Ch 8 SOLUTIONS
EXERCISE 8-2
Inventory
per physical count |
|
$441,000 |
Goods in
transit to customer, f.o.b. destination |
|
+ 38,000 |
Goods in
transit from vendor, f.o.b. seller |
|
+ 51,000 |
Inventory
to be reported on balance sheet |
|
$530,000 |
The consigned
goods of $61,000 are not owned by Jose Oliva and were properly excluded.
The goods in transit to a
customer of $46,000, shipped f.o.b. shipping point, are properly excluded from
the inventory because the title to the goods passed when they left the seller
(Oliva) and therefore a sale and related cost of goods sold should be recorded
in 2004.
The goods in transit from a
vendor of $83,000, shipped f.o.b. destination, are properly excluded from the
inventory because the title to the goods does not pass to Oliva until the buyer
(Oliva) receives them.
EXERCISE 8-4
1. |
Raw Materials Inventory..................................................... |
8,100 |
|
|
Accounts
Payable.................................................. |
|
8,100 |
|
|
|
|
2. |
Raw Materials Inventory..................................................... |
28,000 |
|
|
Accounts
Payable.................................................. |
|
28,000 |
|
|
|
|
3. |
No adjustment necessary. |
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|
|
|
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4. |
Accounts Payable.............................................................. |
7,500 |
|
|
Raw
Materials Inventory......................................... |
|
7,500 |
|
|
|
|
5. |
Raw Materials Inventory..................................................... |
19,800 |
|
|
Accounts
Payable.................................................. |
|
19,800 |
EXERCISE 8-5
(a) |
Inventory December 31, 2004
(unadjusted) |
|
$234,890 |
|
Transaction 2 |
|
13,420 |
|
Transaction 3 |
|
-0- |
|
Transaction 4 |
|
-0- |
|
Transaction 5 |
|
8,540 |
|
Transaction 6 |
|
(10,438) |
|
Transaction 7 |
|
(10,520) |
|
Transaction 8 |
|
1,500 |
|
Inventory December 31, 2004
(adjusted) |
|
$237,392 |
(b) |
Transaction 3 |
|
|
||
|
Sales |
12,800 |
|
||
|
Accounts
Receivable........................................................................ |
12,800 |
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|
(To reverse sale entry in 2004) |
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||
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||
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Transaction
4 |
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|
||
|
Purchases
(Inventory)..................................................... |
15,630 |
|
||
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Accounts
Payable............................................................................. |
15,630 |
|||
|
(To record purchase of merchandise
|
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||
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Transaction
8 |
|
|
||
|
Sales
Returns and Allowances....................................... |
2,600 |
|
||
|
Accounts
Receivable........................................................................ |
2,600 |
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EXERCISE 8-13
(a) |
Cost of Goods Sold |
|
Ending Inventory |
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|
(1) |
LIFO |
500 @ $13 = |
$ 6,500 |
|
300 @ $10 = |
$3,000 |
|
|
|
500 @ $12 = |
6,000 |
|
300 @ $12 = |
3,600 |
|
|
|
|
$12,500 |
|
|
$6,600 |
|
|
|
|
|
|
|
|
|
(2) |
FIFO |
300 @ $10 = |
$
3,000 |
|
500 @ $13 = |
$6,500 |
|
|
|
700 @ $12 = |
8,400 |
|
100 @ $12 = |
1,200 |
|
|
|
|
$11,400 |
|
|
$7,700 |
|
|
|
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(b) |
|
LIFO |
100 @ $10 = |
$
1,000 |
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|
|
|
|
|
300 @ $12 = |
3,600 |
|
|
|
|
|
|
200 @ $13 = |
2,600 |
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|
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|
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|
$ 7,200 |
|
|
|
(c) |
Sales |
$25,400 |
=
($24 X $200) + ($25 X $500) + ($27 X $300) |
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|
Cost
of Goods Sold |
11,400 |
|
|
|
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|
Gross Profit (FIFO) |
$14,000 |
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Note: FIFO periodic and FIFO perpetual provide the same gross profit
and inventory value. |
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(d) |
LIFO matches more current costs with
revenue. When prices are rising (as is generally the case), this results in a
higher amount for cost of goods sold and a lower gross profit. As indicated
in this exercise, prices were rising and cost of goods sold under LIFO was
higher. |
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EXERCISE 8-23
$97,000 – $92,000 = $5,000
increase at base prices.
$98,350 – $92,600 =
$5,750 increase in dollar-value LIFO value.
$5,000 X Index =
$5,750.
Index = $5,750 ¸ $5,000.
Index
= 115
EXERCISE 8-25
|
|
|
|
|
|
|
Change from Prior Year |
2001 |
$
80,000 |
|
1.00 |
|
$
80,000 |
|
— |
2002 |
115,500 |
|
1.05 |
|
110,000 |
|
$+30,000 |
2003 |
108,000 |
|
1.20 |
|
90,000 |
|
(20,000) |
2004 |
122,200 |
|
1.30 |
|
94,000 |
|
+4,000 |
2005 |
154,000 |
|
1.40 |
|
110,000 |
|
+16,000 |
2006 |
176,900 |
|
1.45 |
|
122,000 |
|
+12,000 |
Ending Inventory—Dollar-value LIFO:
2001 |
$80,000 |
|
|
2005 |
$80,000 @ 1.00 = |
$ 80,000 |
|
|
|
|
|
10,000 @ 1.05 = |
10,500 |
2002 |
$80,000 @ 1.00 = |
$
80,000 |
|
|
4,000 @ 1.30 = |
5,200 |
|
30,000 @ 1.05 = |
31,500 |
|
|
16,000 @ 1.40 = |
22,400 |
|
|
$111,500 |
|
|
|
$118,100 |
|
|
|
|
|
|
|
2003 |
$80,000 @ 1.00 = |
$
80,000 |
|
2006 |
$80,000 @ 1.00 = |
$
80,000 |
|
10,000 @ 1.05 = |
10,500 |
|
|
10,000 @ 1.05 = |
10,500 |
|
|
$ 90,500 |
|
|
4,000 @ 1.30 = |
5,200 |
|
|
|
|
|
16,000 @ 1.40 = |
22,400 |
2004 |
$80,000 @ 1.00 = |
$
80,000 |
|
|
12,000 @ 1.45 = |
17,400 |
|
10,000 @ 1.05 = |
10,500 |
|
|
|
$135,500 |
|
4,000 @ 1.30 = |
5,200 |
|
|
|
|
|
|
$ 95,700 |
|
|
|
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|
PROBLEM 8-1 |
|
1.
$150,000
– ($150,000 X .20) = $120,000;
$120,000 –
($120,000 X .10) = $108,000, cost of goods purchased
2.
$1,100,000
+ $69,000 = $1,169,000. The $69,000 of goods in transit on which title had
passed on December 24 (f.o.b. shipping point) should be added to 12/31/03
inventory. The $29,000 of goods shipped (f.o.b. shipping point) on January 3,
2004, should remain part of the 12/31/03 inventory.
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 |
|
1,100
units at 23 |
25,300 |
|
Total |
$ 49,300 |
|
|
|
LIFO inventory cost: |
1,500
units at $21 |
$ 31,500 |
|
600 units at 22 |
13,200 |
|
Total |
$ 44,700 |
|
|
|
Average cost: |
1,500
at $21 |
$ 31,500 |
|
2,000
at 22 |
44,000 |
|
3,500
at 23 |
80,500 |
|
1,000 at 24 |
24,000 |
Totals |
8,000 |
$180,000 |
|
|
|
$180,000 ¸ 8,000 = $22.50 |
|
|
|
|
|
Ending inventory (2,100 X $22.50) is $47,250. |
4.
Computation
of price indexes:
12/31/03 |
$252,000 |
= 105 |
$240,000 |
12/31/04 |
$286,720 |
= 112 |
$256,000 |
Dollar-value
LIFO inventory 12/31/03:
Increase $240,000
– $200,000 = |
$ 40,000 |
|
12/31/03 price
index |
X 1.05 |
|
Increase in terms
of 105 |
42,000 |
2003 Layer |
Base inventory |
200,000 |
|
Dollar-value LIFO inventory |
$242,000 |
|
Dollar-value
LIFO inventory 12/31/04:
Increase $256,000
– $240,000 = |
$ 16,000 |
|
12/31/02 price
index |
X 1.12 |
|
Increase in terms
of 112 |
17,920 |
2004 Layer |
2003 layer |
42,000 |
|
Base inventory |
200,000 |
|
Dollar-value LIFO inventory |
$259,920 |
|
5.
The
inventoriable costs for 2004 are:
Merchandise
purchased |
|
$909,400 |
Add: Freight-in |
|
22,000 |
|
|
931,400 |
Deduct: Purchase returns |
$16,500 |
|
Purchase discounts |
6,800 |
23,300 |
Inventoriable cost |
|
$908,100 |
|
PROBLEM 8-2 |
|
James
T. Kirk Company |
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Schedule
of Adjustments |
||||||
December 31, 2004 |
||||||
|
|
|
|
Accounts
Payable |
|
|
Initial
amounts |
|
$1,520,000 |
|
$1,200,000 |
|
$8,150,000 |
Adjustments: |
|
|
|
|
|
|
1. |
|
NONE |
|
NONE |
|
(40,000) |
2. |
|
71,000 |
|
71,000 |
|
NONE |
3. |
|
30,000 |
|
NONE |
|
NONE |
4. |
|
32,000 |
|
NONE |
|
(47,000) |
5. |
|
21,000 |
|
NONE |
|
NONE |
6. |
|
27,000 |
|
NONE |
|
NONE |
7. |
|
NONE |
|
56,000 |
|
NONE |
8. |
|
3,000 |
|
6,000 |
|
NONE |
Total adjustments |
|
184,000 |
|
133,000 |
|
(87,000) |
Adjusted
amounts |
|
$1,704,000 |
|
$1,333,000 |
|
$8,063,000 |
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 $71,000 of goods
in transit from a vendor to James T. Kirk were shipped f.o.b. shipping point on
12/29/04. Title passes to the buyer as soon as goods are delivered to the
common carrier when sold f.o.b. shipping point. Therefore, these goods are
properly includable in Kirk’s inventory and accounts payable at 12/31/04. Both
inventory and accounts payable must be increased by $71,000.
3.
The work-in-process
inventory sent to an outside processor is Kirk’s property and should be
included in ending inventory. Since this inventory was not in the plant at the
time of the physical count, the inventory column must be increased by $30,000.
4.
The tools costing
$32,000 were recorded as sales ($47,000) in 2004. However, these items were
returned by customers on December 31, so 2004 net sales should be reduced by
the $47,000 return. Also, $32,000 has to be added to the inventory column since
these goods were not included in the physical count.
5.
The $21,000 of Kirk’s
tools shipped to a customer f.o.b. destination are still owned by Kirk while in
transit because title does not pass on these goods until they are received by
the buyer. Therefore, $21,000 must be added to the inventory column. No
adjustment is necessary in the sales column because the sale was properly
recorded in 2005 when the customer received the goods.
6.
The goods received
from a vendor at 5:00 p.m. on 12/31/04 should be included in the ending inventory,
but were not included in the physical count. Therefore, $27,000 must be added
to the inventory column. No adjustment is made to accounts payable, since the
invoice was included in 12/31/04 accounts payable.
7.
The $56,000 of goods
received on 12/26/04 were properly included in the physical count of inventory;
$56,000 must be added to accounts payable since the invoice was not included in
the 12/31/04 accounts payable balance.
8.
Since one-half of the
freight-in cost ($6,000) pertains to merchandise properly included in inventory
as of 12/31/04, $3,000 should be added to the inventory column. The remaining
$3,000 debit should be reflected in cost of goods sold. The full $6,000 must be
added to accounts payable since the liability was not recorded.
|
PROBLEM 8-3 |
|
(a) |
(1) |
8/10 |
||
|
|
Purchases |
9,000 |
|
|
|
Accounts Payable |
|
9,000 |
|
|
|
|
|
|
|
8/13 |
||
|
|
Accounts Payable |
1,200 |
|
|
|
Purchase Returns and Allowances |
|
1,200 |
|
|
|
|
|
|
|
8/15 |
||
|
|
Purchases |
12,000 |
|
|
|
Accounts Payable |
|
12,000 |
|
|
|
|
|
|
|
8/25 |
||
|
|
Purchases |
15,000 |
|
|
|
Accounts Payable |
|
15,000 |
|
|
|
|
|
|
|
8/28 |
||
|
|
Accounts Payable |
12,000 |
|
|
|
Cash |
|
12,000 |
|
|
|
|
|
(2) Purchases—addition
in cost of goods sold section of income statement.
Purchase
returns and allowances—deduction from purchases in cost of goods sold section of
the income statement.
Accounts
payable—current liability in the current liabilities section of the balance
sheet.
(b) |
(1) |
8/10 |
||
|
|
Purchases |
8,820 |
|
|
|
Accounts Payable ($9,000 X .98) |
|
8,820 |
|
|
|
|
|
|
|
8/13 |
||
|
|
Accounts
Payable |
1,176 |
|
|
|
Purchase Returns and Allowances |
|
1,176 |
|
|
($1,200 X .98) |
|
|
|
|
|
|
|
|
|
8/15 |
||
|
|
Purchases |
11,880 |
|
|
|
Accounts
Payable ($12,000 X .99) |
|
11,880 |
|
|
|
|
|
|
|
8/25 |
||
|
|
Purchases |
14,700 |
|
|
|
Accounts
Payable ($15,000 X .98) |
|
14,700 |
|
|
|
|
|
|
|
8/28 |
||
|
|
Accounts Payable |
11,880 |
|
|
|
Purchase Discounts Lost |
120 |
|
|
|
Cash |
|
12,000 |
|
|
|
|
|
|
2. |
8/31 |
||
|
|
Purchase Discounts Lost |
156 |
|
|
|
Accounts
Payable (.02 X [$9,000 – $1,200]) |
|
|
|
|
|
|
|
|
3. |
Same as part (a) (2) except: |
|
|
|
|
Purchase Discounts Lost—treat as
financial expense in income statement. |
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||
(c) |
The second method is better
theoretically because it results in the inventory being carried net of
purchase discounts, and purchase discounts not taken are shown as an expense.
The first method is normally used, however, for practical reasons. |
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|
|
|
PROBLEM 8-9 |
|
(a) Adis
Abeba Wholesalers Inc. |
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Computation
of Internal Conversion Price Index |
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for
Inventory Pool No. 1 Double Extension Method |
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Current
inventory at |
|
|
|
|
|
current-year cost |
|
|
|
|
|
Product A |
17,000 X $35
= |
$595,000 |
|
13,000 X $40
= |
$520,000 |
Product B |
9,000 X $26
= |
234,000 |
|
10,000 X $32
= |
320,000 |
|
|
$829,000 |
|
|
$840,000 |
Current inventory at |
|
|
|
|
|
base cost |
|
|
|
|
|
Product A |
17,000 X $30
= |
$510,000 |
|
13,000 X $30
= |
$390,000 |
Product B |
9,000 X $25
= |
225,000 |
|
10,000 X $25
= |
250,000 |
|
|
$735,000 |
|
|
$640,000 |
|
|
|
|
|
|
Conversion price index $829,000 ¸$735,000 = 1.13 $840,000 ¸ $640,000 = 1.31 |
(b) Adis
Abeba Wholesalers Inc. |
|||||||
Computation
of Inventory Amounts |
|||||||
under
Dollar-Value LIFO Method for Inventory Pool No. 1 |
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at
December 31, 2003 and 2004 |
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|
Current
Inventory at base cost |
|
|
|
|
||
December
31, 2003 |
|
|
|
|
|
|
|
Base inventory |
$525,000 |
|
|
1.00 |
|
|
$525,000 |
2003 layer ($735,000 – $525,000) |
210,000 |
|
|
1.13 |
(a) |
|
237,300 |
Total |
$735,000 |
(a) |
|
|
|
|
$762,300 |
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
|
|
|
|
|
Base inventory |
$525,000 |
|
|
1.00 |
|
|
$525,000 |
2003 layer (remaining) |
115,000 |
(b) |
|
1.13 |
(a) |
|
129,950 |
Total |
$640,000 |
(a) |
|
|
|
|
$654,950 |
(a)
Per schedule for
instruction (a).
(b) After liquidation of $95,000 base cost ($735,000 – $640,000).
|
PROBLEM 8-11 |
|
(a)
Schedule A
|
A |
|
B |
|
C |
|
D |
|
|
|
|
|
|
|
Change from Prior Year |
|
|
|
|
|
|
|
|
2000 |
$
80,000 |
|
1.00 |
|
$
80,000 |
|
— |
2001 |
115,500 |
|
1.05 |
|
110,000 |
|
$+30,000 |
2002 |
108,000 |
|
1.20 |
|
90,000 |
|
(20,000) |
2003 |
131,300 |
|
1.30 |
|
101,000 |
|
+11,000 |
2004 |
154,000 |
|
1.40 |
|
110,000 |
|
+9,000 |
2005 |
174,000 |
|
1.45 |
|
120,000 |
|
+10,000 |
Schedule B
Ending
Inventory-Dollar-Value LIFO:
2000 |
$80,000 |
|
2004 |
$80,000 @ $1.00 = |
$
80,000 |
2001 |
$80,000 @ $1.00 = |
$
80,000 |
|
10,000 @
1.05 = |
10,500 |
|
30,000 @
1.05 = |
31,500 |
|
11,000 @
1.30 = |
14,300 |
|
|
$111,500 |
|
9,000 @ 1.40 = |
12,600 |
2002 |
$80,000 @ 1.00 = |
$
80,000 |
|
|
$117,400 |
|
10,000 @
1.05 = |
10,500 |
2005 |
$80,000 @ 1.00 = |
$
80,000 |
|
|
$
90,500 |
|
10,000 @
1.05 = |
10,500 |
2003 |
$80,000 @ 1.00 = |
$
80,000 |
|
11,000 @ 1.30 = |
14,300 |
|
10,000 @
1.05 = |
10,500 |
|
9,000 @ 1.40 = |
12,600 |
|
11,000 @
1.30 = |
14,300 |
|
10,000 @
1.45 = |
14,500 |
|
|
$104,800 |
|
|
$131,900 |
(b)
To: Warren Dunn
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.
Because dollar-value LIFO
combines various related costs in groups or “pools,” no attempt is made to keep
track of each individual inventory item. Instead, each group of annual
purchases forms a new cost layer of inventory. Further, the most recent layer
will be the first one carried to cost of goods sold during this period.
However, inflation distorts any
cost of purchases made in subsequent years. To counteract the effect of
inflation, this method measures the incremental change in each year’s ending
inventory in terms of the first year’s (base year’s) costs. This is done by
adjusting subsequent cost layers, through the use of a price index, to the base
year’s inventory costs. Only after this adjustment can the new layer be valued
at current-year 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. The difference between the current year’s and
the previous year’s ending inventory expressed in base-year costs usually
represents any inventory which has been purchased but not sold during the year,
that is, the newest LIFO layer. This difference is then readjusted to express
this most recent layer in current-year costs.
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 price index (Column B). For 2000,
this adjustment would be $80,000/100% or $80,000; for 2001, it would be
$115,500/105%, etc. The quotient (Column C) is thus expressed in base-year
costs.
2.
Next, compute the
difference between the previous and the current years’ ending inventory in
base-year costs. Simply subtract the current year’s base-year inventory from
the previous year’s. In 2001, the change is +$30,000 (Column D).
3.
Finally, express this
increment in current-year terms. For the second year, this computation is
straightforward: the base-year ending inventory value is added to the
difference in #2 above multiplied by the price index. For 2001, the ending
inventory for dollar-value LIFO would equal $80,000 of base-year inventory plus
the increment ($30,000) times the price index (1.05) or $111,500. The product
is the most recent layer expressed in current-year prices. See Schedule B.
Be careful with this last step in
subsequent years. Notice that, in 2002, the change from the previous year is
–$20,000, which causes the 2001 layer to be eroded during the period. Thus, the
2002 ending inventory is valued at the original base-year cost $80,000 plus the
remainder valued at the 2001 price index, $10,000 times 1.05. See 2002
computation on Schedule B.
When valuing ending inventory,
remember to include each yearly layer adjusted by that year’s price index.
Refer to Schedule B for 2001. Notice that the +$11,000 change from the 2003
ending inventory indicates that the 2001 layer was not further eroded. Thus,
ending inventory for 2003 would value the first $80,000 worth of inventory at
the base-year price index (1.00), the next $10,000 (the remainder of the 2001
layer) at the 2001 price index (1.05), and the last $11,000 at the 2003 price
index (1.30).
These instructions should help
you implement dollar-value LIFO in your inventory valuation.