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Chapter 8 Supplemental Questions E8-1 (Inventoriable Costs) Presented below is a list of items that may or may not be reported as inventory in a company's December 31 balance sheet. Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Item in Financial Statement

Financial Statement

Cost of goods sold

Income statement

1.

Goods sold on an installment basis (bad debts can be reasonably estimated).

2.

Goods out on consignment at another company's store.

Inventory

Balance sheet

3.

Goods purchased f.o.b. shipping point that are in transit at December 31.

Inventory

Balance sheet

4.

Goods purchased f.o.b. destination that are in transit at December 31.

Not reported

Not reported

5.

Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that covers all costs related to the inventory.

Inventory

Balance sheet

6.

Goods sold where large returns are predictable.

Cost of goods sold

Income statement

7.

Goods sold f.o.b. shipping point that are in transit at December 31.

Cost of goods sold

Income statement

8.

Freight charges on goods purchased.

Inventory

Balance sheet

9.

Interest costs incurred for inventories that are routinely manufactured.

Interest expense

Income statement

10.

Materials on hand not yet placed into production by a manufacturing firm.

Inventory

Balance sheet

Advertising expense

Income statement

Office supplies

Balance sheet

Inventory

Balance sheet

Inventory

Balance sheet

Not reported

Not reported

Inventory

Balance sheet

Inventory

Balance sheet

Short-term investments

Balance sheet

11. Costs incurred to advertise goods held for resale. 12. Office supplies. 13.

Raw materials on which a manufacturing firm has started production, but which are not completely processed.

14. Factory supplies. 15. Goods held in consignment from another company 16.

Costs identified with units completed by a manufacturing firm, but not yet sold.

17. Goods sold f.o.b. destination that are in transit at December 31. 18.

Short-term investments in stocks and bonds that will be resold in the near future.

E8-2 (Inventoriable Costs) In your audit of Garza Company, you find that a physical inventory on December 31, 2010, showed merchandise with a cost of $441,000 was on hand at that date. You also discover the following items were all excluded from the $441,000. 1. 2. 3. 4. 5.

Merchandise of $61,000 which is held by Garza on consignment. The consignor is the Bontemps Company. Merchandise costing $33,000 which was shipped by Garza f.o.b. destination to a customer on December 31, 2010. The customer was expected to receive the merchandise on January 6, 2011. Merchandise costing $46,000 which was shipped by Garza f.o.b. shipping point to a customer on December 29, 2010. The customer was scheduled to receive the merchandise on January 2, 2011. Merchandise costing $73,000 shipped by a vendor f.o.b. destination on December 30, 2010, and received by Garza on January 4, 2011. Merchandise costing $51,000 shipped by a vendor f.o.b. seller on December 31, 2010, and received by Garza on January 5, 2011.

Based on the above information, calculate the amount that should appear on Garza's balance sheet at December 31, 2010, for inventory. Inventory $525,000

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 33,000 51,000 $525,000

The consigned goods of $61,000 are not owned by Garza 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 (Garza) and therefore a sale and related cost of goods sold should be recorded in 2010. The goods in transit from a vendor of $73,000, shipped f.o.b. destination, are properly excluded from the inventory because the title to the goods does not pass to Garza until the buyer (Garza) receives them.

E8-3 (Inventoriable Costs) Assume that in an annual audit of Webber Inc. at December 31, 2010, you find the following transactions below near the closing date. Assuming that each of the amounts is material, state whether the merchandise should be included in the client's inventory. 1.

2. 3.

4.

A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shipping room on December 31, 2010. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2011 Include Merchandise costing $2,800 was received on January 3, 2011, and the related purchase invoice recorded January 5. The invoice showed the shipment was made on December 29, 2010, f.o.b. destination. Do not include A packing case containing a product costing $3,400 was standing in the shipping room when the physical inventory was taken. It was not included in the inventory because it was marked "Hold for shipping instructions." Your investigation revealed that the customer's order was dated December 18, 2010, but that the case was shipped and the customer billed on January 10, 2011. The product was a stock item of your client. Include Merchandise costing $720 was received on December 28, 2010, and the invoice was not recorded. You located it in the hands of the purchasing agent; it was marked "on consignment."

5.

Do not include Merchandise received on January 6, 2011, costing $680 was entered in the purchase journal on January 7, 2011. The invoice showed shipment was made f.o.b. supplier's warehouse on December 31, 2010. Because it was not on hand at December 31, it was not included in inventory. Include

E8-11 (Inventory Errors) At December 31, 2010, Dwight Corporation reported current assets of $390,000 and current liabilities of $200,000. The following items may have been recorded incorrectly. Dwight uses the periodic method. 1. 2. 3. 4.

Goods purchased costing $22,000 were shipped f.o.b. shipping point by a supplier on December 28. Dwight received and recorded the invoice on December 29, 2010, but the goods were not included in Dwight's physical count of inventory because they were not received until January 4, 2011. Goods purchased costing $20,000 were shipped f.o.b. destination by a supplier on December 26. Dwight received and recorded the invoice on December 31, but the goods were not included in Dwight's 2010 physical count of inventory because they were not received until January 2, 2011. Goods held on consignment from Kishi Company were included in Dwight's December 31, 2010, physical count of inventory at $13,000. Freight-in of $3,000 was debited to advertising expense on December 28, 2010.

(a) Compute the current ratio based on Dwight's balance sheet. (Round answer to 2 decimal places, e.g. 5.10.) Current ratio 1.95 : 1 (b) Recompute the current ratio after corrections are made. (Round answer to 2 decimal places, e.g. 5.10.) Current ratio 2.23 : 1 (c) By what amount will income (before taxes) be adjusted up or down as a result of the corrections? $29,000

(a)

$390,000 $200,000 $390,000 + $22,000 - $13,000 + $3,000 $200,000 - $20,000

(b) (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

= 1.95 : 1 =

$402,000 $180,000

= 2.23 : 1

Effect of Error Decreases net income Decreases net income Increases net income

Adjust Income, Increase Decrease) $22,000 20,000 (13,000) 0 $29,000

E8-15 (FIFO, LIFO, Average Cost Inventory) Esplanade Company was formed on December 1, 2010. The following information is available from Esplanade's inventory

records for Product BAP. Units 600

January 1, 2010 (beginning inventory) Purchases: January 5, 2010 January 25, 2010 February 16, 2010 March 26, 2010

1,100 1,300 800 600

Unit Cost $8.00 9.00 10.00 11.00 12.00

A physical inventory on March 31, 2010, shows 1,500 units on hand. Prepare schedules to compute the ending inventory at March 31, 2010, under each of the following inventory methods. Assume Esplanade Company uses the periodic inventory method. (a) FIFO

March 26, 2010 February 16, 2010 January 25, 2010 March 31, 2010, inventory (b) LIFO

ESPLANADE COMPANY Computation of Inventory for Product BAP under FIFO Inventory Method March 31, 2010 Units Unit Cost 600 800 100 1,500

$12.00 11.00 10.00

Total Cost

$7,200 8,800 1,000 $17,000

ESPLANADE COMPANY Computation of Inventory for Product BAP under LIFO Inventory Method March 31, 2010 Units Unit Cost Total Cost Beginning inventory 600 $8.00 $4,800 900 8,100 January 5, 2010 9.00 1,500 $12,900 March 31, 2010, inventory (c) Weighted average (Round weighted average cost to 2 decimal places, e.g. 2.25 and use this rounded amount for future calculations. Round the inventory on March to 0 decimal places, e.g. 1,250.) ESPLANADE COMPANY Computation of Inventory for Product BAP under Weighted Average Inventory Method March 31, 2010 Units Beginning inventory January 5, 2010 January 25, 2010 February 16, 2010 March 26, 2010

Unit Cost 600 1,100 1,300 800 600 4,400 $9.93

Weighted Average cost March 31, 2010, inventory

Total Cost $8.00 9.00 10.00 11.00 12.00

$14,895

E8-15 (a)

March 26, 2010 February 16, 2010

ESPLANADE COMPANY Computation of Inventory for Product BAP under FIFO Inventory Method March 31, 2010 Units Unit Cost 600 $12.00 800 11.00

Total Cost $7,200 8,800

$4,800 9,900 13,000 8,800 7,200 $43,700

100 10.00 1,500 (b) ESPLANADE COMPANY Computation of Inventory for Product BAP under LIFO Inventory Method March 31, 2010 Units Unit Cost Beginning inventory 600 $8.00 900 January 5, 2010 (portion) 9.00 1,500 March 31, 2010, inventory (c) ESPLANADE COMPANY Computation of Inventory for Product BAP under Weighted Average Inventory Method March 31, 2010 Units Unit Cost Beginning inventory 600 $8.00 January 5, 2010 1,100 9.00 January 25, 2010 1,300 10.00 February 16, 2010 800 11.00 600 12.00 March 26, 2010 4,400 Weighted Average Cost ($43,700 ÷ 4,400) $9.93 January 25, 2010 (portion) March 31, 2010, inventory

March 31, 2010, inventory

1,500

$9.93

1,000 $17,000

Total Cost $4,800 8,100 $12,900

Total Cost $4,800 9,900 13,000 8,800 7,200 $43,700

$14,895

P8-5 (Compute FIFO, LIFO and Average Cost - Periodic and Perpetual) Some of the information found on a detail inventory card for Slatkin Inc. for the first month of operations is as follows.

Date January 2 7 10 13 18 20 23 26 28 31

Received No. of Units Unit Cost 1,200 $3.00 600

3.20

1,000

3.30

1,300

3.40

1,600

3.50

Issued, No. of Units 700 500 300 1,100 800 1,300

Balance, No. of Units 1,200 500 1,100 600 1,300 200 1,500 700 2,300 1,000

P8-5 (a) From these data compute the ending inventory on each of the following bases. Assume that perpetual inventory records are kept in units only. (Round unit costs to 2 decimal places, e.g. 1.50 and ending inventory to 0 decimal places, e.g. 2,215 and use the rounded amount for future calculations. Round final answer to 0 decimal places, e.g. 2,215.) 1.

First-in, first-out (FIFO). $3,500

2.

Last-in, first-out (LIFO). $3,000

3.

Average cost. $3,310

Assuming costs are not computed for each withdrawal (units received, 5,700, minus units issued, 4,700, equals ending inventory at 1,000 units): (1) First-in, first-out No. Units Unit Cost Total Cost Date of Invoice $3,500 Jan. 28 1,000 $3.50 (2) Last-in, first-out Date of Invoice Jan. 2

No. Units 1,000

Unit Cost $3.00

Total Cost $3,000

(3) Average cost Cost of goods available: Date of Invoice Jan. 2 Jan. 10 Jan. 18 Jan. 23 Jan. 28 Totals Available

No. Units 1,200 600 1,000 1,300 1,600 5,700

Unit Cost $3.00 3.20 3.30 3.40 3.50

Total Cost $ 3,600 1,920 3,300 4,420 5,600 $18,840

Average cost per unit = $18,840 ÷ 5,700 = $3.31 Cost of inventory Jan. 31 = 1,000 × $3.31 = $3,310

P8-5 (b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, what would the amounts shown as ending inventory in 1, 2, and 3 above be? (Round computation for unit cost to 4 decimal places, e.g. 2.115 when calculating average cost and use the rounded amount for future calculations. Round the final answer to 0 decimal places, e.g. 1,250.) 1.

First-in, first-out (FIFO). $3,500

2.

Last-in, first-out (LIFO). $3,350

3.

Average cost. $3,463

Assuming costs are computed at the time of each withdrawal: Under FIFO-Yes. The amount shown as ending inventory would be the same as in (a) above. In each case the units on hand would be assumed to be part of those purchased on Jan. 28. Under LIFO-No. During the month the available balance dropped below the ending inventory quantity so that the layers of oldest costs were partially liquidated during the month. Under Average Cost-No. A new average cost would be computed each time a withdrawal was made instead of only once for all items purchased during the year. The calculations to determine the inventory on this basis are given below.

(1) First-in, first-out The inventory would be the same in amount as in part (a), $3,500 (2)Last-in, first-out

Date Jan. 2 Jan. 7 Jan. 10

Received No. of Unit units cost 1,200 $3.00

Issued No. of units 700

600

Unit cost $3.00

3.20

Jan. 13

500

Jan. 18

1,000

3.30

Jan. 20

3.20

300

3.30

700 100 300

Jan. 23

1,300

3.30 3.20 3.00

3.40

Jan. 26

800

Jan. 28

1,600

3.40

3.50

Jan. 31

1,300

3.50

No. of units 1,200 500 500 600 500 100 500 100 700

Balance Unit cost $3.00 3.00 3.00 3.20 3.00 3.20 3.00 3.20 3.30

200 200 1,300 200 500 200 500 1,600 200 500 300

3.00 3.00 3.40 3.00 3.40 3.00 3.40 3.50 3.00 3.40 3.50

No. of units 1,200 500 1,100 600 1,300 200 1,500 700 2,300 1,000

Balance Unit cost $3.0000 3.0000 3.1091 3.1091 3.2281 3.2281 3.3773 3.3773 3.4626 3.4626

Amount $3,600 1,500 3,420 1,820 4,130

600 5,020 2,300 7,900

3,350

Inventory, January 31 is $3,350 (3) Average cost

Date Jan. 2 Jan. 7 Jan. 10 Jan. 13 Jan. 18 Jan. 20 Jan. 23 Jan. 26 Jan. 28 Jan. 31

Received No. of Unit units cost 1,200 $3.00 600

3.20

1,000

3.30

1,300

3.40

1,600

3.50

Inventory, January 31 is $3,463

Issued No. of units

Unit cost

700

$3.0000

500 300 1,100

3.1091 3.2281 3.2281

800

3.3773

1,300

3.4626

Amount $3,600 1,500 3,420 1,865 4,197 646 5,066 2,364 7,964 3,463