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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.

 

 

 

 

 

 

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

 

            (To reverse sale entry in 2004)

 

 

 

 

 

 

 

Transaction 4

 

 

 

            Purchases (Inventory).....................................................

15,630

 

 

                        Accounts Payable.............................................................................

15,630

 

            (To record purchase of merchandise
               in 2004)

 

 

 

 

 

 

 

Transaction 8

 

 

 

            Sales Returns and Allowances.......................................

2,600

 

 

                        Accounts Receivable........................................................................

2,600

 

EXERCISE 8-13

 

(a)

Cost of Goods Sold

 

Ending Inventory

 

(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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(b)

 

LIFO

100 @ $10 =

$  1,000

 

 

 

 

 

 

300 @ $12 =

3,600

 

 

 

 

 

 

200 @ $13 =

    2,600

 

 

 

 

 

 

 

$  7,200

 

 

 

 

 (c)

Sales

$25,400

= ($24 X $200) + ($25 X $500) +

       ($27 X $300)

 

Cost of Goods Sold

  11,400

 

 

 

 

Gross Profit (FIFO)

$14,000

 

 

 

 

 

 

 

 

 

 

 

 

Note:  FIFO periodic and FIFO perpetual provide the same gross profit and inventory value.

 

 

(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.

 

 

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

 

 


Current $

 


Price Index

 


Base Year $

 

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

 

 

 

 

 

 

 

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

Schedule of Adjustments

December 31, 2004

 

 


Inventory

 

Accounts Payable

 


Net Sales

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])

 


156

 

 

 

 

 

 

3.

Same as part (a) (2) except:

 

 

 

 

Purchase Discounts Lost—treat as financial expense in income statement.

 

 

 

(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.

 

 

 

 

PROBLEM 8-9

 

 

(a)                                                        Adis Abeba Wholesalers Inc.

Computation of Internal Conversion Price Index

for Inventory Pool No. 1 Double Extension Method

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

at December 31, 2003 and 2004

 

Current Inventory at base cost

 


Conversion price index

 


Inventory at LIFO 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

 


Current $

 


Price Index

 


Base-Year $

 

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.