SOLUTIONS TO EXERCISES EXERCISE 8-1 (15–20 minutes) Items 1, 3, 5, 8, 11, 13, 14, 16, and 17 would be reported as inventory in the financial statements. The following items would not be reported as inventory: 2. Cost of goods sold in the income statement. 4. Not reported in the financial statements. 6. Cost of goods sold in the income statement. 7. Cost of goods sold in the income statement. 9. Interest expense in the income statement. 10. Advertising expense in the income statement. 12. Office supplies in the current assets section of the balance sheet. 15. Not reported in the financial statements. 18. Short-term investments in the current asset section of the balance sheet. LO: 2, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analysis , AICPA BB: None, AICPA FC: Reporting, AICPA PC:, AICPA BB: None EXERCISE 8-2 (10–15 minutes) Inventory per physical count Goods in transit to customer, f.o.b. destination Goods in transit from vendor, f.o.b. seller Inventory to be reported on balance sheet $441,000 + 38,000 + 51,000 $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 2017. 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. LO: 2, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analysis, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 8-14 EXERCISE 8-3 (10–15 minutes) 1. Include. Ownership of the merchandise passes to customer only when it is shipped. 2. Do not include. Title did not pass until January 3. 3. Include in inventory. Product belonged to Harlowe Inc. at December 31, 2017. 4. Include in inventory. Under invoice terms, title passed when goods were shipped. 5. Do not include. Goods received on consignment remain the property of the consignor. LO: 2, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analysis , AICPA BB: None, AICPA FC: Reporting, AICPA PC:, AICPA BB: None EXERCISE 8-4 (10–15 minutes) 1. 2. Raw Materials Inventory................................................... 8,100 Accounts Payable.................................................... 8,100 Raw Materials Inventory................................................... 28,000 Accounts Payable.................................................... 28,000 3. No adjustment necessary. 4. Accounts Payable............................................................. 7,500 Raw Materials Inventory......................................... 7,500 Raw Materials Inventory................................................... 19,800 Accounts Payable.................................................... 19,800 5. LO: 2, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analysis , AICPA BB: None, AICPA FC: Reporting, AICPA PC:, AICPA BB: None 8-15 EXERCISE 8-5 (15–20 minutes) (a) Inventory December 31, 2017 (unadjusted) Transaction 2 Transaction 3 Transaction 4 Transaction 5 Transaction 6 Transaction 7 Transaction 8 Inventory December 31, 2017 (adjusted) (b) Transaction 3 Sales Revenue................................................ Accounts Receivable (To reverse sale entry in 2017) Transaction 4 Purchases (Inventory).................................... Accounts Payable (To record purchase of merchandise in 2017) Transaction 8 Sales Returns and Allowances..................... Accounts Receivable............................ $234,890 13,420 -0-08,540 (10,438) (10,520) 1,500 $237,392 12,800 12,800 15,630 15,630 2,600 LO: 2, Bloom: AP, Difficulty: Hard, Time: 15-20, AACSB: Analysis , AICPA BB: None, AICPA FC: Reporting, AICPA PC:, AICPA BB: None 8-16 2,600 EXERCISE 8-6 (10–20 minutes) 2016 Sales Sales Returns Net Sales Beginning Inventory Ending Inventory Purchases Purchase Returns and Allowances Freight-in Cost of Good Sold Gross Profit $290,000 (11,000) 279,000 20,000 (32,000*) 242,000 (5,000) 8,000 (233,000) $ 46,000 2017 2018 $360,000 $410,000 (13,000) (20,000) 347,000 390,000 32,000 37,000** (37,000) (44,000) 260,000 298,000 (8,000) (10,000) 9,000 12,000 (256,000) (293,000) $ 91,000 $ 97,000 *This was given as the beginning inventory for 2017. **This was calculated as the ending inventory for 2017. LO: 2, Bloom: AN, Difficulty: Moderate, Time: 10-20, AACSB: Analysis , AICPA BB: None, AICPA FC: Reporting, AICPA PC:, AICPA BB: None EXERCISE 8-7 (10–15 minutes) (a) May 10 Purchases.......................................................................... 14,700 Accounts Payable....................................................14,700 ($15,000 X .98) May 11 Purchases.......................................................................... 13,068 Accounts Payable....................................................13,068 ($13,200 X .99) May 19 Accounts Payable............................................................. 14,700 Cash..........................................................................14,700 May 24 Purchases.......................................................................... 11,270 Accounts Payable ($11,500 X .98)........................................................11,270 8-17 EXERCISE 8-7 (Continued) (b) May 31 Purchase Discounts Lost................................................. 132 Accounts Payable ($13,200 X .01)....................................................... 132 (Discount lost on purchase of May 11, $13,200, terms 1/15, n/30) LO: 2, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analysis , AICPA BB: None, AICPA FC: Reporting, AICPA PC:, AICPA BB: None EXERCISE 8-8 (20–25 minutes) (a) (b) (c) Feb. 1 Inventory [$10,800 – ($10,800 X 10%)]............................ 9,720 Accounts Payable.................................................... 9,720 Feb. 4 Accounts Payable [$2,500 – ($2,500 X 10%)]............................................................... 2,250 Inventory..................................................................2,250 Feb. 13 Accounts Payable ($9,720 – $2,250)................................ 7,470 Inventory (3% X $7,470)..........................................224.10 Cash.......................................................................... 7,245.90 Feb. 1 Purchases [$10,800 – ($10,800 X 10%)].......................... 9,720 Accounts Payable.................................................... 9,720 Feb. 4 Accounts Payable [$2,500 – ($2,500 X 10%)]............................................................................... 2,250 Purchase Returns and Allowances..........................2,250 Feb. 13 Accounts Payable ($9,720 – $2,250)................................ 7,470 Purchase Discounts (3% X $7,470)...........................224.10 Cash.......................................................................... 7,245.90 Purchase price (list) Less: Trade discount (10% X $10,800) Price on which cash discount based Less: Cash discount (3% X $9,720) Net price $10,800.00 1,080.00 9,720.00 291.60 $ 9,428.40 LO: 2, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analysis , AICPA BB: None Measurement, Reporting, AICPA PC:, AICPA BB: None 8-18 EXERCISE 8-9 (15–25 minutes) (a) Jan. 4 Accounts Receivable........................................................ 640 Sales Revenue (80 X $8)......................................... 640 Jan. 11 Purchases ($150 X $6)...................................................... 900 Accounts Payable.................................................... 900 Jan. 13 Accounts Receivable........................................................ 1,050 Sales Revenue (120 X $8.75)..................................1,050 Jan. 20 Purchases (160 X $7)........................................................ 1,120 Accounts Payable.................................................... 1,120 Jan. 27 Accounts Receivable........................................................ 900 Sales Revenue (100 X $9)....................................... 900 Jan. 31 Inventory ($7 X 110).......................................................... 770 Cost of Goods Sold.......................................................... 1,750* Purchases ($900 + $1,120)...................................... 2,020 Inventory (100 X $5)................................................. 500 *($500 + $2,020 – $770) (b) Sales revenue ($640 + $1,050 + $900) Cost of goods sold Gross profit $2,590 1,750 $ 840 8-19 EXERCISE 8-9 (Continued) (c) Jan. 4 Accounts Receivable........................................................ 640 Sales Revenue (80 X $8)......................................... 640 Cost of Goods Sold.......................................................... 400 Inventory (80 X $5)................................................... 400 Jan. 11 Inventory............................................................................ 900 Accounts Payable (150 X $6)................................... 900 Jan. 13 Accounts Receivable........................................................ 1,050 Sales Revenue (120 X $8.75)..................................1,050 Cost of Goods Sold.......................................................... 700 Inventory ([(20 X $5) + (100 X $6)].............................................................. 700 Jan. 20 Inventory............................................................................ 1,120 Accounts Payable (160 X $7)..................................1,120 Jan. 27 Accounts Receivable........................................................ 900 Sales Revenue (100 X $9)....................................... 900 Cost of Goods Sold.......................................................... 650 Inventory [(50 X $6) + (50 X $7)]................................................................ 650 (d) Sales revenue Cost of goods sold ($400 + $700 + $650) Gross profit $2,590 1,750 $ 840 Note: FIFO periodic and FIFO perpetual provide the same gross profit and inventory value. LO: 3, Bloom: AP, Difficulty: Moderate, Time: 15-25, AACSB: Analysis , AICPA BB: None Measurement, Reporting, AICPA PC:, AICPA BB: None 8-20 EXERCISE 8-10 (15–20 minutes) (a) Units in ending inventory Beginning balance Purchase Goods available Sales Ending balance (b) (c) 300 1,300 ($ 800 + $ 500) 1,600 (1,000) ($ 200 + $ 500 + $ 300) 600 (1) Cost of Goods Sold LIFO 500 @ $13 = $ 6,500 500 @ $12 = 6,000 $12,500 Ending Inventory 300 @ $10 = 300 @ $12 = (2) FIFO 300 @ $10 = $ 3,000 700 @ $12 = 8,400 $11,400 500 @ $13 = 100 @ $12 = LIFO 100 @ $10 = $ 1,000 300 @ $12 = 3,600 200 @ $13 = 2,600 $ 7,200 Sales revenue Cost of Goods Sold Gross Profit (FIFO) $3,000 3,600 $6,600 $6,500 1,200 $7,700 $25,400 = ($24 X 200) + ($25 X 500) + ($27 X 300) 11,400 = (200 @ $10) + (100 @ $10) $14,000 + (400 @ $12) + (300 @ $12) 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. LO: 3, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analysis , AICPA BB: None Measurement, Reporting, AICPA PC:, AICPA BB: None 8-21 EXERCISE 8-11 (20–25 minutes) (a) (1) LIFO 600 @ $6.00 = $3,600 100 @ $6.08 = 608 $4,208 (2) Average cost Total cost = Total units $33,655* 5,300 = $6.35 average cost per unit 700 (5,300 − 4,600)@ $6.35 = $4,445 *Units 600 1,500 800 1,200 700 500 5,300 (b) @ @ @ @ @ @ Price $6.00 $6.08 $6.40 $6.50 $6.60 $6.79 = = = = = = Total Cost $ 3,600 9,120 5,120 7,800 4,620 3,395 $33,655 (1) FIFO 500 @ $6.79 = $3,395 200 @ $6.60 = 1,320 $4,715 (2) LIFO 100 @ $6.00 = $ 600 100 @ $6.08 = 608 500 @ $6.79 = 3,395 $4,603 (c) Total merchandise available for sale Less: Inventory (FIFO) Cost of goods sold (d) FIFO. $33,655 4,715 $28,940 LO: 3, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analysis , AICPA BB: None Measurement, Reporting, AICPA PC:, AICPA BB: None 8-22 EXERCISE 8-12 (15–20 minutes) (a) Shania Twain Company COMPUTATION OF INVENTORY FOR PRODUCT BAP UNDER FIFO INVENTORY METHOD March 31, 2017 March 26, 2017 February 16, 2017 January 25, 2017 (portion) March 31, 2017, inventory (b) Units 600 800 200 1,600 Unit Cost $12.00 11.00 10.00 Total Cost $ 7,200 8,800 2,000 $18,000 Shania Twain Company COMPUTATION OF INVENTORY FOR PRODUCT BAP UNDER LIFO INVENTORY METHOD March 31, 2017 Beginning inventory January 5, 2017 (portion) March 31, 2017, inventory (c) Units 600 1,000 1,600 Unit Cost $8.00 9.00 Total Cost $ 4,800 9,000 $13,800 Shania Twain Company COMPUTATION OF INVENTORY FOR PRODUCT BAP UNDER WEIGHTED-AVERAGE INVENTORY METHOD March 31, 2017 Beginning inventory January 5, 2017 January 25, 2017 February 16, 2017 March 26, 2017 Units 600 1,200 1,300 800 600 4,500 Weighted average cost ($44,600 ÷ 4,500) March 31, 2017, inventory *Rounded off. Unit Cost $ 8.00 9.00 10.00 11.00 12.00 Total Cost $ 4,800 10,800 13,000 8,800 7,200 $44,600 $ 9.91* 1,600 $ 9.91 LO: 3, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analysis , AICPA BB: None Measurement, Reporting, AICPA PC:, AICPA BB: None 8-23 $15,856 EXERCISE 8-13 (15–20 minutes) (a) (1) 2,100 units available for sale – 1,400 units sold = 700 units in the ending inventory. 500 @ $4.58 = $2,290 200 @ 4.60 = 920 700 $3,210 Ending inventory at FIFO cost. (2) 100 @ $4.10 = 600 @ 4.20 = 700 $ 410 2,520 $2,930 Ending inventory at LIFO cost. (3) $9,240 cost of goods available for sale ÷ 2,100 units available for sale = $4.40 weighted-average unit cost. 700 units X $4.40 = $3,080 Ending inventory at weighted-average cost. (b) (1) LIFO will yield the lowest gross profit because this method will yield the highest cost of goods sold figure in the situation presented. The company has experienced rising purchase prices for its inventory acquisitions. In a period of rising prices, LIFO will yield the highest cost of goods sold because the most recent purchase prices (which are the higher prices in this case) are used to price cost of goods sold while the older (and lower) purchase prices are used to cost the ending inventory. (2) LIFO will yield the lowest ending inventory because LIFO uses the oldest costs to price the ending inventory units. The company has experienced rising purchase prices. The oldest costs in this case are the lower costs. LO: 3, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analysis, Communication, AICPA BB: None Measurement, Reporting, AICPA PC: Communication EXERCISE 8-14 (10–15 minutes) (a) 8-24 (1) 400 @ $30 = $12,000 160 @ $25 = 4,000 $16,000 (2) 400 @ $20 = 160 @ $25 = $ 8,000 4,000 $12,000 EXERCISE 8-14 (Continued) (b) (1) FIFO $16,000 [same as (a)] (2) LIFO 100 @ $20 = 60 @ $25 = 400 @ $30 = $ 2,000 1,500 12,000 $15,500 LO: 3, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analysis , AICPA BB: None Measurement, Reporting, AICPA PC:, AICPA BB: None EXERCISE 8-15 (15–20 minutes) First-in, first-out Sales revenue (21,000 $50) Cost of goods sold: Inventory, Jan. 1 Purchases Cost of goods available Inventory, Dec. 31 Cost of goods sold Gross profit Operating expenses Net income $1,050,000 $120,000 592,000* 712,000 (235,000**) *Purchases 6,000 @ $22 = 10,000 @ $25 = 7,000 @ $30 = **Computation of inventory, Dec. 31: First-in, first-out: 7,000 units @ $30 = 1,000 units @ $25 = ***Last-in, first-out: 6,000 units @ $20 = 2,000 units @ $22 = Last-in, first-out $1,050,000 $120,000 592,000 712,000 (164,000***) 477,000 573,000 200,000 $ 373,000 $132,000 250,000 210,000 $592,000 $210,000 25,000 $235,000 $120,000 44,000 $164,000 LO: 3, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analysis , AICPA BB: None Measurement, Reporting, AICPA PC:, AICPA BB: None 8-25 548,000 502,000 200,000 $ 302,000 EXERCISE 8-16 (20–25 minutes) Sandy Alomar Corporation SCHEDULES OF COST OF GOODS SOLD For the First Quarter Ended March 31, 2017 Beginning inventory Plus purchases Cost of goods available for sale Less: Ending inventory Cost of goods sold Schedule 1 First-in, First-out $ 40,000 146,200* 186,200 61,300 $124,900 Schedule 2 Last-in, First-out $ 40,000 146,200 186,200 56,800 $129,400 *($33,600 + $25,500 + $38,700 + $48,400) Schedules Computing Ending Inventory Units 10,000 34,000 44,000 30,000 14,000 Beginning inventory Plus purchases Units available for sale Less sales ($150,000 ÷ 5) Ending inventory The unit computation is the same for both assumptions, but the cost assigned to the units of ending inventory are different. First-in, First-out (Schedule 1) 11,000 at $4.40 = $48,400 3,000 at $4.30 = 12,900 14,000 $61,300 Last-in, First-out (Schedule 2) 10,000 at $4.00 = $40,000 4,000 at $4.20 = 16,800 14,000 $56,800 LO: 3, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analysis , AICPA BB: None Measurement, Reporting, AICPA PC:, AICPA BB: None 8-26 EXERCISE 8-17 (10–15 minutes) (a) FIFO Ending Inventory 12/31/2017 76 @ $10.89* = $ 827.64 24 @ $11.88** = 285.12 $1,112.76 *[$11.00 – .01 ($11.00)] **[$12.00 – .01 ($12.00)] (b) LIFO Cost of Goods Sold—2017 76 @ $10.89 = $ 827.64 84 @ $11.88 = 997.92 90 @ $14.85* = 1,336.50 15 @ $15.84** = 237.60 $3,399.66 *[$15.00 – .01 ($15)] **[$16.00 – .01 ($16)] (c) FIFO matches older costs with revenue. When prices are declining, as in this case, this results in a higher amount for cost of goods sold. Therefore, it is recommended that FIFO be used by Johnny Football Shop to minimize taxable income. LO: 3, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analysis, Communication , AICPA BB: None Measurement, Reporting, AICPA PC: Communication EXERCISE 8-18 (10–15 minutes) (a) The difference between the inventory used for internal reporting purposes and LIFO is referred to as the Allowance to Reduce Inventory to LIFO or the LIFO reserve. The change in the allowance balance from one period to the next is called the LIFO effect (or as shown in this example, the LIFO adjustment). (b) LIFO subtracts inflation from inventory costs by charging the items purchased recently to cost of goods sold. As a result, ending inventory (assuming increasing prices) will be lower than FIFO or average cost. 8-27 EXERCISE 8-18 (Continued) (c) Cash flow was computed as follows: Revenue $3,200,000 Cost of goods sold (2,800,000) Operating expenses (150,000) Income taxes (75,600) Cash flow $ 174,400 If the company has any sales on account or payables, then the cash flow number is incorrect. It is assumed here that the cash basis of accounting is used. (d) The company has extra cash because its taxes are less. The reason taxes are lower is because cost of goods sold (in a period of inflation) is higher under LIFO than FIFO. As a result, net income is lower which leads to lower income taxes. If prices are decreasing, the opposite effect results. LO: 4, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analysis, Communication , AICPA BB: None Reporting, AICPA PC: Communication EXERCISE 8-19 (25–30 minutes) (a) (1) Ending inventory—Specific Identification Date No. Units Unit Cost December 2 July 20 (2) Ending inventory—FIFO Date No. Units December 2 September 4 (3) 100 50 150 Ending inventory—LIFO Date No. Units January 1 March 15 8-28 100 50 150 100 50 150 $30 25 Unit Cost $30 28 Unit Cost $20 24 Total Cost $3,000 1,250 $4,250 Total Cost $3,000 1,400 $4,400 Total Cost $2,000 1,200 $3,200 EXERCISE 8-19 (Continued) (4) Ending inventory—Average-Cost Date No. Units Explanation January 1 March 15 July 20 September 4 December 2 Beginning inventory Purchase Purchase Purchase Purchase Unit Cost 100 $20 300 24 300 25 200 28 100 30 1,000 Total Cost $ 2,000 7,200 7,500 5,600 3,000 $25,300 $25,300 ÷ 1,000 = $25.30 Ending Inventory—Average-Cost No. Units Unit Cost Total Cost 150 (b) Units 150 $25.30 $3,795 Double Extension Method Base-Year Costs Base-Year Cost Per Unit $20 Total $3,000 Units 100 50 Ending Inventory for the Period at Current Cost Ending Inventory for the Period at Base-Year Cost Current Costs Current-Year Cost Per Unit $30 $28 = Total $3,000 1,400 $4,400 $4,400 = 1.4667 $3,000 Ending inventory at base-year prices ($4,400 ÷ 1.4667) Base layer (100 units at $20) Increment in base-year dollars Current index Increment in current dollars Base layer (100 units at $20) Ending inventory at dollar-value LIFO $3,000 (2,000) 1,000 1.4667 1,467 2,000 $3,467 LO: 3, 4, Bloom: AP, Difficulty: Moderate, Time: 25-30, AACSB: Analysis , AICPA BB: None Measurement, Reporting, AICPA PC:, AICPA BB: None 8-29 EXERCISE 8-20 (5–10 minutes) $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 LO: 4, Bloom: AP, Difficulty: Moderate, Time: 5-10, AACSB: Analysis , AICPA BB: None Reporting, AICPA PC:, AICPA BB: None EXERCISE 8-21 (15–20 minutes) (a) (b) 12/31/17 inventory at 1/1/17 prices, $140,000 ÷ 1.12 Inventory 1/1/17 Inventory decrease at base prices $125,000 160,000 $ 35,000 Inventory at 1/1/17 prices Less decrease at 1/1/17 prices Inventory 12/31/17 under dollar-value LIFO method $160,000 35,000 $125,000 12/31/18 inventory at base prices, $172,500 ÷ 1.15 12/31/17 inventory at base prices Inventory increment at base prices $150,000 125,000 $ 25,000 Inventory at 12/31/17 Increment added during 2018 at 12/31/18 prices, $25,000 X 1.15 Inventory 12/31/18 LO: 4, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analysis , AICPA BB: None Reporting, AICPA PC:, AICPA BB: None 8-30 $125,000 28,750 $153,750 EXERCISE 8-22 (20–25 minutes) Current $ 2014 2015 2016 2017 2018 2019 Price Index $ 80,000 115,500 108,000 122,200 154,000 176,900 Base Year $ 1.00 1.05 1.20 1.30 1.40 1.45 $ 80,000 110,000 90,000 94,000 110,000 122,000 Change from Prior Year — $+30,000 (20,000) +4,000 +16,000 +12,000 Ending Inventory—Dollar-value LIFO: 2014 $80,000 2018 2015 $80,000 @ 1.00 = 30,000 @ 1.05 = $ 80,000 31,500 $111,500 2016 $80,000 @ 1.00 = 10,000 @ 1.05 = $ 80,000 2019 10,500 $ 90,500 2017 $80,000 @ 1.00 = 10,000 @ 1.05 = 4,000 @ 1.30 = $ 80,000 10,500 5,200 $ 95,700 $80,000 @ 1.00 = 10,000 @ 1.05 = 4,000 @ 1.30 = 16,000 @ 1.40 = $ 80,000 10,500 5,200 22,400 $118,100 $80,000 @ 1.00 = $ 80,000 10,000 @ 1.05 = 10,500 4,000 @ 1.30 = 5,200 16,000 @ 1.40 = 22,400 12,000 @ 1.45 = 17,400 $135,500 LO: 4, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analysis , AICPA BB: None Reporting, AICPA PC:, AICPA BB: None EXERCISE 8-23 (15–20 minutes) Date Dec. 31, 2013 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Current $ $ 70,000 90,300 95,120 105,600 100,000 Price Index 1.00 1.05 1.16 1.20 1.25 Base-Year $ $70,000 86,000 82,000 88,000 80,000 Change from Prior Year — $+16,000 (4,000) +6,000 (8,000) 8-31 EXERCISE 8-23 (Continued) Ending Inventory—Dollar-value LIFO: Dec. 31, 2013 $70,000 Dec. 31, 2014 $70,000 @ 1.00 = $70,000 16,000 @ 1.05 = 16,800 $86,800 Dec. 31, 2015 $70,000 @ 1.00 = $70,000 12,000 @ 1.05 = 12,600 $82,600 Dec. 31, 2016 $70,000 @ 1.00 = $70,000 12,000 @ 1.05 = 12,600 6,000 @ 1.20 = 7,200 $89,800 Dec. 31, 2017 $70,000 @ 1.00 = $70,000 10,000 @ 1.05 = 10,500 $80,500 LO: 4, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analysis , AICPA BB: None Reporting, AICPA PC:, AICPA BB: None 8-32 EXERCISE 8-24 (10–15 minutes) Current Year Subsequent Year 1. Working capital Current ratio Retained earnings Net income Overstated Overstated Overstated Overstated No effect No effect No effect Understated 2. Working capital Current ratio Retained earnings Net income No effect Overstated* No effect No effect No effect No effect No effect No effect 3. Working capital Current ratio Retained earnings Net income Overstated Overstated Overstated Overstated No effect No effect No effect Understated *Assume that the correct current ratio is greater than one. LO: 5, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analysis , AICPA BB: None Reporting, AICPA PC:, AICPA BB: None EXERCISE 8-25 (10–15 minutes) (a) $370,000 = 1.85 to 1 $200,000 (b) $370,000 + $22,000 – $13,000 + $3,000 $382,000 = = 2.06 to 1 $200,000 – $15,000 $185,000 (c) 1. 2. 3. 4. Event Understatement of ending inventory Overstatement of purchases Overstatement of ending inventory Overstatement of advertising expense; understatement of cost of goods sold (assuming goods are sold). Adjust Income Increase (Decrease) $22,000 Effect of Error Decreases net income Decreases net income Increases net income 15,000 (13,000) 0 $24,000 LO: 5, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analysis , AICPA BB: None Reporting, AICPA PC:, AICPA BB: None 8-33 EXERCISE 8-26 (15–20 minutes) Errors in Inventories Year 2012 2013 2014 2015 2016 2017 Net Income Per Books $ 50,000 52,000 54,000 56,000 58,000 60,000 $330,000 Add Overstatement Jan. 1 Deduct Understatement Jan. 1 Deduct Overstatement Dec. 31 Add Understatement Dec. 31 $3,000 9,000 $3,000 9,000 $11,000 $11,000 2,000 2,000 8,000 Note: The error will reverse in 2016. LO: 5, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analysis , AICPA BB: None Reporting, AICPA PC:, AICPA BB: None 8-34 Corrected Net Income $ 47,000 46,000 74,000 45,000 60,000 50,000 $322,000

Ch. 8 Valuation of Inventories A Cost - Basis Approach Solutions to Exercises

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