eBook Navigation

Intermediate Accounting eBook

6/e

Content

Resources
Content

Chapter8: Inventories: Measurement

Exercises

An alternate exercise and problem set is available on the text website: www.mhhe.com/spiceland6e

E 8-1

Perpetual inventory system; journal entries

● LO1

John's Specialty Store uses a perpetual inventory system. The following are some inventory transactions for the month of May 2011:

1.		John's purchased merchandise on account for $5,000. Freight charges of $300 were paid in cash.
2.		John's returned some of the merchandise purchased in (1). The cost of the merchandise was $600 and John's account was credited by the supplier.
3.		Merchandise costing $2,800 was sold for $5,200 in cash.

p. 428

Required:

Prepare the necessary journal entries to record these transactions.

E 8-2

Periodic inventory system; journal entries

● LO1

[This is a variation of the previous exercise modified to focus on the periodic inventory system.]

John's Specialty Store uses a periodic inventory system. The following are some inventory transactions for the month of May 2011:

1.		John's purchased merchandise on account for $5,000. Freight charges of $300 were paid in cash.
2.		John's returned some of the merchandise purchased in (1). The cost of the merchandise was $600 and John's account was credited by the supplier.
3.		Merchandise costing $2,800 was sold for $5,200 in cash.

Required:

Prepare the necessary journal entries to record these transactions.

E 8-3

Determining cost of goods sold; periodic inventory system

● LO1

Askew Company uses a periodic inventory system. The June 30, 2011, year-end trial balance for the company contained the following information:

In addition, you determine that the June 30, 2011, inventory balance is $40,000.

Required:

1.		Calculate the cost of goods sold for the Askew Company for the year ending June 30, 2011.
2.		Prepare the year-end adjusting entry to record cost of goods sold.

E 8-4

Perpetual and periodic inventory systems compared

● LO1

The following information is available for the Johnson Corporation for 2011:

Required:

Applying both a perpetual and a periodic inventory system, prepare the journal entries that summarize the transactions that created these balances. Include all end-of-period adjusting entries indicated.

E 8-5

Periodic inventory system; missing data

● LO1

The Playa Company uses a periodic inventory system. The following information is taken from Playa's records. Certain data have been intentionally omitted. ($ in thousands)

Required:

Determine the missing numbers. Show computations where appropriate.

p. 429

E 8-6

Goods in transit

● LO2

The Kwok Company's inventory balance on December 31, 2011, was $165,000 (based on a 12/31/11 physical count) before considering the following transactions:

1.		Goods shipped to Kwok f.o.b. destination on December 20, 2011, were received on January 4, 2012. The invoice cost was $30,000.
2.		Goods shipped to Kwok f.o.b. shipping point on December 28, 2011, were received on January 5, 2012. The invoice cost was $17,000.
3.		Goods shipped from Kwok to a customer f.o.b. destination on December 27, 2011, were received by the customer on January 3, 2012. The sales price was $40,000 and the merchandise cost $22,000.
4.		Goods shipped from Kwok to a customer f.o.b. destination on December 26, 2011, were received by the customer on December 30, 2011. The sales price was $20,000 and the merchandise cost $13,000.
5.		Goods shipped from Kwok to a customer f.o.b. shipping point on December 28, 2011, were received by the customer on January 4, 2012. The sales price was $25,000 and the merchandise cost $12,000.

Required:

Determine the correct inventory amount to be reported in Kwok's 2011 balance sheet.

E 8-7

Goods in transit; consignment

● LO2

The December 31, 2011, year-end inventory balance of the Raymond Corporation is $210,000. You have been asked to review the following transactions to determine if they have been correctly recorded.

1.		Goods shipped to Raymond f.o.b. destination on December 26, 2011, were received on January 2, 2012. The invoice cost of $30,000 is included in the preliminary inventory balance.
2.		At year-end, Raymond held $14,000 of merchandise on consignment from the Harrison Company. This merchandise is included in the preliminary inventory balance.
3.		On December 29, merchandise costing $6,000 was shipped to a customer f.o.b. shipping point and arrived at the customer's location on January 3, 2012. The merchandise is not included in the preliminary inventory balance.
4.		At year-end, Raymond had merchandise costing $15,000 on consignment with the Joclyn Corporation. The merchandise is not included in the preliminary inventory balance.

Required:

Determine the correct inventory amount to be reported in Raymond's 2011 balance sheet.

E 8-8

Physical quantities and costs included in inventory

● LO2

The Phoenix Corporation's fiscal year ends on December 31. Phoenix determines inventory quantity by a physical count of inventory on hand at the close of business on December 31. The company's controller has asked for your help in deciding if the following items should be included in the year-end inventory count.

1.		Merchandise held on consignment for Trout Creek Clothing.
2.		Goods shipped f.o.b. destination on December 28 that arrived at the customer's location on January 4.
3.		Goods purchased from a vendor shipped f.o.b. shipping point on December 26 that arrived on January 3.
4.		Goods shipped f.o.b. shipping point on December 28 that arrived at the customer's location on January 5.
5.		Phoenix had merchandise on consignment at Lisa's Markets, Inc.
6.		Goods purchased from a vendor shipped f.o.b. destination on December 27 that arrived on January 3.
7.		Goods sold to a customer sitting on the loading dock on December 31 waiting to be picked up by the customer.
8.		Freight charges on goods purchased in 3.

Required:

Determine if each of the items above should be included or excluded from the company's year-end inventory.

E 8-9

Purchase discounts; the gross method

● LO3

On July 15, 2011, the Nixon Car Company purchased 1,000 tires from the Harwell Company for $50 each. The terms of the sale were 2/10, n/30. Nixon uses a periodic inventory system and the gross method of accounting for purchase discounts.

Required:

1.		Prepare the journal entries to record the purchase on July 15 and payment on July 23, 2011.
2.		Prepare the journal entry to record the payment on August 15, 2011.
3.		If Nixon instead uses a perpetual inventory system, explain any changes to the journal entries created in requirements 1 and 2.

E 8-10

Purchase discounts; the net method

● LO3

[This is a variation Exercise 8-9 modified to focus on the net method of accounting for purchase discounts.]

p. 430

Required:

1.		Prepare the journal entries to record the purchase on July 15 and payment on July 23, 2011.
2.		Prepare the journal entry to record the payment on August 15, 2011.
3.		If Nixon instead uses a perpetual inventory system, explain any changes to the journal entries created in requirements 1 and 2.

E 8-11

Trade and purchase discounts; the gross method and the net method compared

● LO3

Tracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, 2011. The units have a list price of $500 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30. Thomas uses a periodic inventory system.

Required:

1.		Prepare the journal entries to record the purchase by Thomas on November 17 and payment on November 26, 2011, using the gross method of accounting for purchase discounts.
2.		Prepare the journal entry to record the payment on December 15, 2011, using the gross method of accounting for purchase discounts.
3.		Repeat requirements 1 and 2 using the net method of accounting for purchase discounts.

E 8-12

FASB codification research

● LO2 LO3

Access the FASB's Codification Research System at the FASB website (www.fasb.org). Determine the specific citation for each of the following items:

1.		Define the meaning of cost as it applies to the initial measurement of inventory.
2.		Indicate the circumstances when it is appropriate to initially measure agricultural inventory at fair value.
3.		What is a major objective of accounting for inventory?
4.		Are abnormal freight charges included in the cost of inventory?

E 8-13

Inventory cost flow methods; periodic system

● LO1 LO4

Altira Corporation uses a periodic inventory system. The following information related to its merchandise inventory during the month of August 2011 is available:

Aug. 1

Inventory on hand—2,000 units; cost $6.10 each.

Purchased 10,000 units for $5.50 each.

Sold 8,000 units for $12.00 each.

Purchased 6,000 units for $5.00 each.

Sold 7,000 units for $11.00 each.

Inventory on hand—3,000 units.

Required:

Determine the inventory balance Altira would report in its August 31, 2011, balance sheet and the cost of goods sold it would report in its August 2011 income statement using each of the following cost flow methods:

1.		First-in, first-out (FIFO)
2.		Last-in, first-out (LIFO)
3.		Average cost

E 8-14

Inventory cost flow methods; perpetual system

● LO1 LO4

[This is a variation of Exercise 8-13 modified to focus on the perpetual inventory system and alternative cost flow methods.]

Altira Corporation uses a perpetual inventory system. The following transactions affected its merchandise inventory during the month of August 2011:

Aug. 1

Inventory on hand—2,000 units; cost $6.10 each.

Purchased 10,000 units for $5.50 each.

Sold 8,000 units for $12.00 each.

Purchased 6,000 units for $5.00 each.

Sold 7,000 units for $11.00 each.

Inventory on hand—3,000 units.

p. 431

Required:

1.		First-in, first-out (FIFO)
2.		Last-in, first-out (LIFO)
3.		Average cost

E 8-15

Comparison of FIFO and LIFO; periodic system

● LO1 LO4

Alta Ski Company's inventory records contained the following information regarding its latest ski model. The company uses a periodic inventory system.

Required:

1.		Which method, FIFO or LIFO, will result in the highest cost of goods sold figure for January 2011? Why? Which method will result in the highest ending inventory balance? Why?
2.		Compute cost of goods sold for January and the ending inventory using both the FIFO and LIFO methods.

E 8-16

Average cost method; periodic and perpetual systems

● LO1 LO4

The following information is taken from the inventory records of the CNB Company:

Required:

1.		Assuming that CNB uses a periodic inventory system and employs the average cost method, determine cost of goods sold for September and September's ending inventory.
2.		Repeat requirement 1 assuming that the company uses a perpetual inventory system.

E 8-17

FIFO, LIFO, and average cost methods

● LO1 LO4

Causwell Company began 2011 with 10,000 units of inventory on hand. The cost of each unit was $5.00. During 2011 an additional 30,000 units were purchased at a single unit cost, and 20,000 units remained on hand at the end of 2011 (20,000 units therefore were sold during 2011). Causwell uses a periodic inventory system. Cost of goods sold for 2011, applying the average cost method, is $115,000. The company is interested in determining what cost of goods sold would have been if the FIFO or LIFO methods were used.

Required:

1.		Determine the cost of goods sold for 2011 using the FIFO method. [Hint: Determine the cost per unit of 2011 purchases.]
2.		Determine the cost of goods sold for 2011 using the LIFO method.

E 8-18

Supplemental LIFO disclosures; LIFO reserve; Steelcase

● LO6

Steelcase Inc. is the global leader in providing furniture for office environments. The company uses the LIFO inventory method for external reporting and for income tax purposes but maintains its internal records using FIFO. The following disclosure note was included in a recent annual report:

Real World Financials

p. 432

The company's income statement reported cost of goods sold of $2,236.7 million for the fiscal year ended February 27, 2009.

Required:

1.		Steelcase adjusts the LIFO reserve at the end of its fiscal year. Prepare the February 27, 2009, adjusting entry to make the cost of goods sold adjustment.
2.		If Steelcase had used FIFO to value its inventories, what would cost of goods sold have been for the 2009 fiscal year?

E 8-19

LIFO liquidation

● LO1 LO6

The Reuschel Company began 2011 with inventory of 10,000 units at a cost of $7 per unit. During 2011, 50,000 units were purchased for $8.50 each. Sales for the year totaled 54,000 units leaving 6,000 units on hand at the end of 2011. Reuschel uses a periodic inventory system and the LIFO inventory cost method.

Required:

1.		Calculate cost of goods sold for 2011.
2.		From a financial reporting perspective, what problem is created by the use of LIFO in this situation? Describe the disclosure required to report the effects of this problem.

E 8-20

FASB codification research

● LO6

The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles.

Required:

1.		Obtain the relevant authoritative literature on the disclosure of accounting policies using the FASB's Codification Research System at the FASB website (www.fasb.org).
2.		What is the specific citation that describes the disclosure requirements that must be made by publicly traded companies for a LIFO liquidation?
3.		Describe the disclosure requirements.

E 8-21

Ratio analysis; Home Depot and Lowe's

● LO7

The table below contains selected information from recent financial statements of The Home Depot, Inc., and Lowe's Companies, Inc., two companies in the home improvement retail industry ($ in millions):

Real World Financials

Required:

Calculate the gross profit ratio, the inventory turnover ratio, and the average days in inventory for the two companies using the most recent fiscal year data. Compare your calculations for the two companies, taking into account the industry averages.

E 8-22

Dollar-value LIFO

● LO8

On January 1, 2011, the Haskins Company adopted the dollar-value LIFO method for its one inventory pool. The pool's value on this date was $660,000. The 2011 and 2012 ending inventory valued at year-end costs were $690,000 and $760,000, respectively. The appropriate cost indexes are 1.04 for 2011 and 1.08 for 2012.

Required:

Calculate the inventory value at the end of 2011 and 2012 using the dollar-value LIFO method.

E 8-23

Dollar-value LIFO

● LO8

Mercury Company has only one inventory pool. On December 31, 2011, Mercury adopted the dollar-value LIFO inventory method. The inventory on that date using the dollar-value LIFO method was $200,000. Inventory data are as follows:

p. 433

Required:

Compute the inventory at December 31, 2012, 2013, and 2014, using the dollar-value LIFO method.

(AICPA adapted)

E 8-24

Concepts; terminology

● LO1 through LO5

Listed below are several terms and phrases associated with inventory measurement. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it.

2011 McGraw-Hill Higher Education

Any use is subject to the Terms of Use and Privacy Notice.
McGraw-Hill Higher Education is one of the many fine businesses of The McGraw-Hill Companies.

Connect

eBook Navigation

Intermediate Accounting eBook

6/e

Content

Chapter8: Inventories: Measurement

Exercises