLEM 8-7 (Continued)
Determination of Retained Earnings at
12/31/12
12/31/13
Net income under FIFO
$114,000
$174,000
Net income under LIFO
Reduction in retained earnings
12,000
21,600
2012 reduction
12,000
Total reduction in retained earnings
12,000
33,600
Retained earnings under FIFO
8-52
PROBLEM 8-8
(a)
1.
Ending inventory in units
Portable
6,000 + 15,000 – 14,000 =
7,000
2.
Ending inventory at current cost
Portable
7,000 X $110 =
$ 770,000
Midsize
4,000 X $300 =
Flat-screen
7,000 X $500 =
3.
Ending inventory at base-year cost
Portable
7,000 X $100 =
$ 700,000
Midsize
4,000 X $250 =
Flat-screen
7,000 X $400 =
4.
Price index
$5,470,000 ÷ $4,500,000 = 1.2156
5.
Ending inventory
$3,800,000 X 1.0000 =
$3,800,000
700,000* X 1.2156 =
850,920
*($4,500,000 – $3,800,000 = $700,000)
6.
Cost of goods sold
Beginning inventory ………………………………………….
$ 3,800,000
Purchases
Cost of goods available …………………………………….
Ending inventory ………………………………………………
Midsize
8,000 + 20,000 – 24,000 =
4,000
Flat-screen
3,000 + 10,000 – 6,000 =
8-53
PROBLEM 8-8 (Continued)
7.
Gross profit
Sales revenue
(b)
1.
Ending inventory at current cost restated to base cost
Portable
$ 770,000 ÷ 1.10a =
$ 700,000
a. $110 ÷ $100
b. $300 ÷ $250
c. $500 ÷ $400
2.
Ending inventory
Portable
$ 600,000 X 1.00 =
$ 600,000
100,000 X 1.10 =
Midsize
Flat-screen
2,000,000
3.
Cost of good sold
Cost of good available …………………………………………
$16,450,000
Ending inventory …………………………………………………
Cost of goods sold …………………………………………
$11,540,000
4.
Gross profit
Sales revenue ……………………………………………………..
$15,420,000
Cost of goods sold ………………………………………………
(6,000 X $600)] …………………………………………………….
$15,420,000
Cost of goods sold …………………………………………………
PROBLEM 8-9
(a) BONANZA WHOLESALERS INC.
Computation of Internal Conversion Price Index
for Inventory Pool No. 1 Double Extension Method
Current inventory at
17,000 X $36 =
(b) BONANZA WHOLESALERS INC.
Computation of Inventory Amounts
Under Dollar-Value LIFO Method for Inventory Pool No. 1
at December 31, 2012 and 2013
December 31, 2012
December 31, 2013
Current
8-55
PROBLEM 8-10
Base-Year
Cost
Index %
Dollar-Value
LIFO
December 31, 2011
January 1, 2011, base
$45,000
100
$45,000
December 31, 2011, layer
11,000
112*
12,320
$56,000
$57,320
December 31, 2013
January 1, 2011, base
$45,000
100
$45,000
December 31, 2011, layer
11,000
112
12,320
December 31, 2012, layer
12,400
128
15,872
December 31, 2013, layer
1,600
130***
2,080
$70,000
$75,272
*$62,700 ÷ $56,000
***$90,800 ÷ $70,000
December 31, 2012
January 1, 2011, base
$45,000
100
December 31, 2011, layer
11,000
112
12,320
December 31, 2012, layer
$68,400
$73,192
PROBLEM 8-11
(a)
Schedule A
A
B
C
D
Current $
Price Index
Base-Year $
Change from
Prior Year
2008
$ 80,000
1.00
$ 80,000
—
2009
1.05
2011
1.30
99,000
2012
1.40
Schedule B
Ending Inventory-Dollar-Value LIFO:
2008
$80,000 @ $1.00 =
$ 80,000
9,000 @ 1.30 =
$80,000 @ 1.00 =
$ 80,000
6,000 @ 1.40 =
9,000 @ 1.30 =
21,750
8-57
PROBLEM 8-11 (Continued)
(b)
To: Richardson Company
From: Accounting Student
Subject: Dollar-Value LIFO Pool Accounting
Dollar-value LIFO is an inventory method which values groups or “pools”
of inventory in layers of costs. It assumes that any goods sold during a
given period were taken from the most recently acquired group of goods in
stock and, consequently, any goods remaining in inventory are assumed to
be the oldest goods, valued at the oldest prices.
To do this valuation, you need to know both the ending inventory at year–
end prices and the price index used to adjust the current year’s new layer.
The idea is to convert the current ending inventory into base-year costs.
8-58
PROBLEM 8-11 (Continued)
1. Refer to Schedule A. To express each year’s ending inventory (Column A)
in terms of base-year costs, simply divide the ending inventory by the
2. Next, compute the difference between the previous and the current
3. Finally, express this increment in current-year terms. For the second
year, this computation is straightforward: the base-year ending inven-
tory value is added to the difference in #2 above multiplied by the price
index. For 2009, the ending inventory for dollar-value LIFO would equal
$80,000 of base-year inventory plus the increment ($26,000) times the
price index (1.05) or $107,300. The product is the most recent layer
expressed in current-year prices. See Schedule B.
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 8-1 (Time 15–20 minutes)
Purpose—a short case designed to test the skills of the student in determining whether an item should
be reported in inventory. In addition, the student is required to speculate as to why the company may
wish to postpone recording this transaction.
CA 8-2 (Time 15–25 minutes)
Purpose—to provide the student with four questions about the carrying value of inventory. These
questions must be answered and defended with rationale. The topics are shipping terms, freight–in,
weighted-average cost vs. FIFO, and consigned goods.
CA 8-3 (Time 25–35 minutes)
Purpose—to provide a number of difficult financial reporting transactions involving inventories. This case
is vague and much judgment is required in its analysis. Right or wrong answers should be discouraged;
rather emphasis should be placed on the underlying rationale to defend a given position. Includes a
product versus period cost transaction, proper classification of a possible inventory item, and a product
financing arrangement.
CA 8-4 (Time 15–25 minutes)
Purpose—the student discusses the acceptability of alternative methods of reporting cash discounts.
Also, the student identifies the effects on financial statements of using LIFO instead of FIFO when
prices are rising.
CA 8-5 (Time 20–25 minutes)
Purpose—to provide a broad overview to students as to why inventories must be included in the
balance sheet and income statement. In addition, students are asked to determine why taxable income
and accounting income may be different. Finally, the conditions under which FIFO and LIFO may give
different answers must be developed.
CA 8-6 (Time 15–20 minutes)
Purpose—to provide the student with the opportunity to discuss the rationale for the use of the LIFO
method of inventory valuation. The conditions that must exist before the tax benefits of LIFO will accrue
also must be developed.
CA 8-7 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to discuss the cost flow assumptions of average
cost, FIFO, and LIFO. Student is also required to distinguish between weighted-average and moving-
average and discuss the effect of LIFO on the B/S and I/S in a period of rising prices.
CA 8-8 (Time 25–30 minutes)
Purpose—to provide the student with the opportunity to discuss the differences between traditional
LIFO and dollar-value LIFO. In this discussion, the specific procedures employed in traditional LIFO
and dollar-value LIFO must be examined. This case provides a good basis for discussing LIFO
conceptual issues.
CA 8-9 (Time 25–30 minutes)
Purpose—to provide the student with an opportunity to discuss the concept of a LIFO pool and its use
in various LIFO methods. The student is also asked to define LIFO liquidation, to explain the use of
price indexes in dollar-value LIFO, and to discuss the advantages of using dollar-value LIFO.