Solution manual intermediate accounting 15e by stice ch09

Chapter 9

109

CHAPTER 9
QUESTIONS
1. Four questions associated with accounting
for inventory are as follows:

are allocated to the cost of inventory, and
costs incurred outside the factory wall (e.g.,
in the finished goods warehouse) are
expensed as incurred.

• When is inventory considered to have
been purchased?
• Similarly, when is inventory considered to
have been sold?
• Which costs are considered to be part of
the cost of inventory, and which are
simply business expenses for that
period?
• How should total inventory cost be
divided between the inventory that was
sold (cost of goods sold) and the
inventory
that
remains
(ending
inventory)?

6. Computers are characteristic of perpetual
inventory systems. The recordkeeping
requirements of a perpetual system are
greater than those for a periodic system, so
a computer can greatly aid in managing the
data. In fact, periodic systems can be
operated with just an old-fashioned cash
register. The decrease in computing costs
over the past 20 years has greatly increased
the use of perpetual systems.
7. The inventory system must be cost
effective. That is, cost vs. benefit must be
considered. Also, it should provide effective
control over the use and management of
the asset. The perpetual inventory system,
because it is more costly to maintain and
implement, should be used for items of
relatively high unit value and for which
management of the asset’s use is desired.
Therefore, items (a), (b), and (d) would
most likely use the perpetual method.
However, with information technology
constantly bringing down the cost of
perpetual inventory systems, it is possible
that a perpetual system is used in all the
cases.

2. Vehicles are classified as inventory on the
balance sheets of companies that sell
vehicles in the normal course of business.

However, for a firm that uses vehicles but
does not sell them, such as a delivery
service business, the vehicles would be
shown as property, plant, and equipment
instead of as inventory.
3. Direct materials are applied directly to the
manufacturing process and become part of
the finished product.
Indirect materials are auxiliary materials, or
materials that are not incorporated directly
into the finished product. They include such
items as oil, fuels, and cleaning supplies.
They may also include materials of minor
significance that are embodied in the final
product but are too immaterial to account
for as direct materials.

8. When a perpetual inventory system is used,
the company knows how much inventory
should be on hand at any point in time.
Comparing the inventory records to the
result of a physical count allows the
company to compute the amount of
inventory shrinkage.

4. (a) The three cost elements found in work
in process and finished goods are direct
materials,
direct
labor,

and
manufacturing overhead.
(b) Manufacturing overhead is composed of
all manufacturing costs other than direct
materials and direct labor. It includes
indirect
labor,
indirect
materials,
depreciation, repairs, insurance, taxes,
and the portion of managerial costs
identified with production efforts.

9. (a) Merchandise in transit is legally
reported as inventory by the seller if it
was shipped FOB destination.
(b) Merchandise in transit is legally
reported as inventory by the buyer if it
was shipped FOB shipping point or if it
was shipped FOB destination and
received before the year-end but not yet
unloaded or moved into the inventory
storage area.

5. The general rule of thumb is that inventoryrelated costs incurred inside the factory wall

109


110

Chapter 9

10. (a) Consigned goods should be included in
the inventory of the shipper/consignor,
not in the inventory of the dealer
holding the goods. The consigned
inventory should be reported in the
shipper's inventory at the sum of its cost
and the handling and shipping costs
incurred in the transfer to the dealer.
(b) Inventory sold under an installment sale
may continue to be shown in the
inventory of the seller because the seller
retains title to the goods. If the seller
reports the inventory, it should be
reduced by the buyer’s equity in the
inventory as established by collections.
However, in the usual case when the
possibilities of returns and defaults are
very low, the seller, anticipating
completion of the contract and the
ultimate passing of title, recognizes the
transaction as a regular sale and
removes the goods from reported
inventory at the time of the sale.
11. The substance of an inventory sale
accompanied by a repurchase agreement is
that the inventory is being used as collateral
for a loan. Accordingly, the inventory

continues to be reported as part of the
seller's inventory. The proceeds from the
"sale" are reported as a loan. A note
describes the repurchase agreement.
12. An activity-based cost (ABC) system is one
in which overhead costs are allocated to
inventory based on clearly identified cost
drivers, which are characteristics of the
production process known to create
overhead costs.
13. (a) Cash discounts may be accounted for
under the gross method or the net
method. Under the gross method,
purchases of merchandise are recorded
at the gross amount of the invoice and
discounts taken at the time of payment
are recognized in a contra purchases
account. Under the net method,
purchases of merchandise are recorded
at the net amount of the invoice and
any discounts not taken are recognized
as an expense of the period.
(b) The net method of accounting for
purchases is strongly preferred. By
separately reporting purchase discounts
lost, the failure of a company to take
advantage of cash discounts is
highlighted. It is normally considered
advantageous for a company to take

the purchase discount. Failure to do so
is considered a lapse in efficient
financial management of a company.
14. Although the specific identification method
may be considered a highly satisfactory
approach in matching costs with revenues,
it is often difficult or even impossible to
apply. If there are many items in the
inventory with acquisition occurring at
different times and at different prices, cost
identification procedures may be very slow,
burdensome, and costly. When the units are
in effect identical, the specific identification
method opens the door to possible profit
manipulation through the choice of specific
units for sale.
15. The average cost method of inventory
valuation has the advantage of evening out
the fluctuations of inventory pricing and
generally is easier to apply than either the
FIFO or LIFO method. As prices vary, the
average price used to cost inventory sold is
automatically adjusted. Because the cost of
purchases during a period is usually several
times more than the value of the opening
inventory, the price used is heavily
influenced by current costs.
16. For most businesses, a FIFO assumption
better matches the physical flow of goods. A
LIFO physical flow would mean that the

oldest inventory would never be recycled
but
instead would stay in the company
for years. On the other hand, a LIFO
assumption better matches current costs
with current revenues because cost of
goods sold is computed based on the costs
of the most recently
acquired inventory.
17. Computation of average cost and LIFO
under a perpetual system is complicated
because the average cost of units available
for sale changes every time a purchase is
made, and the identification of the "last in"
units also changes with every purchase.
18. (a) A new LIFO layer is created in each
year in which the number of units
purchased or manufactured exceeds
the number of units sold. As long as
inventory continues to grow, a new LIFO
layer is created each year and the old
LIFO layers
remain untouched.
(b) LIFO reserve is the difference between
the LIFO ending inventory amount and
the amount obtained using another

110

Chapter 9

111

inventory valuation method (such as
FIFO or average cost).

111


19. (a) The LIFO conformity rule requires
companies using the LIFO method for
tax reporting to also use it for financial
reporting.
(b) In 1981, the IRS relaxed the LIFO
conformity rule by permitting companies
to use non-LIFO disclosures as long as
they are not presented on the face of
the income statement and to apply LIFO
differently for book purposes than for
tax purposes.

presented for recording gains in value if
they
occur.
23. Movement in replacement cost (entry cost)
may not result in immediate movement in
sales price (exit value). If sales price does
not change, no downward adjustment to
cost is justified. Thus, the floor limitation

prevents charging a loss in one period to
obtain a higher than normal profit in a
subsequent
period. On the other hand,
sales price may decline and replacement
cost may not. Thus, the net realizable value
for an item might fall below replacement
cost. This decline should be recognized in
the period when the loss occurs, not in a
subsequent period when the sale takes
place.

20. In periods of increasing prices, FIFO
historical cost flow will reflect the greatest
dollar value of ending inventory because the
historical unit cost assigned to the asset
reflects the most recent unit price. LIFO
inventory will reflect the oldest relevant unit
costs, thereby causing the highest cost of
goods sold. Even though the quantity of
inventory does not change, the dollar value
of the asset will change when using FIFO
because the beginning inventory reflects the
most recent unit prices for the prior year
and the current year’s ending inventory
reflects the most recent unit prices for the
current year. LIFO inventory value would not
change since there has been no change in
LIFO quantities and layers. LIFO will result
in higher cost of goods sold and lower

payment of income taxes.

24. Application of the lower-of-cost-or-market
method to individual inventory items results
in a lower inventory value. When LCM is
applied to the inventory as a whole, the
increased market value of some inventory
items offsets decreases in the value of other
items.
25. The value assigned to inventory can be very
important in determining how profits and
losses are allocated among different
reporting units within the business. A
manager wants any inventory he or she
receives from another department to be
transferred at the lowest possible value.
When transferred inventory is reported at a
low value, higher profits are recognized on
the subsequent sale of the item. Reported
profits
of
a
department may be used in the evaluation
and bonus computation for the manager of
the department.

21. The primary reason for using LIFO is to
decrease income taxes paid during times of
inflation. For firms with small inventory
levels or with flat or decreasing inventory

costs, LIFO gives little, if any, tax benefit.
Such firms are unlikely to use LIFO.
22. The lower-of-cost-or-market rule is an
application of the general valuation concept
for inventories that they should not be
valued at a price that would exceed the net
realizable values. If market is defined as
replacement cost and there is no evaluation
of net realizable value, the resulting
valuation using the lower-of-cost-or-market
concept could be ultraconservative. On the
other hand, if a
decline in value has
occurred, such decline should be reflected
in
the
year
the
loss
occurred. Similar arguments could be

26. In developing a reliable gross profit
percentage, reference is made to the
historical
percentage, with adjustments for changes in
current circumstances. For example, the
historical gross profit percentage would be
adjusted if the pricing strategy has changed
(e.g., because of increased competition), if
the sales mix has changed, or if a different

inventory valuation method has been
adopted (e.g., a switch from FIFO to LIFO).

112


113

Chapter 9

27.

(1)
Effect on Statements of
Current Period

(2)
Effect on Statements of
Succeeding Period

(a) Ending
inventory
over-stated because
of a miscount.

Net income is overstated by
the amount of the error.
Current assets and owners'
equity are overstated by the
amount of the error.

Net income is understated by
the amount of the error.
No effect on the balance sheet.

(b) Failure
to
record
purchase
of
merchandise
on
account,
and
the
merchandise
purchased was not
recognized
in
recording
ending
inventory.

No effect on net income,
although both ending inventory
and purchases are understated
by the amount of the omission.
Both current assets and
current
liabilities

are
understated by the amount of
the omission.

No effect on net income
because the understatement in
the beginning inventory is
counterbalanced
by
the
overstatement of purchases.
No effect on the balance sheet.

(c) Ending
inventory
understated because
of a miscount.

Net income is understated by
the amount of the error.
Current assets and owners’
equity are understated by the
amount of the error.

Nature of Error

28. Generally, a higher inventory turnover ratio
is a sign of a company that is managing
its inventory more efficiently. Therefore,
Company B, with an inventory turnover

ratio of 10.0 times, is managing its
inventory more efficiently than Company
A, with a ratio of 8.0 times. However, as
illustrated in the chapter, inventory
turnover ratios for companies that do not
use the same inventory valuation method
cannot be compared. For example,
comparison of the ratios for Companies A
and B would not be valid if one company
used FIFO and the other used LIFO.
29.‡ No journal entry is made when a purchase
commitment is originally entered into. A
purchase commitment is not an inventory
purchase but a commitment to purchase
inventory in the future. This type of
contract

Net income is overstated by
the amount of the error.
No effect on the balance sheet.

is an exchange of promises about future
actions and is known as an executory
contract.
30. ‡ No,
all
transactions
with
foreign
companies are not classified as foreign

currency transactions. The currency
specified
by
the
invoice determines if a transaction is a
foreign currency transaction. For example,
if an invoice is denominated in U.S.
dollars, then—for a U.S. company—the
transaction is a domestic transaction
regardless of to whom the merchandise is
sold.
31. ‡ The FASB requires an adjustment on the
balance sheet date to ensure that gains
and losses from exchange rate changes
are
included in the period in which the
changes took place.
‡

Relates to Expanded Material.


PRACTICE EXERCISES
PRACTICE 9−1
1.

PERPETUAL AND PERIODIC JOURNAL ENTRIES

Periodic:
Purchases

Accounts Payable

3,000
3,000

Accounts Receivable
Sales

10,000
10,000

Cash

9,000
Accounts Receivable

2.

9,000

Perpetual:
Inventory
Accounts Payable

3,000
3,000

Accounts Receivable
Sales

10,000
10,000

Cost of Goods Sold
Inventory

4,500

Cash

9,000

4,500

Accounts Receivable
PRACTICE 9−2

9,000

PERPETUAL AND PERIODIC COMPUTATIONS

1.
Beginning inventory
Plus: Purchases
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold

$100,000
550,000

650,000
130,000
$520,000

2.
Beginning inventory
Plus: Purchases
Cost of goods available for sale
Less: Preliminary cost of goods sold
Ending inventory, predicted
Less: Ending inventory, actual
Cost of missing inventory

$100,000
550,000
650,000
460,000
190,000
130,000
$ 60,000

Cost of Goods Sold (or Inventory Shrinkage Expense)60,000
Inventory
60,000


PRACTICE 9−3

GOODS IN TRANSIT AND ON CONSIGNMENT

Before adjustment
$200,000
Consignment
no adjustment needed, correctly excluded
Sold, FOB destination
+ $20,000
Purchased, FOB shipping point
+ $30,000
Sold, FOB shipping point no adjustment needed, correctly excluded
Adjusted total
$250,000
PRACTICE 9−4

SCHEDULE OF COST OF GOODS MANUFACTURED

Direct materials:
Beginning raw materials inventory
Plus: Purchases of raw materials
Less: Ending raw materials inventory
Raw materials used in production

$ 40,000
230,000
(34,000)
$ 236,000

Direct labor

198,000

Manufacturing overhead:
Depreciation on factory building
Factory supervisor’s salary
Indirect labor
Total manufacturing overhead

$ 32,000
56,000
36,000
124,000

Total manufacturing costs
Plus: Beginning work-in-process inventory
Less: Ending work-in-process inventory
Cost of goods manufactured

PRACTICE 9−5
1.

2.

$ 558,000
76,000
(100,000)
$ 534,000

ACCOUNTING FOR PURCHASE DISCOUNTS

Net method, paid within discount period
Inventory

Accounts Payable

98,000

Accounts Payable
Cash

98,000

98,000
98,000

Net method, paid after discount period
Inventory
Accounts Payable

98,000

Accounts Payable
Discounts Lost
Cash

98,000
2,000

98,000

100,000

PRACTICE 9−5 (Concluded)
3.

4.

Gross method, paid within discount period
Inventory
Accounts Payable

100,000

Accounts Payable
Inventory
Cash

100,000

100,000
2,000
98,000

Gross method, paid after discount period
Inventory
Accounts Payable

100,000

Accounts Payable
Cash

100,000

PRACTICE 9−6

Beginning inventory
Purchases:
March 23
September 16

100,000
100,000

INVENTORY VALUATION: FIFO, LIFO, AND AVERAGE
Units
300
900
1,200
2,400

Cost per
Unit
$17.50

Total
Cost
$ 5,250

18.00
18.25

16,200
21,900
$43,350

Units remaining: 400, meaning that 2,000 (2,400 – 400) units were sold
a. FIFO

1. Cost of Goods Sold
300 × $17.50
900 × 18.00
800 × 18.25
Total

400 × $18.25

=

$7,300

1,200 × $18.25 = $21,900
800 × 18.00 = 14,400
Total = $ 36,300

300 × $17.50
=
100 × 18.00
=
Total = $7,050

$5,250

1,800

c. Average Cost
$43,350/2,400 units = $18.0625 2,000 × $18.0625 = $36,125

400 × $18.0625 = $7,225

b. LIFO

= $ 5,250
= 16,200
= 14,600
= $ 36,050

2. Ending Inventory


PRACTICE 9−7

INVENTORY VALUATION: COMPLICATIONS WITH A PERPETUAL SYSTEM
1.

a. FIFO
January 16 (100 units)

Cost of Goods Sold

2.

Ending Inventory

100 × $17.50 = $ 1,750

200 × $17.50 = $3,500

July 15 (600 units)

200 × $17.50 = $ 3,500
400 × 18.00 =
7,200

500 × $18.00 = $9,000

November 1 (1,300 units)

500 × $18.00 = $ 9,000
800 × 18.25 = 14,600

400 × $18.25

b. LIFO
January 16 (100 units)
July 15 (600 units)

November 1 (1,300 units)

c. Average Cost
January 16 (100 units)

=

Total = $36,050

Total = $7,300

100 × $17.50 = $ 1,750

200 × $17.50 = $3,500

600 × $18.00 = $10,800
300 × 18.00 =
5,400

200 × $17.50 = $3,500

1,200 × $18.25 = $21,900
100 × 18.00 =
1,800

200 × $17.50 = $3,500
200 × 18.00 = 3,600

Total = $36,250

Total = $7,100

100 × $17.50 = $ 1,750

200 × $17.50 = $3,500

$7,300

July 15 (600 units)
200 × $17.50 = $ 3,500
900 × 18.00 = 16,200
1,100
$19,700
$19,700/1,100 = $17.909 per unit
600 × $17.909 = $10,745
$8,955

500 × $17.909 =

November 1 (1,300 units)
500 × $17.909 = $ 8,955
1,200 × 18.25 = 21,900
1,700
$ 30,855
$30,855/1,700 = $18.150 per unit

1,300 × $18.150 = $23,595

400 × $18.150 = $7,260

Total = $36,090

Total = $7,260


PRACTICE 9−8

LIFO LAYERS

Year 1

Units
Purchased
100

Cost
per Unit
$1.00

Units
Sold
80

Year 2

150

$1.50

100

20 × $1.00 =
50 × $1.50 =

20
75

Year 3

150

$2.50

150

20 × $1.00 =
50 × $1.50 =

20
75

Ending Inventory
20 × $1.00 = $ 20

Note: No new LIFO layer was created in this year.
Year 4

200

PRACTICE 9−9

$4.00

20 × $1.00 = 20
50 × $1.50 = 75
40 × $4.00 = 160

Total = $255

160

LIFO RESERVE AND LIFO LIQUIDATION

1. LIFO reserve: Difference between LIFO ending inventory and ending inventory computed using FIFO (which
approximates current replacement cost).
FIFO ending inventory (110 × $4.00)
LIFO ending inventory (see Practice 9−8 solution)
LIFO reserve

$440
255
$185

2.

Cost of goods sold in Year 4: 160 units sold × $4.00 = $640

3.

Cost of goods sold in Year 4 if the number of units purchased had been 90:

Purchases during the year: 90 units × $4.00
Beginning LIFO inventory of 70 units
Total cost of goods sold

$360
95

$455

It can be seen that dipping into the LIFO layers, as in (3), increases reported profit as the old LIFO layers, with low
costs, are assumed to be sold.
PRACTICE 9−10

LIFO AND INCOME TAXES

1. LIFO income taxes
Year 1
Year 2
Year 3
Year 4
Total

Sales
$400
500
750
800

Cost of
Goods Sold
$ 80
150
375
640

Income before
Taxes

$320
350
375
160

Income
Taxes (40%)
$128
140
150
64
$482


PRACTICE 9−10 (Concluded)
2. FIFO income taxes
Year 1
Year 2
Year 3
Year 4
Total

Sales
$400
500
750
800

Cost of
Goods Sold*

$ 80
140
305
535

Income before
Taxes
$320
360
445
265

Income
Taxes (40%)
$128
144
178
106
$556

*FIFO cost of goods sold computations:
Year 1: 80 × $1.00 = $80
Year 2: (20 × $1.00) + (80 × $1.50) = $140
Year 3: (70 × $1.50) + (80 × $2.50) = $305
Year 4: (70 × $2.50) + (90 × $4.00) = $535
PRACTICE 9−11

LOWER OF COST OR MARKET

A: Ceiling = $650, Replacement cost = $600, Floor = $550; Market = $600.

B: Ceiling = $740, Replacement cost = $550, Floor = $590; Market = $590.
C: Ceiling = $1,150, Replacement cost = $1,100, Floor = $850; Market = $1,100.
Lower of cost or market:
Item A
$ 575
Item B
590
Item C
1,100
Total
$2,265
PRACTICE 9−12

LOWER OF COST OR MARKET: INDIVIDUAL VS. AGGREGATE

See the solution for Practice 9−11 for computation of the market amounts for the individual inventory items.

Item A
Item B
Item C
Total

Original
Cost
$ 575
700
1,180
$2,455

Market

$ 600
590
1,100
$2,290

The market value of the inventory as a whole is $2,290. Market is less than cost ($2,290 < $2,455), so the amount
of the inventory that should be reported is $2,290.


PRACTICE 9−13
1.
2.

LOWER-OF-COST-OR-MARKET JOURNAL ENTRIES

Loss on Decline in Value of Inventory
Allowance for Decline in Value of Inventory

200

Allowance for Decline in Value of Inventory
Cost of Goods Sold

150

200
150

$150 = $200 beginning balance in the allowance account − $50 required ending balance
PRACTICE 9−14

RETURNED INVENTORY

1.
Loss on return: $100,000 recorded amount of returned inventory − $100,000 original cost =
$0 loss
Sales
Cost of goods sold
Gross profit (loss)

$ 85,000
(100,000)
$ (15,000)

2.
Loss on return: $85,000 recorded amount of returned inventory – $100,000 original cost =
$15,000 loss
Sales
Cost of goods sold
Gross profit

$85,000
(85,000)
$
0

3.
Loss on return: $56,669 recorded amount of returned inventory – $100,000 original cost =
$43,331 loss
Sales

Cost of goods sold
Gross profit
PRACTICE 9−15

$85,000
(56,669)
$28,331

GROSS PROFIT METHOD

1. and 2.
Sales
Cost of goods sold (estimated)
Gross profit (estimated)
-----------------------------Beginning inventory
+ Purchases
= Cost of goods available for sale
− July 23 inventory (estimated)
= Cost of goods sold (estimated)

Gross Profit Percentage
Last Year
Two Years Ago
$5,000,000
$5,000,000
2,000,000
2,250,000
$3,000,000
$2,750,000
$1,000,000

3,700,000
$4,700,000
2,700,000
$2,000,000

$1,000,000
3,700,000
$4,700,000
2,450,000
$2,250,000


PRACTICE 9−16

INVENTORY ERRORS

1. Year 1
Beginning inventory
Plus: Purchases
Cost of goods available for sale
Less: Ending inventory
overstated by
Cost of goods sold
understated by
Net income

correct
correct
correct
$2,000

$2,000

overstated by $2,000

Correct net income: $3,000 − $2,000 = $1,000
2. Year 2
Beginning inventory
overstated by $2,000
Plus: Purchases
correct
Cost of goods available for saleoverstated by $2,000
Less: Ending inventory
understated by $450
Cost of goods sold
overstated by $2,450
Net income

understated by $2,450

Correct net income: $3,000 + $2,450 = $5,450
Note that the effect of the inventory error in Year 1 was reversed in Year 2.
3. Year 3
Beginning inventory
understated by $450
Plus: Purchases
correct
Cost of goods available for saleunderstated by $450
Less: Ending inventory
correct
Cost of goods sold

understated by $450
Net income

overstated by $450

Correct net income: $3,000 − $450 = $2,550
Note that the effect of the inventory error in Year 2 was reversed in Year 3.
PRACTICE 9−17

COMPUTING INVENTORY RATIOS

1. Inventory turnover

= Cost of goods sold/Average inventory
= $3,000/[($1,300 + $1,800)/2]
= 1.94 times

2. Number of days’ sales in inventory
= Average inventory/Average daily cost of goods
sold
= [($1,300 + $1,800)/2]/($3,000/365)
= 188.6 days


PRACTICE 9−18

PURCHASE COMMITMENTS

1. No entry necessary
2.

Loss on Purchase Commitment
4,290,000
Estimated Loss on Purchase Commitment
4,290,000

Loss: 100,000 ounces
3.

× ($270.60 − $313.50) = $4,290,000

Estimated Loss on Purchase Commitment
Gain on Purchase Commitment

Gain: 100,000 ounces

2,940,000

2,940,000

× ($300.00 − $270.60) = $2,940,000

Gold Inventory
Estimated Loss on Purchase Commitment
Cash

30,000,000
1,350,000

31,350,000

Remaining balance in Estimated Loss: $4,290,000 − $2,940,000 = $1,350,000
PRACTICE 9−19
1.

FOREIGN CURRENCY INVENTORY PURCHASES

November 6
Inventory
Accounts Payable (fc)

11,494

11,494

Accounts Payable: 100,000,000 rupiah/8,700 = $11,494
2.

December 31
Accounts Payable (fc)
Exchange Gain

1,494
1,494

Accounts Payable: 100,000,000 rupiah/10,000 = $10,000
$11,494 − $10,000 = $1,494
3.

March 23

Accounts Payable (fc)
Exchange Loss
Cash

Accounts Payable: 100,000,000 rupiah/9,100 = $10,989
$10,989 − $10,000 = $989

10,000
989

10,989


EXERCISES
9–20.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)

I
E
I
I

E
I
I
I
E
I

MOH
DM
MOH
DL
MOH
MOH
MOH

9–21.
1.

Purchases ..................................................................................
Accounts Payable....................................................................

5,000

Accounts Receivable.....................................................................
Sales ........................................................................................

6,000

5,000
6,000

2.

Beginning inventory...................................................................... $ 1,000
+ Purchases ..................................................................................
5,000
= Cost of goods available for sale................................................ $ 6,000
– Ending inventory.........................................................................
1,500
= Cost of goods sold..................................................................... $ 4,500

3.

Beginning inventory......................................................................
+ Purchases ..................................................................................
= Cost of goods available for sale................................................
– Cost of goods sold.....................................................................
= Estimated ending inventory.......................................................
– Actual ending inventory.............................................................
= Inventory shrinkage....................................................................

$ 1,000
5,000
$ 6,000
4,000
$ 2,000
1,500
$ 500

Inventory ........................................................................................

Accounts Payable....................................................................

5,000

Accounts Receivable.....................................................................
Sales ........................................................................................

6,000

Cost of Goods Sold.......................................................................
Inventory ..................................................................................

4,000

Inventory Shrinkage Expense (or Cost of Goods Sold).............
Inventory ..................................................................................

500

5,000
6,000
4,000
500


9–22.

Cost of goods sold—2005......................................
Add December 31, 2005, inventory........................
Total required...........................................................

Less January 1, 2005, inventory.............................
Purchases—2005.....................................................
Less December 31, 2005, accounts payable.........
Add January 1, 2005, accounts payable................
Cash expended for inventory—2005.....................

9–23.

November 30 balance..............................................
December purchases:
Date of Order
12–11–04........................................................
12–13–04.......................................................
Total available for sale.............................................
Less December sales:
Consignment sales............................................
Other sales.........................................................
Ending inventory quantity as of December 31......

9–24.

$ 900,000
200,000
$1,100,000
(300,000)
$ 800,000
(450,000)
200,000
$ 550,000
150,000 units

8,000
13,000
171,000 units
(20,000)
(25,000)
126,000 units

Item
(a)

Included/Excluded
Included

Reason
Merchandise should be included in the
inventory until shipped. An exception would
be special orders.

(b)

Excluded

Joliet Manufacturing has the merchandise on
a consignment basis and therefore does not
possess legal title.

(c)

Included

The merchandise was shipped FOB shipping
point and therefore would be included in the
inventory on the shipping date.

(d)

Excluded

Title may pass on special orders when
segregated for shipment.

(e)

Excluded

The
merchandise
was
shipped
destination and was not received
January 3, 2006.

(f)

Excluded

Historical experience suggests that Joliet will
collect the full purchase price, so the sale is
recognized even though legal title has not
passed.

(g)

Included

This is not a sale of inventory but instead is a
loan with the inventory as collateral.

FOB
until


9–25.

Garrison Mfg. Inc.
Schedule of Cost of Goods Manufactured
For the Quarter Ended March 31, 2005
Raw materials:
Beginning inventory........................................................ $ 600
Purchases [(85 × $7) + (110 × $7.50)].............................. 1,420
Cost of raw materials available for use.......................... $2,020
Less: Ending inventory (80 × $7.50)...............................
600
Raw materials used in production....................................
Direct labor..........................................................................
Manufacturing overhead....................................................
Total manufacturing costs ................................................
Add: Work in process inventory, Jan. 1 (56 × $13.50)......
Less: Work in process inventory, Mar. 31 (42 × $13.75). .
Cost of goods manufactured.............................................

7,348

9–26.

9–27.

Aug. 15 Purchases................................................................
Accounts Payable.................................................
To record purchase of inventory at net price.
*$15,536 × 2% = $311; $15,536 – $311 = $15,225

15,225*

Aug. 28 Accounts Payable.....................................................
Discounts Lost..........................................................
Cash.......................................................................
To record payment of invoice.

15,225
311

1. (a) Net method
Dec. 3 Purchases........................................................
Accounts Payable.......................................
To record purchase of inventory at net
from Mark Photo Supply.
*$8,600 × 0.03 = $258; $8,600 – $258 = $8,342
10 Purchases........................................................
Accounts Payable.......................................
To record purchase of inventory at net

from Erickson Wholesale.
*$7,500 × 0.03 = $225; $7,500 – $225 = $7,275
16 Accounts Payable...........................................
Discounts Lost................................................
Cash.............................................................
To record payment of December 3
and 10 invoices.

$1,420
2,500
3,250
$7,170
756
$7,926
578
$

15,225

15,536

8,342*
8,342

7,275*
7,275

15,617
258
15,875

9–27.

(Concluded)
(b) Gross method
Dec. 3 Purchases........................................................
Accounts Payable.......................................
To record purchase of inventory at gross
from Mark Photo Supply.
10 Purchases........................................................
Accounts Payable.......................................
To record purchase of inventory at gross
from Erickson Wholesale.

8,600
8,600

7,500
7,500

16 Accounts Payable........................................... 16,100
Purchase Discounts...................................
225
Cash.............................................................
15,875
To record payment of December 3 and 10
invoices.
2.

Dec. 31 Discounts Lost ($258 + $225)........................
Accounts Payable.......................................
To record lost discounts from Mark Photo
Supply and Erickson Wholesale as of
December 31.

483
483

9–28.
1. Purchases............................................................................
Accounts Payable.........................................................
Accounts Payable...............................................................
Purchase Returns and Allowances.............................

5,000

2. Inventory .............................................................................
Accounts Payable.........................................................
Accounts Payable...............................................................
Inventory........................................................................

5,000

5,000
300
300
5,000
300
300

9–29.

Periodic inventory system
1. FIFO:
Most recent purchase..........................
2. LIFO:
Oldest costs.........................................
Next oldest costs.................................
3. Average:
Beginning inventory............................
Purchases.............................................

400 units @ $19.50 =

$ 7,800

300 units @ $17.50 =
100
@ 18.00 =
400 units

$5,250
1,800
$ 7,050

300 units @ $17.50 = $ 5,250
900
@ 18.00 = 16,200

1,200
@ 19.50 = 23,400
2,400 units
$44,850

Total......................................................

$44,850/2,400 = $18.688 per unit
Ending inventory valuation:
400 units × $18.688 (average unit cost) = $7,475
9–30.

Beginning inventory
500

+
+

Purchases
500

–
–

Sales
700

=
=

Ending inventory
300 units


128

Chapter 9

9–30. (Continued)
1.

FIFO Inventory Record—Product AB
Received

Date
9–1
9–6

Quantity
100

Unit Cost
$4.50

Cost

Quantity

Unit Cost

Balance
Cost

$ 450

9–12

300

$5.00

$1,500

9–13
9–18

200

5.00

1,000

200

6.00

1,200

9–20

200

4.00

800

100
100

4.50
6.00

450
600

9–25
Ending inventory value:

2.

Issued

100 units @ $6.00 = $ 600
200
@ 4.00 =
800
300 units
$ 1,400

200 units @ $4.00 = $ 800

100
@ 6.00 =
600
300 units
$ 1,400

Quantity

Unit Cost

500
500
100
200
100
100
100
200
100
200
200
100
200

$5.00
5.00
4.50
5.00
4.50
4.50

4.50
6.00
4.50
6.00
4.00
6.00
4.00

Cost
$2,500
2,500
450
1,000
450
450
450
1,200
450
1,200
800
600
800


Chapter 9

129

9–30. (Concluded)
3.

LIFO Inventory Record—Product AB
Received
Date
9–1
9–6

Quantity
100

Unit Cost
$4.50

Issued
Cost

Unit Cost

Cost

$ 450

9–12
9–13
9–18

200

6.00

1,200

9–20

200

4.00

800

9–25
Ending inventory value:

Quantity

Balance

100
200
200

$4.50
5.00
5.00

$ 450
1,000
1,000

200

4.00

800

100 units @ $5.00 = $ 500
200
@ 6.00 = 1,200
300 units
$ 1,700

4. 300 units @ $5.00 (earliest costs) = $1,500

Quantity

Unit Cost

Cost

500
500
100

$5.00
5.00
4.50

$2,500
2,500
450

300
100
100
200
100
200
200
100
200

5.00
5.00
5.00
6.00
5.00
6.00
4.00
5.00
6.00

1,500
500
500
1,200
500
1,200
800
500
1,200

130

Chapter 9

9–31.

1.

(a) $15,000 ($79,000 – $64,000)
(b) $10,500 ($79,000 – $68,500)
(c) $19,000 ($79,000 – $60,000)

2. Theoretically, specific identification should be used in every case.
However, there are many instances where the costs of using the
specific identification method far exceed the benefits. In cases in which
the inventory item can be easily identified and the resulting information
is beneficial, the use of specific identification is warranted. Expensive
items such as automobiles and houses are typically accounted for
using specific identification. In this case, by carefully choosing the
semitrailer to sell, Spearman has managed to maximize reported income
if specific identification is used. Thus, there is some potential for
income manipulation.
9–32.
1.

Computation of FIFO inventory, October 31:
August purchases................................................ 5,500 units @ $5.10 = $28,050
September purchases.......................................... 8,000

@ 5.20 = 41,600
October purchases............................................... 5,100
@ 5.30 = 27,030
FIFO:
Most recent purchases, October......................... 5,100 units @ $5.30 = $ 27,030 *
Next most recent purchase, September............. 1,800
@ 5.20 =
9,360 †
6,900 units
$ 36,390
*It can be assumed that all of the October purchases remain in the inventory because $36,390 exceeds $27,030. ($27,030/$5.30 = 5,100 units)
†
A balancing figure: $36,390 – $27,030 = $9,360; $9,360/$5.20
= 1,800 units from the September purchase.
Computation of LIFO inventory, October 31:
Earliest cost relating to goods, August............ 5,500 units @ $5.10 = $28,050
Next earliest cost, September............................ 1,400*
@ 5.20 =
7,280
6,900 units
$35,330
*Total number of units in inventory (from FIFO method
shown above).............................................................................
Less August purchases......................................................................
September purchases included in inventory....................................

2.

6,900 units
5,500

1,400 units

In the notes to its financial statements, White Farm could disclose that its LIFO
reserve as of October 31 is $1,060 ($36,390 – $35,330).


Chapter 9

9–33.

Purchases:

Units
60,000
50,000
40,000
50,000
200,000

Unit Cost
$0.40
0.41
0.42
0.45

Total Cost
$24,000
20,500
16,800
22,500

$83,800

1. Beginning inventory + Purchases = Cost of units available for sale
?
+ $83,800
= $118,800
Beginning inventory = $ 35,000
$35,000(Beginning inventory value)
= 100,000 units
$0.35(Beginning inventory unit cost)
2. Beginning inventory + Purchases
100,000 units
+ 200,000
3.

–
–

Sales = Ending inventory
? =
50,000 units
Sales = 250,000 units

$118,800 (Cost of units available for sale)
= $0.396 per unit cost*
300,000 (Quantity of units available for sale)
*An alternative method would be:
Cost of units
available for sale

–

$118,800

–

Cost of
= Ending
goods sold
inventory
$99,000

= $19,800;

$19,800
= $0.396
50,000

4. Ending inventory value = 50,000 units × $0.396 (unit cost) = $19,800
9–34.

Quantity available for sale – Sales
? – 57,200
Quantity available for sale

= Ending inventory
= 16,000 units
= 73,200 units

Beginning inventory + Purchases

? + 51,500
Beginning inventory

= Quantity available for sale
= 73,200 units
= 21,700 units

Sales – Cost of goods sold
$572,000 – ?
Cost of goods sold

= Gross profit on sales
= $205,875
= $366,125

Cost of Goods Sold
Beginning inventory 21,700 @
?
=
?
Purchases:
10,000 @ $6.50 = $ 65,000
12,500 @
6.25 =
78,125
13,000 @
6.00 =
78,000*
57,200
$366,125

132

9–34.

Chapter 9

(Concluded)
Beginning inventory + $221,125 (Total purchases applicable to cost of
goods sold) = $366,125
Beginning inventory value = $145,000
*Because the company uses the FIFO inventory method, the earliest
inventory costs are used to compute cost of goods sold. The beginning
inventory is used, and then purchases are added until the total units sold
is reached. Thus, only 13,000 units of the July 12 purchase are included.

9–35.

1. Beginning inventory + Purchases –
600 units
+ 410 units –

Ending inventory = Sales
360 units
= 650 units

Cost of Goods Sold (Based on LIFO inventory costing)
Units
Unit Cost

Total Cost
200
$14.50
$2,900
95
15.00
1,425
115
14.00
1,610
75
13.00
975
165
11.00
1,815
650
$8,725
Sales – Cost of goods sold
$13,000 (650 × $20) – $8,725
Gross profit as a percent of sales:
2.

= Gross profit on sales
= $4,275

$4,275
= 0.3288, or 32.88% of sales
$13,000

Cost of Goods Sold
Units
95
115
75
225
140
650

Unit Cost
$15.00
14.00
13.00
11.00
8.00

Sales – Cost of goods sold
Gross profit as a percent of sales:

Total Cost
$1,425
1,610
975
2,475
1,120
$7,605
= Gross profit on sales
$13,000 – $7,605
=

$5,395

$5,395
= 0.415, or 41.5% of sales
$13,000


Chapter 9

9–35.

(Concluded)
3.
Gross profit on sales..............................................
Gross profit as a percent of sales.........................

(1)
$4,275
32.88%

(2)
$5,395
41.5%

The inability to replenish the LIFO layers at month-end required
Harrison to dip into past LIFO layers that were valued at a cost lower
than current costs. The result was an increased gross profit simply from
the inability to replenish inventories.
9–36.

1. The effect on income was $900,000 for 100,000 units or $9.00 per unit
(difference between LIFO layer and the most recent historical cost).
Current replacement price................................
Difference in price..............................................
Unit average cost of inventory sold from
beginning inventory...........................................
2. December 31, 2005, ending inventory (LIFO). .
Value of units sold.............................................
January 1, 2005, inventory................................

$20
9
$ 11
$2,900,000
1,100,000*
$4,000,000

*$11.00 × 100,000 units equal the value of the units sold, $1,100,000