12 Accounting
Questions
E8-8 E8-9 E8-10
E8-11 E8-12 E8-13 E8-14 E8-15 E8-16 E8-17 E8-18 E8-19 E8-20 E8-21
E8-8
(Purchases Recorded, Gross Method)
Cruise
Industries purchased $10,800 of merchandise on February 1, 2014, subject to a
trade discount of 10% and with credit terms of 3/15, n/60. It returned $2,500
(gross price before trade or cash discount) on February 4. The invoice was paid
on February 13.
Instructions
(a)Assuming that Cruise uses the perpetual method for recording merchandise
transactions, record the purchase, return, and payment using the gross method.
(b)Assuming that Cruise uses the periodic method for recording merchandise
transactions, record the purchase, return, and payment using the gross method.
(c)At what amount would the purchase on February 1 be recorded if the net
method were used?
E8-9
(Periodic versus Perpetual Entries)
Fong Sai-Yuk
Company sells one product. Presented below is information for January for Fong
Sai-Yuk Company.
|
Jan. 1
|
Inventory
|
100 units at $5 each
|
|
4
|
Sale
|
80 units at $8 each
|
|
11
|
Purchase
|
150 units at $6 each
|
|
13
|
Sale
|
120 units at $8.75 each
|
|
20
|
Purchase
|
160 units at $7 each
|
|
27
|
Sale
|
100 units at $9 each
|
Fong Sai-Yuk
uses the FIFO cost flow assumption. All purchases and sales are on account.
Instructions
(a)Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary
journal entries, including the end-of-month closing entry to record cost of
goods sold. A physical count indicates that the ending inventory for January is
110 units.
(b)Compute gross profit using the periodic system.
(c)Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary
journal entries.
(d)Compute gross profit using the perpetual system.
E8-10
(Inventory Errors—Periodic)
Ann M. Martin
Company makes the following errors during the current year. (Evaluate each case
independently and assume ending inventory in the following year is correctly
stated.)
1. Ending inventory is overstated, but purchases and related accounts
payable are recorded correctly.
2. Both ending inventory and purchases and related accounts payable are
understated. (Assume this purchase was recorded and paid for in the following
year.)
3. Ending inventory is correct, but a purchase on account was not recorded.
(Assume this purchase was recorded and paid for in the following year.)
Instructions
Indicate the
effect of each of these errors on working capital, current ratio (assume that
the current ratio is greater than 1), retained earnings, and net income for the
current year and the subsequent year.
E8-11
(Inventory Errors)
At December
31, 2013, Stacy McGill Corporation reported current assets of $370,000 and
current liabilities of $200,000. The following items may have been recorded
incorrectly.
1. Goods purchased costing $22,000
were shipped f.o.b. shipping point by a supplier on December 28. McGill
received and recorded the invoice on December 29, 2013, but the goods were not
included in McGill’s physical count of inventory because they were not received
until January 4, 2014.
2. Goods purchased costing $15,000 were shipped f.o.b. destination by a
supplier on December 26. McGill received and recorded the invoice on December
31, but the goods were not included in McGill’s 2013 physical count of
inventory because they were not received until January 2, 2014.
3. Goods held on consignment from Claudia Kishi Company were included in
McGill’s December 31, 2013, physical count of inventory at $13,000.
4. Freight-in of $3,000 was debited to advertising expense on December 28,
2013.
Instructions
(a)Compute the current ratio based on McGill’s balance sheet.
(b) Recompute the current ratio after corrections are made.
(c) By what amount will income (before taxes) be adjusted up or down as a
result of the corrections?
E8-12
(Inventory Errors)
The net
income per books of Linda Patrick Company was determined without knowledge of
the errors indicated.
|
Year
|
Net Income per Books
|
Error in Ending Inventory
|
|
|
2009
|
$50,000
|
Overstated
|
$ 3,000
|
|
2010
|
52,000
|
Overstated
|
9,000
|
|
2011
|
54,000
|
Understated
|
11,000
|
|
2012
|
56,000
|
No error
|
|
|
2013
|
58,000
|
Understated
|
2,000
|
|
2014
|
60,000
|
Overstated
|
8,000
|
Instructions
Prepare a
worksheet to show the adjusted net income figure for each of the 6 years after
taking into account the inventory errors.
E8-13
(FIFO and LIFO—Periodic and Perpetual)
Inventory
information for Part 311 of Monique Aaron Corp. discloses the following
information for the month of June.
|
June 1
|
Balance
|
300 units @ $10
|
June 10
|
Sold
|
200 units @ $24
|
|
11
|
Purchased
|
800 units @ $12
|
15
|
Sold
|
500 units @ $25
|
|
20
|
Purchased
|
500 units @ $13
|
27
|
Sold
|
300 units @ $27
|
Instructions
(a)Assuming that the periodic inventory method is used, compute the cost of
goods sold and ending inventory under (1) LIFO and (2) FIFO.
(b)Assuming that the perpetual inventory method is used and costs are
computed at the time of each withdrawal, what is the value of the ending
inventory at LIFO?
(c)Assuming that the perpetual inventory method is used and costs are
computed at the time of each withdrawal, what is the gross profit if the
inventory is valued at FIFO?
(d)Why is it stated that LIFO usually produces a lower gross profit than
FIFO?
E8-14 (FIFO,
LIFO and Average-Cost Determination)
John Adams
Company’s record of transactions for the month of April was as follows.
|
Purchases
|
Sales
|
|||||
|
April 1
|
(balance on hand)
|
600
|
@ $ 6.00
|
April 3
|
500
|
@ $10.00
|
|
4
|
|
1,500
|
@ 6.08
|
9
|
1,400
|
@ 10.00
|
|
8
|
|
800
|
@ 6.40
|
11
|
600
|
@ 11.00
|
|
13
|
|
1,200
|
@ 6.50
|
23
|
1,200
|
@ 11.00
|
|
21
|
|
700
|
@ 6.60
|
27
|
900
|
@ 12.00
|
|
29
|
|
500
|
@ 6.79
|
|
4,600
|
|
|
|
|
5,300
|
|
|
|
|
Instructions
(a)Assuming that periodic inventory records are kept in units only, compute
the inventory at April 30 using (1) LIFO and (2) average-cost.
(b)Assuming that perpetual inventory records are kept in dollars, determine
the inventory using (1) FIFO and (2) LIFO.
(c)Compute cost of goods sold assuming periodic inventory procedures and
inventory priced at FIFO.
(d)In an inflationary period, which inventory method—FIFO, LIFO,
average-cost—will show the highest net income?
E8-15 (FIFO,
LIFO, Average-Cost Inventory)
Shania Twain
Company was formed on December 1, 2013. The following information is available
from Twain’s inventory records for Product BAP. A physical inventory on March
31, 2014, shows 1,600 units on hand.
|
|
Units
|
Unit Cost
|
|
January 1, 2014 (beginning
inventory)
|
600
|
$ 8.00
|
|
Purchases:
|
|
|
|
January
5, 2014
|
1,200
|
9.00
|
|
January
25, 2014
|
1,300
|
10.00
|
|
February
16, 2014
|
800
|
11.00
|
|
March
26, 2014
|
600
|
12.00
|
Instructions
Prepare
schedules to compute the ending inventory at March 31, 2014, under each of the
following inventory methods.
(a) FIFO.
(b) LIFO.
(c) Weighted-average (round unit costs to two decimal places).
E8-16
(Compute FIFO, LIFO, Average-Cost—Periodic)
Presented
below is information related to Blowfish radios for the Hootie Company for the
month of July.
|
Date
|
Transaction
|
Unit In
|
Units Cost
|
Total
|
Units Sold
|
Selling Price
|
Total
|
|
July 1
|
Balance
|
100
|
$4.10
|
$ 410
|
|
|
|
|
6
|
Purchase
|
800
|
4.20
|
3,360
|
|
|
|
|
7
|
Sale
|
|
|
|
300
|
$7.00
|
$ 2,100
|
|
10
|
Sale
|
|
|
|
300
|
7.30
|
2,190
|
|
12
|
Purchase
|
400
|
4.50
|
1,800
|
|
|
|
|
15
|
Sale
|
|
|
|
200
|
7.40
|
1,480
|
|
18
|
Purchase
|
300
|
4.60
|
1,380
|
|
|
|
|
22
|
Sale
|
|
|
|
400
|
7.40
|
2,960
|
|
25
|
Purchase
|
500
|
4.58
|
2,290
|
|
|
|
|
30
|
Sale
|
|
|
|
200
|
7.50
|
1,500
|
|
|
Totals
|
2,100
|
|
$9,240
|
1,400
|
|
$10,230
|
Instructions
(a)Assuming that the periodic inventory method is used,
compute the inventory cost at July 31 under each of the following cost flow
assumptions.
(1) FIFO.
(2) LIFO.
(3 ) Weighted-average.
(b) Answer the following questions.
(1)Which of the methods used above will yield the lowest figure for gross
profit for the income statement? Explain why.
(2)Which of the methods used above will yield the lowest figure for ending
inventory for the balance sheet? Explain why.
E8-17 (FIFO
and LIFO—Periodic and Perpetual)
The
following is a record of Pervis Ellison Company’s transactions for Boston
Teapots for the month of May 2014.
|
May 1
|
Balance 400 units @ $20
|
May 10
|
Sale 300 units @ $38
|
|
12
|
Purchase 600 units @ $25
|
20
|
Sale 540 units @ $38
|
|
28
|
Purchase 400 units @ $30
|
|
|
Instructions
(a)Assuming that perpetual inventories are not maintained and
that a physical count at the end of the month shows 560 units on hand, what is
the cost of the ending inventory using (1) FIFO and (2) LIFO?
(b)Assuming that perpetual records are maintained and they tie into the
general ledger, calculate the ending inventory using (1) FIFO and (2) LIFO.
E8-18 (FIFO
and LIFO; Income Statement Presentation)
The board of
directors of Ichiro Corporation is considering whether or not it should
instruct the accounting department to shift from a first-in, first-out (FIFO)
basis of pricing inventories to a last-in, first-out (LIFO) basis. The following
information is available.
|
Sales
|
21,000 units @ $50
|
|
Inventory, January 1
|
6,000 units @ 20
|
|
Purchases
|
6,000 units @ 22
|
|
|
10,000 units @ 25
|
|
|
7,000 units @ 30
|
|
Inventory, December 31
|
8,000 units @ ?
|
|
Operating expenses
|
$200,000
|
Instructions
Prepare a
condensed income statement for the year on both bases for comparative purposes.
E8-19 (FIFO
and LIFO Effects)
You are the
vice president of finance of Sandy Alomar Corporation, a retail company that
prepared two different schedules of gross margin for the first quarter ended
March 31, 2014. These schedules appear below.
|
|
Sales ($5 per unit)
|
Cost of Goods Sold
|
Gross Margin
|
|
Schedule 1
|
$150,000
|
$124,900
|
$25,100
|
|
Schedule 2
|
150,000
|
129,400
|
20,600
|
The
computation of cost of goods sold in each schedule is based on the following
data.
|
|
Units
|
Cost per Unit
|
Total Cost
|
|
Beginning inventory, January 1
|
10,000
|
$4.00
|
$40,000
|
|
Purchase, January 10
|
8,000
|
4.20
|
33,600
|
|
Purchase, January 30
|
6,000
|
4.25
|
25,500
|
|
Purchase, February 11
|
9,000
|
4.30
|
38,700
|
|
Purchase, March 17
|
11,000
|
4.40
|
48,400
|
Jane
Torville, the president of the corporation, cannot understand how two different
gross margins can be computed from the same set of data. As the vice president
of finance, you have explained to Ms. Torville that the two schedules are based
on different assumptions concerning the flow of inventory costs, i.e., FIFO and
LIFO. Schedules 1 and 2 were not necessarily prepared in this sequence of cost
flow assumptions.
Instructions
Prepare two
separate schedules computing cost of goods sold and supporting schedules
showing the composition of the ending inventory under both cost flow
assumptions.
E8-20 (FIFO
and LIFO—Periodic)
Johnny
Football Shop began operations on January 2, 2014. The following stock record
card for footballs was taken from the records at the end of the year.
|
Date
|
Voucher
|
Terms
|
Units Received
|
Unit Invoice Cost
|
Gross Invoice Amount
|
|
1/15
|
10624
|
Net 30
|
50
|
$ 20
|
$ 1,000
|
|
3/15
|
11437
|
1/5, net 30
|
65
|
16
|
1,040
|
|
6/20
|
21332
|
1/10, net 30
|
90
|
15
|
1,350
|
|
9/12
|
27644
|
1/10, net 30
|
84
|
12
|
1,008
|
|
11/24
|
31269
|
1/10, net 30
|
76
|
11
|
836
|
|
|
Totals
|
|
365
|
|
$ 5,234
|
A physical
inventory on December 31, 2014, reveals that 100 footballs were in stock. The
bookkeeper informs you that all the discounts were taken. Assume that Johnny
Football Shop uses the invoice price less discount for recording purchases.
Instructions
(a)Compute the December 31, 2014, inventory using the FIFO method.
(b)Compute the 2014 cost of goods sold using the LIFO method.
(c)What method would you recommend to the owner to minimize income taxes in
2014, using the inventory information for footballs as a guide?
E8-21 (LIFO
Effect)
The
following example was provided to encourage the use of the LIFO method. In a
nutshell, LIFO subtracts inflation from inventory costs, deducts it from
taxable income, and records it in a LIFO reserve account on the books. The LIFO
benefit grows as inflation widens the gap between current-year and past-year
(minus inflation) inventory costs. This gap is:
|
|
With LIFO
|
Without LIFO
|
|
Revenues
|
$3,200,000
|
$3,200,000
|
|
Cost of goods sold
|
2,800,000
|
2,800,000
|
|
Operating expenses
|
150,000
|
150,000
|
|
Operating income
|
250,000
|
250,000
|
|
LIFO adjustment
|
40,000
|
0
|
|
Taxable income
|
$ 210,000
|
$ 250,000
|
|
Income taxes @ 36%
|
$ 75,600
|
$ 90,000
|
|
Cash flow
|
$ 174,400
|
$ 160,000
|
|
Extra cash
|
$ 14,400
|
0
|
|
Increased cash flow
|
9%
|
0%
|
Instructions
(a)Explain what is meant by the LIFO reserve account.
(b)How does LIFO subtract inflation from inventory costs?
(c)Explain how the cash flow of $174,400 in this example was computed.
Explain why this amount may not be correct.
(d)Why does a company that uses LIFO have extra cash? Explain whether this
situation will always exist.
TUTORIAL PREVIEW
Prepare a
condensed income statement for the year on both bases for comparative purposes.
|
|
First-in, first-out
|
|
Last-in, first-out
|
||
|
Sales revenue
|
|
$1,050,000
|
|
|
$1,050,000
|
|
Cost of goods sold:
|
|
|
|
|
|
|
Inventory, Jan. 1
|
$120,000
|
|
|
$120,000
|
|
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