Chapter 6
Day 1:
Page 302 – BE6-1
Helgeson Company has identified the following items for possible inclusion when taking a physical inventory. Indicate whether each item should be included or excluded from the inventory.
1. Goods shipped on consignment by Helgeson to another company
2. Goods in transit from a supplier, shipped FOB destination
3. Goods sold but being held for customer pickup
4. Goods held on consignment from another company
5. Goods in transit to a customer, shipped FOB destination
Page 302 – BE6-2
Mary Ann’s Hat Shop recently purchased a shipment of hats from a wholesaler. The cost of the hats was $3,000. Mary Ann’s was also required to pay freight charges of $70. In addition, Mary Ann’s paid $100 to cover the travel expenses of an employee who negotiated the purchase of the hats. Calculate the cost of this inventory for financial reporting purposes. Briefly explain your reasoning.
Page 307-308 – P6-1A
Kananaskis Country Company is trying to determine the value of its ending inventory as at February 28, 2003, the company’s year end. The following transactions occurred, and the accountant asked for your help in determining whether these transactions should be recorded or not:
1. On February 26, Kananaskis shipped goods costing $800 to a customer and charged the customer $1,000. The goods were shipped with terms FOB destination and the receiving report indicates that the customer received the goods on March 2.
2. On February 26, Seller Inc. shipped goods to Kananaskis with terms FOB shipping point. The invoice price was $350 plus $25 for freight. The receiving report indicates that the goods were received by Kananaskis on March 2.
3. Kananaskis had $500 of inventory isolated in the warehouse. The inventory is designated for a customer who has requested that the goods be shipped on March 10.
4. Also in Kananaskis’ warehouse is $400 of inventory that Craft Producers shipped to Kananaskis on consignment.
5. On February 26, Kananaskis issued a purchase order to acquire goods costing $750. The goods were shipped with terms FOB destination. The receiving reporting indicates that Kananaskis received the goods on March 2.
6. On February 26, Kananskis shipped goods to a customer with terms FOB shipping point. The invoice price was $350 plus $25 for freight. The cost of the items was $280. The receiving report indicates that the goods were received by the customer March 2.
Instructions
For each of the above transactions, specify whether the item in questions should be included in ending inventory, and if so, at what amount. Explain your reasoning.
Day 2:
Page 304 – E6-3
The trial balance of LeBlanc Company at the end of its fiscal year, August 31, 2003, includes the following accounts:
· Freight In - $4,000
· Freight Out - $1,000
· Merchandise Inventory - $17,200
· Purchases - $142,400
· Purchase Returns and Allowances - $2,000
· Sales - $190,000
· Sales Returns and Allowances - $3,000
· Ending Merchandise Inventory - $26,000
Instructions
Prepare a cost of goods sold section for the year ending August 31, 2003.
Page 304 – E6-4
Below is a series of cost of goods sold sections for four companies:
Co. 1 / Co. 2 / Co. 3 / Co. 4Beginning inventory / 250 / 120 / 1,000 / j)
Purchases / 1,500 / 1,080 / g) / 44,590
Purchase returns and allowances / 40 / d) / 290 / k)
Net purchases / a) / 1,020 / 7,210 / 44,330
Freight in / 110 / e) / h) / 2,240
Cost of goods purchased / b) / 1,230 / 7,940 / l)
Cost of goods available for sale / 1,820 / 1,350 / i) / 49,530
Ending inventory / 310 / f) / 1,450 / 6,230
Cost of goods sold / c) / 1,250 / 7,490 / 43,300
Instructions
Fill in the lettered blanks to complete the cost of goods sold sections.
Page 308 – P6-2A
Joanie Kane, a former professional golfer, operates Kane’s Pro Shop at Crowbush Golf Course. At the beginning of the current season April 1, the ledger of Kane’s Pro Shop showed:
· Cash - $2,500
· Merchandise Inventory - $3,500
· Kane, Capital - $6,000
The following transactions occurred during April 2003:
April / 5 / Purchased golf bags, clubs, and balls on account from Balata Co. for $1,600, FOB shipping point, terms n/607 / Paid freight on Balata Co. purchases, $80
9 / Received credit from Balata Co. for merchandise returned, $100
10 / Sold merchandise on account to members $900, terms n/30
12 / Purchased golf shoe, sweaters, and other accessories on account from Arrow Sportswear, $660, terms n/30.
14 / Paid Balata Co. in full
17 / Received $60 credit from Arrow Sportswear for merchandise returned
20 / Made sales on account to members, $700, terms n/30
21 / Paid Arrow Sportswear in full.
27 / Granted credit to members for clothing that did not fit, $30
30 / Made cash sales, $600
30 / Received payments on accounts from members, $1,100
Instructions
a) Journalize the April transactions for Kane’s Pro Shop using a periodic inventory system.
b) Enter the beginning balances in the ledger accounts and post the April transactions
c) Prepare a trial balance as a at April 30, 2003
d) Prepare a multiple-step income statement up to gross profit, assuming merchandise inventory on hand at April 30 is $4,200.
Day 3:
Page 305 – E6-6
On December 1, Discount Electronics has three DVD players left in stock. All are identical and priced to sell at $750. Of the three DVD players left in stock, one with serial #1012 was purchased on June 1 at a cost of $500, another with serial #1045 was purchased on November 1 for $450. The last player, serial #1056, was purchased on November 30 for $400.
Instructions
a) Calculate the cost of goods sold using the FIFO periodic inventory method, assuming that two of the three players were sold by the end of December, Discount Electronics’ year end.
b) If Discount Electronics used the specific identification method instead of the FIFO method, how might it alter its income by “selectively choosing” which particular players to sell to the two customers? What would Discount’s cost of goods sold be if the company wished to maximize income? What would Discount’s cost of goods sold be if the company wished to minimize income?
c) Which inventory method do you recommend that Discount use? Explain why.
Page 305-306 – E6-9
Inventory data for Dene Company are presented in E6-8.
Instructions
a) Calculate the cost of the ending inventory and the cost of goods sold using the weighted average cost method.
b) Will the results in a) be higher of lower than the results under 1) FIFO, and 2) LIFO?
c) Why is the average unit cost not $6?
Page 309 – P6-4A
Choi Company had a beginning inventory on January 1 of 100 units of Product SXL at a cost of $20 per unit. During the year, the following purchases were made:
March 15 / 300 units at $24July 20 / 200 units at $25
September 4 / 300 units at $28
December 2 / 100 units at $30
By year end, 750 units were sold. Choi Company uses a periodic inventory system.
Instructions
a) Determine the cost of goods available for sale.
b) Determine 1) the cost of the ending inventory, and 2) the cost of goods sold under each of the three assumed cost flow methods (FIFO, weighted average, and LIFO).
c) During a period of rising prices (as a illustrated in this situation), which cost flow method results 1) the highest inventory amount for the balance sheet, and 2) the highest cost of goods sold for the income statement?
d) Which method would have the most favourable impact on the company’s cash flows?
Day 4:
Page 309 – P6-5A
The management of Real Novelty is re-evaluating the appropriateness of its present inventory cost flow method, weighted average cost. It requests your help in determining the results of operations for the year ended December 31, 2003, if the FIFO method had been used. For 2003, the accounting records show the following data:
InventoriesBeginning (15,000 units) / $34,000
Ending (20,000 units) / ?
Purchases and Sales
Total net sales (225,000) / $865,000
Total cost of goods purchased (230,000 units) / 591,500
Purchases were made quarterly, as follows:
Quarter / Units / Unit Cost / Total Cost1 / 60,000 / $2.40 / $144,000
2 / 50,000 / 2.50 / 125,000
3 / 50,000 / 2.60 / 130,000
4 / 70,000 / 2.75 / 192.500
/ 230,000 / $591,500
Operating expenses were $147,000. The periodic inventory system is used.
Instructions
a) Prepare comparative condensed income statements for 2003 under periodic FIFO and weighted average cost.
b) Answer the following questions for management in the form of a business letter.
1. Will gross profit under the weighted average cost method be higher or lower than under FIFO?
2. How much additional cash will be available for management under weighted average cost than under FIFO? Why?
3. What factors should management consider in selecting its inventory cost flow assumption?
Day 5:
Page 310 – P6-6A
JL Company maintains its inventory records on a periodic basis. At the end of 2001, the inventory was properly stated. But, in taking a physical inventory at the end of 2002, a batch of inventory was not included in the count. The inventory was properly stated at the end of 2003.
Instructions
a) Indicate the effects of the error (overstatement, understatement, or no effect) on the following:
1. Cost of goods sold for 2002
2. Cost of goods sold for 2003
3. Net income for 2002
4. Net income for 2003
5. Combined income for the two years, 2002 and 2003
b) Identify the inventory costing method most closely related to each of the following statements assuming a period of falling prices:
1. Overstates current value on a balance sheet
2. Matches recent costs against revenue
3. Results in a balance sheet inventory value closest to replacement cost
4. Smooths out the effect of price fluctuations.
Page 310 – P6-8A
You are provided with the following information for Amelia Company. Amelia purchases all its high-tech items from Karina Company and makes sales to a variety of customers, All transactions are settled in cash. Returns are usually not damaged and are restored immediately to inventory for resale. Both Amelia and Karina use the periodic inventory method and the weighted average cost flow assumption increased competition has reduced the price of the product.
Amelia Company
Date / Transactions / Quantity / Unit Dollar AmountJuly 1 / Beginning inventory / 25 / $10.00
5 / Purchase / 60 / 9.00
8 / Sale / 45 / 11.00
10 / Sale return / 10 / 11.00
15 / Purchase / 25 / 8.00
16 / Purchase return / 5 / 8.00
20 / Sale / 60 / 9.00
25 / Purchase / 10 / 6.50
Instructions
a) Prepare the required journal entries for the month of July for Amelia Company, the purchaser.
b) Prepare the required journal entries for the month of July for Karina Company, the seller, to record the purchases made by Amelia.
c) Determine the ending inventory amount using the weighted average cost flow assumption for Amelia Company
d) By July 31, Amelia Company earns that the product has a net realizable value of $7 per unit. What amount should ending inventory be value at on the July 31 balance sheet?
Day 6:
Page 311 – P6-10A
The Reliable Appliance Mart began operations on May 1 and uses a perpetual inventory system. During May, the company had the following purchases and sales for its Model 25 Sureshot camera:
Purchases / SalesDate / Units / Unit Cost / Units / Unit Price
May 1 / 7 / $150
4 / 5 / $250
8 / 8 / 170
12 / 5 / 280
15 / 5 / 180
20 / 4 / 300
25 / 2 / 300
Instructions
a) Determine the cost of goods sold and ending inventory under a perpetual inventory system using 1) FIFO and 2) moving average cost.
b) Which costing method produces 1) the higher ending inventory valuation, and 2) the higher net income?
Page 311 – P6-11A
Chang Company lost all of its inventory in a fire on December 28, 2003. The accounting records showed the following gross profit data November and December:
November / December (to 12/28)Net Sales / $500,000 / $400,000
Beginning inventory / 22,100 / 31,100
Purchases / 314,975 / 236,000
Purchases returns and allowances / 11,800 / 4,000
Freight In / 4,402 / 3,700
Ending inventory / 31,100 / ?
Chang is fully insured for fire losses but must prepare a report for the insurance company.
Instructions
a) Calculate the gross profit margin for November.
b) Using the gross profit margin for November, determine the estimated cost of the inventory lost in the fire.
Page 312 – P6-12A
Varocher’s Book Store uses the retail inventory method to estimate its monthly ending inventories. The following information is available at October 31, 2002.
Cost / RetailBeginning inventory / $260,000 / $400,000
Purchases / 1,180,000 / 1,800,000
Freight In / 5,000
Sales / 1,820,000
Sales returns and allowances / 15,000
At December 31, Varocher’s Book Store takes a physical inventory at retail. The actual retail value of the inventory is $400,000 at year end.
Instructions
a) Determine the estimated cost of the inventory at October 31, 2002, using the retail inventory method.
b) Calculate the ending inventory at cost at December 31, assuming the cost to retail ratio for the year remains constant.