Chapter 5: Exercises

Exercise 5-1: Inventory Ownership 1. $12,500 Merchandise (FOB Destination): Since the terms are FOB destination, the merchandise is included in Barr Co.’s inventory until it reaches Lee Co. Barr Co. retains ownership while the goods are in transit. 2. $20,000 of Goods (Consignment): Parris Company is the consignor, and Harlow Co. is the consignee. Since the goods are on consignment, they remain in Parris Company’s inventory until they are sold by Harlow Co. Exercise 5-2: Inventory Costs To compute the total cost of inventory for Walberg Associates, we include all costs related to getting the inventory ready for sale: • • • • Goods purchase price: $75,000 Transportation-in (FOB Shipping Point): $2,400 Insurance on shipment: $300 Cleaning and refurbishing: $980 Other costs like advertising and salaries are excluded as they are not directly tied to getting the goods ready for sale. Total inventory cost: $75,000 + $2,400 + $300 + $980 = $78,680. Exercise 5-3: Perpetual Inventory Costing Methods January Purchases and Sales Data (Laker Company): • • • • • • January 1: Beginning inventory: 100 units @ $10 each January 5: Purchase: 200 units @ $12 each January 20: Purchase: 100 units @ $14 each January 25: Sale: 250 units January 30: Purchase: 100 units @ $15 each January 31: Sale: 50 units a) Specific Identification Ending inventory: • 180 units from January 30 @ $15 = $2,700 • • 5 units from January 20 @ $14 = $70 15 units from beginning inventory @ $10 = $150 Total Ending Inventory: $2,700 + $70 + $150 = $2,920 Cost of Goods Sold: (100 @ $10) + (200 @ $12) + (50 @ $14) = $3,760 b) Weighted Average 1. Total cost of goods available for sale = (100 @ $10) + (200 @ $12) + (100 @ $14) + (100 @ $15) = $6,300. 2. Total units available = 100 + 200 + 100 + 100 = 500 units. 3. Weighted average cost per unit = $6,300 ÷ 500 = $12.60 per unit. 4. Ending inventory = 180 units × $12.60 = $2,268. Cost of Goods Sold: (250 + 50) units × $12.60 = $3,780. c) FIFO (First-In, First-Out) 1. Ending inventory: o 100 units @ $15 = $1,500 o 50 units @ $14 = $700 Total Ending Inventory: $1,500 + $700 = $2,200. Cost of Goods Sold: (100 @ $10) + (200 @ $12) = $3,600. d) LIFO (Last-In, First-Out) 1. Ending inventory: o 100 units @ $10 = $1,000 o 50 units @ $12 = $600 Total Ending Inventory: $1,000 + $600 = $1,600. Cost of Goods Sold: (100 @ $15) + (100 @ $14) + (50 @ $12) = $4,100. Exercise 5-4: Perpetual Journal Entries (FIFO) January Transactions: 1. Purchase on January 5: Debit Inventory $2,400 Credit Accounts Payable $2,400 2. Purchase on January 20: Debit Inventory $1,400 Credit Accounts Payable $1,400 3. Sale on January 25: Debit Accounts Receivable $5,000 (250 units × $20) Credit Sales Revenue $5,000 Debit Cost of Goods Sold $3,000 (100 @ $10 + 150 @ $12) Credit Inventory $3,000 4. Purchase on January 30: Debit Inventory $1,500 Credit Accounts Payable $1,500 5. Sale on January 31: Debit Accounts Receivable $1,000 (50 units × $20) Credit Sales Revenue $1,000 Debit Cost of Goods Sold $600 (50 @ $12) Credit Inventory $600 Exercise 5-5: Gross Profit Effects of Inventory Methods Using the same data as in Exercise 5-3, the gross profit can be calculated as: Gross Profit = Sales − Cost of Goods Sold a) Gross Profit for Each Method: • • • • Specific Identification: Sales = (250 + 50) units × $20 = $6,000 COGS = $3,760 Gross Profit = $6,000 − $3,760 = $2,240. Weighted Average: Sales = $6,000 COGS = $3,780 Gross Profit = $6,000 − $3,780 = $2,220. FIFO: Sales = $6,000 COGS = $3,600 Gross Profit = $6,000 − $3,600 = $2,400. LIFO: Sales = $6,000 COGS = $4,100 Gross Profit = $6,000 − $4,100 = $1,900. b) Which Method Yields the Highest Gross Profit? • FIFO yields the highest gross profit ($2,400). c) Where Does Weighted Average Fall? • Weighted Average gross profit falls between FIFO and LIFO. d) If Costs Were Rising, Which Method Would Yield the Highest Gross Profit? • LIFO would yield the highest gross profit if costs were rising. This concludes the solutions for Exercises 5-1 through 5-5.