EXERCISE 8-10 (10–15 minutes)
Current Year
Subsequent Year
1.
Working capital
No effect
No effect
Current ratio
No effect
Retained earnings
No effect
No effect
Net income
No effect
No effect
2.
Working capital
Overstated
No effect
Current ratio
Overstated
No effect
Retained earnings
Overstated
No effect
Net income
Overstated
3.
Working capital
Overstated
No effect
Current ratio
Overstated
No effect
Retained earnings
Overstated
No effect
Net income
Overstated
EXERCISE 8-11 (10–15 minutes)
(a)
$390,000
= 1.95 to 1
$200,000
$180,000
(c)
Event
Effect of Error
Adjust Income
Increase (Decrease)
1.
Understatement of ending
inventory
Decreases net income
$22,000
3.
Overstatement of ending
Increases net income
EXERCISE 8-12 (15–20 minutes)
Errors in Inventories
Year
Net
Income
Per Books
Add
Overstate-
ment Jan. 1
Deduct
Understate-
ment Jan. 1
Deduct
Overstate-
ment Dec. 31
Add
Understate-
ment Dec. 31
Corrected
Net Income
2008
$ 50,000
$5,000
$ 45,000
EXERCISE 8-13 (15–20 minutes)
(a)
Cost of Goods Sold
Ending Inventory
1.
LIFO
500 @ $13 =
$ 6,500
300 @ $10 =
$3,000
450 @ $11 =
4,950
350 @ $11 =
3,850
$11,450
$6,850
FIFO
300 @ $10 =
$ 3,000
500 @ $13 =
650 @ $11 =
7,150
150 @ $11 =
1,650
$10,150
$8,150
(b)
LIFO
100 @ $10 =
$ 1,000
300 @ $11 =
250 @ $13 =
3,250
$ 7,550
(c)
Sales Revenue
$24,050
= ($24 X 200) + ($25 X 500) + ($27 X 250)
Cost of Goods Sold
10,150
Gross Profit (FIFO)
$13,900
EXERCISE 8-14 (20–25 minutes)
(a)
1.
LIFO
600 @ $6.00 =
$3,600
200 @ $6.08 =
1,216
$4,816
800 @ $6.35 = $5,080
*Units
Price
Total Cost
600
@
$6.00
=
$ 3,600
1,500
@
$6.08
=
9,120
@
$6.40
=
5,120
1,200
@
$6.50
=
@
$6.60
=
4,620
500
@
$6.79
=
(b)
1.
FIFO
500 @ $6.79 =
$3,395
300 @ $6.60 =
1,980
$5,375
2.
LIFO
100 @ $6.00 =
$ 600
200 @ $6.08 =
1,216
$5,211
(c)
Total merchandise available for sale
$33,655
8-24
EXERCISE 8-15 (15–20 minutes)
(a) ESPLANADE COMPANY
Computation of Inventory for Product BAP
Under FIFO Inventory Method
March 31, 2012
Units
Unit Cost
Total Cost
March 26, 2012 ………………………..
600
$12.00
$ 7,200
(b) ESPLANADE COMPANY
Computation of Inventory for Product BAP
Under LIFO Inventory Method
Units
Unit Cost
Total Cost
Beginning inventory ………………..
600
$ 4,800
January 5, 2012 (portion) …………
(c) ESPLANADE COMPANY
Computation of Inventory for Product BAP
Under Weighted Average Inventory Method
March 31, 2012
Units
Unit Cost
Total Cost
Beginning inventory ………………..
600
$ 8.00
$ 4,800
January 5, 2012 ……………………….
January 25, 2012 ……………………..
February 16, 2012 ……………………
March 26, 2012 ………………………..
February 16, 2012 ……………………
January 25, 2012 (portion) ……….
1,000
EXERCISE 8-16 (15–20 minutes)
(a)
1.
2,100 units available for sale – 1,400 units sold = 700 units in the
ending inventory.
920
2.
100 @ $4.10 =
$ 410
3.
$9,324 cost of goods available for sale ÷ 2,100 units available for
sale = $4.44 weighted-average unit cost.
700 units X $4.44 = $3,108 Ending inventory at weighted-average
cost.
(b)
1.
LIFO will yield the lowest gross profit because this method will yield
the highest cost of goods sold figure in the situation presented.
2.
LIFO will yield the lowest ending inventory because LIFO uses the
oldest costs to price the ending inventory units. The company has
experienced rising purchase prices. The oldest costs in this case
are the lower costs.
EXERCISE 8-17 (10–15 minutes)
110 @ $25 =
2.
400 @ $20 =
110 @ $25 =
8-26
EXERCISE 8-17 (Continued)
(b)
1.
FIFO
$14,750 [same as (a)]
EXERCISE 8-18 (15–20 minutes)
First-in, first-out
Last-in, first-out
Sales revenue ………………………….
$1,000,000
$1,000,000
Cost of goods sold:
Inventory, Jan. 1 …………………
$120,000
$120,000
Inventory, Dec. 31 ……………….
Cost of goods sold ………..
Gross profit ……………………………..
Operating expenses …………………
*Purchases
6,000 @ $22 =
$132,000
10,000 @ $25 =
250,000
7,000 @ $30 =
210,000
$592,000
First-in, first-out:
7,000 units @ $30 =
$210,000
2,000 units @ $25 =
$260,000
***Last-in, first-out:
6,000 units @ $20 =
3,000 units @ $22 =
LIFO
100 @ $20 =
400 @ $30 =
EXERCISE 8-19 (15–20 minutes)
MICKIEWICZ CORPORATION
Schedules of Cost of Goods Sold
For the First Quarter Ended March 31, 2012
Schedule 1
First-in, First-out
Schedule 2 Last-in,
First-out
Beginning inventory ……………………
$ 40,000
$ 40,000
Cost of goods available for sale …..
65,700
Schedules Computing Ending Inventory
Units
Beginning inventory ……………………………………………………………..
10,000
Plus purchases …………………………………………………………………….
35,000
Units available for sale …………………………………………………………
45,000
at $4.40 =
at $4.00 =
at $4.30 =
at $4.20 =
8-28
EXERCISE 8-20 (10–15 minutes)
(a)
FIFO Ending Inventory 12/31/12
76 @ $10.89* =
$ 827.64
34 @ $11.88** =
403.92
$1,231.56
*[$15.00 – (.01 X $15.00)]
**[$16.00 – (.01 X $16.00)]
EXERCISE 8-21 (10–15 minutes)
(a) The difference between the inventory used for internal reporting pur–
poses and LIFO is referred to as the Allowance to Reduce Inventory to
(b)
$ 827.64
5 @ $15.84** =
79.20
$3,241.26
8-29
EXERCISE 8-21 (Continued)
(c) Cash flow was computed as follows:
Sales revenue ……………………
$3,200,000
Cost of goods sold …………….
(2,800,000)
Operating expenses …………..
(150,000)
Income taxes …………………….
(75,600)
Cash flow ………………………….
$ 174,400
EXERCISE 8-22 (25–30 minutes)
(a)
1.
Ending inventory—Specific Identification
Date
No. Units
Unit Cost
Total Cost
December 2
100
$30
$3,000
July 20
30
25
750
130
$3,750
2.
Ending inventory—FIFO
September 4
30
28
840
March 15
30
24
720
8-30
EXERCISE 8-22 (Continued)
4.
Ending inventory—Average Cost
Date
Explanation
No.
Units
Unit
Cost
Total
Cost
January 1
Beginning inventory
100
$20
$ 2,000
March 15
Purchase
300
24
7,200
(b) Double Extension Method
Base-Year Costs
Current Costs
Units
Base-Year
Cost Per Unit
Total
Units
Current-Year
Cost Per Unit
Total
130
$20
$2,600
100
$30
$3,000
30
$28
840
$3,840
Ending Inventory for the Period at Current Cost
$2,600
Base layer (100 units at $20) ………………………………………………
Increment in current dollars ……………………………………………….
Ending inventory at dollar-value LIFO …………………………………
December 2
Purchase
100
30
3,000
1,000
EXERCISE 8-23 (5–10 minutes)
$98,000 – $92,000 = $6,000 increase at base prices.
EXERCISE 8-24 (15–20 minutes)
(a)
12/31/12 inventory at 1/1/12 prices, $151,200 ÷ 1.12 ……………..
$135,000
Inventory 1/1/12 …………………………………………………………………
(160,000)
Inventory decrease at base prices ………………………………………
$ 25,000
Inventory at 1/1/12 prices …………………………………………………..
$160,000
Less decrease at 1/1/12 prices ……………………………………………
(b)
12/31/13 inventory at base prices, $195,500 ÷ 1.15 ……………….
$170,000
12/31/12 inventory at base prices ……………………………………….
Inventory increment at base prices …………………………………….
$ 35,000
Inventory at 12/31/12 ……………………………………………………….
$135,000
EXERCISE 8-25 (20–25 minutes)
Current $
Price Index
Base Year $
Change from
Prior Year
2009
$ 80,000
1.00
$ 80,000
—
2011
1.20
90,000
2014
1.45
8-32
EXERCISE 8-25 (Continued)
Ending Inventory—Dollar-value LIFO:
2009
$80,000
2013
$80,000 @ 1.00 =
$ 80,000
10,000 @ 1.05 =
10,500
EXERCISE 8-26 (15–20 minutes)
Date
Current $
Price Index
Base-Year $
Change from
Prior Year
Dec. 31, 2009
$ 70,000
1.00
$70,000
—
Dec. 31, 2010
88,200
1.05
Dec. 31, 2013
1.25
$111,100
4,000 @ 1.30 =
11,000 @ 1.40 =
15,400
$135,750
EXERCISE 8-26 (Continued)
Ending Inventory—Dollar-value LIFO:
Dec. 31, 2009
$70,000
Dec. 31, 2010
$70,000 @ 1.00 =
$70,000
14,000 @ 1.05 =
$84,700
Dec. 31, 2011
$70,000 @ 1.00 =
$70,000
12,000 @ 1.05 =
$82,600
Dec. 31, 2012
$70,000 @ 1.00 =
$70,000
12,000 @ 1.05 =
12,600
8,000 @ 1.20 =
9,600
$92,200
Dec. 31, 2013
$70,000 @ 1.00 =
$70,000
$80,500
8-34
TIME AND PURPOSE OF PROBLEMS
Problem 8-1 (Time 30–40 minutes)
Purpose—to provide a multipurpose problem with trade discounts, goods in transit, computing internal
price indexes, dollar-value LIFO, comparative FIFO, LIFO, and average cost computations, and inven-
toriable cost identification.
Problem 8-2 (Time 25–35 minutes)
Purpose—to provide the student with eight different situations that require analysis to determine their
impact on inventory, accounts payable, and net sales.
Problem 8-3 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to prepare general journal entries to record pur–
chases on a gross and net basis.
Problem 8-4 (Time 40–55 minutes)
Purpose—to provide a problem where the student must compute the inventory using a FIFO, LIFO, and
average cost assumption. These inventory value determinations must be made under two differing
assumptions: (1) perpetual inventory records are kept in units only and (2) perpetual records are kept in
dollars. Many detailed computations must be made in this problem.
Problem 8-5 (Time 40–55 minutes)
Purpose—to provide a problem where the student must compute the inventory using a FIFO, LIFO, and
average cost assumption. These inventory value determinations must be made under two differing
assumptions: (1) perpetual inventory records are kept in units only and (2) perpetual records are kept in
dollars. This problem is very similar to Problem 8-4, except that the differences in inventory values must
be explained.
Problem 8-6 (Time 25–35 minutes)
Purpose—to provide a problem where the student must compute cost of goods sold using FIFO, LIFO,
and weighted average, under both a periodic and perpetual system.
Problem 8-7 (Time 30–40 minutes)
Purpose—to provide a problem where the student must identify the accounts that would be affected if
LIFO had been used rather than FIFO for purposes of computing inventories.
Problem 8-8 (Time 30–40 minutes)
Purpose—to provide a problem which covers the use of inventory pools for dollar-value LIFO. The
student is required to compute ending inventory, cost of goods sold, and gross profit using dollar-value
LIFO, first with one inventory pool and then with three pools.
Problem 8-9 (Time 25–35 minutes)
Purpose—the student computes the internal conversion price indexes for a LIFO inventory pool and
then computes the inventory amounts using the dollar-value LIFO method.
Problem 8-10 (Time 30–35 minutes)
Purpose—to provide the student with the opportunity to compute inventories using the dollar-value
approach. An index must be developed in this problem to price the new layers. This problem will prove
difficult for the student because the indexes are hidden.
Problem 8-11 (Time 40–50 minutes)
Purpose—to provide the student with an opportunity to write a memo on how a dollar-value LIFO
pool works. In addition, the student must explain the step-by-step procedure used to compute dollar
value LIFO.
8-35
SOLUTIONS TO PROBLEMS
PROBLEM 8-1
1. $175,000 – ($175,000 X .20) = $140,000;
$140,000 – ($140,000 X .10) = $126,000, cost of goods purchased
3. Because no date was associated with the units issued or sold, the
periodic (rather than perpetual) inventory method must be assumed.
FIFO inventory cost:
1,000 units at $24
$ 24,000
1,000 units at 23
23,000
LIFO inventory cost:
1,500 units at $21
$ 31,500
500 units at 22
11,000
Average cost:
1,500 at $21
$ 31,500
2,000 at 22
3,500 at 23
1,000 at 24
24,000
$180,000 ÷ 8,000 = $22.50
8-36
PROBLEM 8-1 (Continued)
4. Computation of price indexes:
12/31/12
$264,000
= 110
$240,000
5. The inventoriable costs for 2013 are:
Merchandise purchased …………………………...
$909,400
Add: Freight-in ………………………………………..
22,000
931,400
Deduct: Purchase returns ………………………..
Purchase discounts …………………….
23,300
12/31/13
$286,720
= 112
12/31/12 price index
Increase in terms of 110
2012 Layer
Base inventory
12/31/13 price index
2012 layer
Base inventory
8-37
PROBLEM 8-2
DIMITRI COMPANY
Schedule of Adjustments
December 31, 2012
Inventory
Accounts
Payable
Net Sales
Initial amounts
$1,520,000
$1,200,000
$8,150,000
Adjustments:
1.
NONE
NONE
(40,000)
2.
76,000
76,000
NONE
3.
30,000
NONE
NONE
1. The $31,000 of tools on the loading dock were properly included in the
physical count. The sale should not be recorded until the goods are
picked up by the common carrier. Therefore, no adjustment is made to
inventory, but sales must be reduced by the $40,000 billing price.
2. The $76,000 of goods in transit from a vendor to Dimitri were shipped
f.o.b. shipping point on 12/29/12. Title passes to the buyer as soon as
3. The work-in–process inventory sent to an outside processor is Dimitri’s
4.
32,000
NONE
(47,000)
5.
26,000
NONE
NONE
6.
27,000
NONE
NONE
7.
NONE
56,000
NONE
8.
8,000
Total adjustments
195,000
140,000
8-38
PROBLEM 8-2 (Continued)
4. The tools costing $32,000 were recorded as sales ($47,000) in 2012.
However, these items were returned by customers on December 31, so
5. The $26,000 of Dimitri’s tools shipped to a customer f.o.b. destination
are still owned by Dimitri while in transit because title does not pass on
6. The goods received from a vendor at 5:00 p.m. on 12/31/12 should be
included in the ending inventory, but were not included in the physical
7. The $56,000 of goods received on 12/26/12 were properly included in
8. Since one-half of the freight-in cost ($8,000) pertains to merchandise
properly included in inventory as of 12/31/12, $4,000 should be added
8-39
PROBLEM 8-3
(a)
1.
8/10
Purchases ………………………………………………………
12,000
Accounts Payable …………………………………..
12,000
8/13
2. Purchases—addition to beginning inventory in cost of goods
sold section of income statement.
(b)
1.
8/10
Purchases ………………………………………………………
11,760
Accounts Payable ($12,000 X .98) …………….
11,760
Accounts Payable …………………………………………..
Purchase Returns and Allowances
($1,200 X .98) ……………………………………….
Accounts Payable …………………………………………..
Purchase Returns and Allowances …………..
8/15
Purchases ………………………………………………………
16,000
Accounts Payable …………………………………..
16,000
Purchases ………………………………………………………
20,000
Accounts Payable …………………………………..
20,000
8/28
Accounts Payable …………………………………………..
16,000
Cash ………………………………………………………
16,000
PROBLEM 8-3 (Continued)
8/15
Purchases …………………………..………………………….
15,840
Accounts Payable ($16,000 X .99) …………….
15,840
8/25
Purchases …………………………..………………………….
19,600
Accounts Payable ($20,000 X .98) …………….
19,600
Accounts Payable……………………………………………
15,840
Purchase Discounts Lost …………………………………
Cash ………………………………………………………
16,000
2.
8/31
Purchase Discounts Lost …………………………………
216
Accounts Payable
(.02 X [$12,000 – $1,200]) ……………………….
216
3.
Same as part (a) (2) except: