Solution manual accounting 25th editon warren chapter 07

CHAPTER 7
INVENTORIES
DISCUSSION QUESTIONS
1.

The receiving report should be reconciled to the initial purchase order and the vendor’s invoice before
recording or paying for inventory purchases. This procedure will verify that the inventory received
matches the type and quantity of inventory ordered. It also verifies that the vendor’s invoice is
charging the company for the actual quantity of inventory received at the agreed-upon price.

2.

A physical inventory should be taken periodically to test the accuracy of the perpetual records. In
addition, a physical inventory will identify inventory shortages or shrinkage.

3.

No, they are not techniques for determining physical quantities. The terms refer to cost flow
assumptions, which affect the determination of the cost prices assigned to items in the inventory.

4.

a.
b.

5.

FIFO

6.

LIFO. In periods of rising prices, the use of LIFO will result in the lowest net income and thus the

LIFO
FIFO

c.
d.

LIFO
FIFO

lowest income tax expense.

7.

Net realizable value (estimated selling price less any direct cost of disposition, such as sales
commissions).

8.

a.

Gross profit for the year was understated by $14,750.

b.

Merchandise inventory and owner’s equity were understated by $14,750.

9.

10.

Bibbins Company. Since the merchandise was shipped FOB shipping point, title passed to
Bibbins Company when it was shipped and should be reported in Bibbins Company’s financial
statements at May 31, the end of the fiscal year.
Manufacturer’s. The manufacturer retains title until the goods are sold. Thus, any unsold merchandise
at the end of the year is part of the manufacturer’s (consignor’s) inventory, even though the
merchandise is in the hands of the retailer (consignee).

7-1
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CHAPTER 7

Inventories

PRACTICE EXERCISES
PE 7–1A

a.
b.
c.

Gross Profit
February

$35 ($75 – $40)
$31 ($75 – $44)
$33 ($75 – $42)

First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Weighted average cost

PE 7–1B

a.
b.
c.

PE 7–2A
a.

Cost of merchandise sold (May 28):
15 units @ $120
3 units @ $130
18

$1,800
390
$2,190

b. Inventory, May 31: $7,410 = 57 units × $130

PE 7–2B
a. Cost of merchandise sold (July 24):
6 units @ $15
34 units @ $18
40

$ 90
612
$702

b. Inventory, July 31: $1,008 = 56 units × $18

$86 ($42 + $44)
$82 ($40 + $42)
$84 ($42 × 2)

Gross Profit

Ending Inventory

June

June 30

$60 ($110 – $50)
$40 ($110 – $70)
$50 ($110 – $60)

First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Weighted average cost

Ending Inventory
February 28

$130 ($60 + $70)
$110 ($50 + $60)
$120 ($60 × 2)


PE 7–3A
a.

Cost of merchandise sold (June 26):
$5,400 = (90 units × $60)

b.

Inventory, June 30:
20 units @ $50
35 units @ $60
55

$1,000
2,100
$3,100

PE 7–3B
a.

Cost of merchandise sold (March 27):
$4,800 = (240 units × $20)

b.

Inventory, March 31:
45 units @ $18
135 units @ $20
180

$ 810
2,700
$3,510

PE 7–4A
a. Weighted average unit cost: $71.25
Inventory total cost after purchase on July 15:
40 units @ $60
120 units @ $75
160

$ 2,400
9,000
$11,400

Weighted average unit cost = $71.25 ($11,400 ÷ 160 units)
b.

Cost of merchandise sold (July 27): $5,985 (84 units × $71.25)

c.

Inventory, July 31: $5,415 (76 units × $71.25)

PE 7–4B

a. Weighted average unit cost: $9.50
Inventory total cost after purchase on October 22:
125 units @ $8
375 units @ $10
500

$1,000
3,750
$4,750

Weighted average unit cost = $9.50 ($4,750 ÷ 500 units)
b.

Cost of merchandise sold (October 29): $2,660 (280 units × $9.50)

c.

Inventory, October 31: $2,090 (220 units × $9.50)


PE 7–5A
a. First-in, first-out (FIFO) method: $3,726 = 23 units × $162
b. Last-in, first-out (LIFO) method: $3,105 = 23 units × $135
c. Weighted average cost method: $3,450 (23 units × $150), where average cost = $150 =
$13,500 ÷ 90 units

PE 7–5B
a. First-in, first-out (FIFO) method: $20,094 = (40 units × $357) + (17 units × $342)
b. Last-in, first-out (LIFO) method: $19,854 = (20 units × $360) + (37 units × $342)
c. Weighted average cost method: $19,665 (57 units × $345), where average cost = $345 =

$110,400 ÷ 320 units
PE 7–6A

Commodity

1107B
1110M

Inventory
Quantity

450
75

Unit

Unit

Cost
Price

Market
Price

$80
60

$78
64

Unit

Unit

Cost
Price

Market
Price

$10
36

$11
34

Total

Total
Cost

Market

$36,000
4,500
$40,500

$35,100
4,800
$39,900

Lower of
C or M

$35,100
4,500
$39,600

PE 7–6B

Commodity

JFW1
SAW9
Total

Inventory
Quantity

6,330
1,140

Total
Cost

$ 63,300
41,040
$104,340

Market

$ 69,630
38,760
$108,390

Lower of
C or M

$ 63,300
38,760
$102,060


PE 7–7A

Amount of Misstatement

Overstatement (Understatement)

Balance Sheet:
Merchandise inventory understated*…………………
Current assets understated………………………………
Total assets understated………………………………
Owner’s equity understated……………………………

$(4,450)
(4,450)
(4,450)
(4,450)

Income Statement:
Cost of merchandise sold overstated…………………
Gross profit understated………………………………
Net income understated…………………………………

$ 4,450
(4,450)
(4,450)

* $118,350 – $113,900 = $4,450
PE 7–7B

Amount of Misstatement
Overstatement (Understatement)

Balance Sheet:
Merchandise inventory overstated*……………………
Current assets overstated………………………………
Total assets overstated…………………………………
Owner’s equity overstated………………………………

$8,780
8,780
8,780
8,780

Income Statement:
Cost of merchandise sold understated………………
Gross profit overstated……………………………………
Net income overstated…………………………………

$(8,780)
8,780
8,780

* $728,660 – $719,880 = $8,780


PE 7–8A
a.

Inventory Turnover

Cost of merchandise sold
Inventories:
Beginning of year
End of year
Average inventory
Inventory turnover

2014

2013

$1,452,500

$1,120,000

$380,000
$450,000

$415,000

$320,000
$380,000
$350,000

[($380,000 + $450,000) ÷ 2]

[($320,000 + $380,000) ÷ 2]

3.5

3.2

($1,452,500 ÷ $415,000)

($1,120,000 ÷ $350,000)

2014

2013

$1,452,500

$1,120,000

Number of Days’ Sales

b.

in Inventory

Cost of merchandise sold
Average daily cost of
merchandise sold
Average inventory
Number of days’ sales in
inventory

$3,979.5

$3,068.5

($1,452,500 ÷ 365 days)

($1,120,000 ÷ 365 days)

$415,000

$350,000

[($380,000 + $450,000) ÷ 2]

[($320,000 + $380,000) ÷ 2]

104.3 days

114.1 days

($415,000 ÷ $3,979.5)

($350,000 ÷ $3,068.5)

c. The increase in the inventory turnover from 3.2 to 3.5 and the decrease in the
number of days’ sales in inventory from 114.1 days to 104.3 days indicate
favorable trends in managing inventory.


CHAPTER 7

Inventories

PE 7–8B
a.

Inventory Turnover

Cost of merchandise sold
Inventories:
Beginning of year
End of year
Average inventory
Inventory turnover

2014

2013

$3,864,000

$4,001,500

$770,000
$840,000
$805,000

$740,000
$770,000
$755,000

[($770,000 + $840,000) ÷ 2]

[($740,000 + $770,000) ÷ 2]

4.8

5.3

($3,864,000 ÷ $805,000)

($4,001,500 ÷ $755,000)

2014

2013

$3,864,000

$4,001,500

Number of Days’ Sales

b.

in Inventory

Cost of merchandise sold
Average daily cost of
merchandise sold
Average inventory
Number of days’ sales in
inventory

c.

$10,586.3

$10,963.0

($3,864,000 ÷ 365 days)

($4,001,500 ÷ 365 days)

$805,000

$755,000

[($770,000 + $840,000) ÷ 2]

[($740,000 + $770,000) ÷ 2]

76.0 days

68.9 days

($805,000 ÷ $10,586.3)

($755,000 ÷ $10,963.0)

The decrease in the inventory turnover from 5.3 to 4.8 and the increase in the
number of days’ sales in inventory from 68.9 days to 76.0 days indicate
unfavorable trends in managing inventory.


EXERCISES
Ex. 7–1
Switching to a perpetual inventory system will strengthen Triple Creek Hardware’s
internal controls over inventory, since the store managers will be able to keep track
of how much of each item is on hand. This should minimize shortages of goodselling items and excess inventories of poor-selling items.
On the other hand, switching to a perpetual inventory system will not eliminate
the need to take a physical inventory count. A physical inventory must be taken to
verify the accuracy of the inventory records in a perpetual inventory system. In
addition, a physical inventory count is needed to detect shortages of inventory
due to damage or theft.

Ex. 7–2
a.

Appropriate. The inventory tags will protect the inventory from customer theft.

b. Inappropriate. The control of using security measures to protect the inventory
is violated if the stockroom is not locked.
c.

Inappropriate. Good controls include a receiving report, prepared after all
inventory items received have been counted and inspected. Inventory
purchased should only be recorded and paid for after reconciling the receiving
report, the initial purchase order, and the vendor’s invoice.


CHAPTER 7

Inventories

Ex. 7–3
a.

Portable DVD Players
Purchases
Date

Apr.

Quantity

1
6
14

140

Unit
Cost

Total
Cost

40

30
b.

160

43

Inventory

Unit
Cost

Unit
Cost

Quantity

Total
Cost

90

39

3,510

30
80
45

39
40
40

1,170
3,200
1,800

Quantity

5,600

19
25
30

Cost of Merchandise Sold

6,880

Balances

Total
Cost

120
30
30
140
60

39
39
39
40
40

4,680
1,170
1,170
5,600
2,400

15
15
160

40
40
43

600
600
6,880
7,480

9,680

Since the prices rose from $39 for the April 1 inventory to $43 for the purchase on April 30, we would
expect that under last-in, first-out the inventory would be lower.
Note to Instructors: Exercise 7–4 shows that the inventory is $7,465 under LIFO.

7-9
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


Ex. 7–4
Portable DVD Players
Purchases
Date

Apr.

Quantity

1
6
14

Unit
Cost

Total
Cost

Cost of Merchandise Sold

Inventory

Unit
Cost

Unit
Cost

Quantity

Total
Cost

90

39

3,510

19

110

40

4,400

25

30
15

40
39

1,200
585

30
30

140

160
Balances

40

43

5,600

6,880
9,695

Quantity

Total
Cost

120
30
30
140
30
30
15

39
39
39
40
39
40
39

4,680
1,170
1,170
5,600
1,170
1,200
585

15
160

39
43

585
6,880
7,465


Ex. 7–5
a.

Prepaid Cell Phones
Purchases
Date

Aug.

Quantity

1
10

360

Unit
Cost

Total
Cost

45

600

31
31
b.

48

Inventory

Unit
Cost

Unit
Cost

Quantity

Total
Cost

16,200

12
14

20

Cost of Merchandise Sold

360
240
415

45
44
44

16,200
10,560
18,260

500

48

24,000

28,800

Balances

Quantity

775
775

360
535

44
44
45
44

34,100
34,100
16,200
23,540

120
120
600
120
100

44
44
48
44
48

5,280
5,280
28,800
5,280
4,800

10,080

69,020

Since the prices rose from $44 for the August 1 inventory to $48 for the purchase on August 20, we would
expect that under first-in, first-out the inventory would be higher.
Note to Instructors: Exercise 7–6 shows that the inventory is $10,560 under FIFO.

Total
Cost


Ex. 7–6
Prepaid Cell Phones
Purchases
Date

Aug.

Quantity

1
10

360

Unit
Cost

Total

Cost

45

Cost of Merchandise Sold

Inventory

Unit
Cost

Unit
Cost

Quantity

Total
Cost

16,200

12

600

44

26,400

14

175
240

44
45

7,700
10,800

120
380

45
48

5,400
18,240
68,540

20

600

31
31

Balances

48

28,800

Quantity

Total
Cost

775
775
360
175
360

44
44
45
44
45

34,100
34,100
16,200
7,700
16,200

120
120
600

45
45
48

5,400
5,400
28,800

220

48

10,560
10,560


Ex. 7–7
a.

$22,880 ($440 × 52 units)

b.

$22,000 [($400 × 12 units) + ($420 × 20 units) + ($440 × 20 units)] = $4,800 + $8,400 + $8,800

Ex. 7–8

Date
Jan.
1

Mar. 18
May
2
Aug.
9
Oct.
20
Dec. 31

Purchases
Unit
Quantity
Cost

Total
Cost

1,800

155.00 279,000

700
Balances

160.50 112,350

Cost of Merchandise Sold
Unit
Total
Quantity Cost

Cost
800

150.00

1,500

154.50

Inventory

Quantity Unit Cost
1,000
150.00
120,000
200
150.00
2,000
154.50
231,750
500
154.50
1,200
158.00
351,750
1,200
158.00

Total
Cost

150,000
30,000
309,000
77,250
189,600
189,600

Ex. 7–9

Date
Jan.
1
Apr.
19
June 30
Sept.
2
Nov. 15
Dec. 31

Purchases
Unit
Quantity
Cost

Total
Cost

12,000

48.00 576,000

2,000
Balances

50.00 100,000

Cost of Merchandise Sold
Unit
Total
Quantity Cost
Cost
5,000

40.00

9,000

46.40

Inventory

Quantity Unit Cost
8,000
40.00
200,000
3,000
40.00
15,000
46.40

417,600
6,000
46.40
8,000
47.30
617,600
8,000
47.30

7-13
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Total
Cost
320,000
120,000
696,000
278,400
378,400
378,400


Ex. 7–10

Date
Jan.
1
Apr.
19
June 30

Sept.

Purchases
Unit
Cost
Quantity

12,000

Total
Cost

15

Dec.

31

2,000
Balances

5,000

40.00

3,000
6,000

40.00
48.00

48.00 576,000

2

Nov.

Cost of Merchandise Sold
Unit
Total
Cost
Cost
Quantity

50.00 100,000

Inventory

Quantity Unit Cost
8,000
40.00
200,000
3,000
40.00
3,000
40.00
12,000
48.00
120,000
6,000

48.00
288,000
6,000
48.00
2,000
50.00
608,000

Total
Cost
320,000
120,000
120,000
576,000
288,000
288,000
100,000
388,000


Ex. 7–11

Date
Jan.
1
Apr.
19
June
30
Sept.

Purchases
Unit
Cost
Quantity

12,000

Total
Cost

15

Dec.

31

2,000

5,000

40.00

9,000

48.00

48.00 576,000

2

Nov.

Cost of Merchandise Sold
Unit
Total
Cost
Quantity Cost

50.00 100,000

Balances

Quantity Unit Cost
8,000
40.00
200,000
3,000
40.00
3,000
40.00
12,000
48.00
432,000
3,000
40.00
3,000
48.00
3,000
40.00

3,000
48.00
2,000
50.00
632,000

Ex. 7–12
a.

$62,496 (24 units at $1,980 plus 8 units at $1,872) = $47,520 + $14,976

b.

$49,104 (18 units at $1,440 plus 14 units at $1,656) = $25,920 + $23,184

c.

$56,448 (32 units at $1,764; $211,680 ÷ 120 units = $1,764)
Cost of merchandise available for sale:
18 units @ $1,440……………………………………………
36 units @ $1,656……………………………………………
42 units @ $1,872……………………………………………
24 units @ $1,980……………………………………………
120 units (at an average cost of $1,764)…………………

Inventory

$ 25,920
59,616
78,624

47,520
$211,680

Total
Cost
320,000
120,000
120,000
576,000
120,000
144,000
120,000
144,000
100,000
364,000


CHAPTER 7

Inventories

Ex. 7–13
Cost

Inventory Method

a.

FIFO

b.

LIFO
Weighted average cost

c.

Merchandise
Inventory

Merchandise
Sold

$39,888
34,920
37,440

$77,112
82,080
79,560

Cost of merchandise available for sale:
42 units at $720……………………………………………………...……………
58 units at $780………………………………………………...………………
20 units at $816………………………………………………………..…………
30 units at $840………………………………………………….………………
150 units (at an average cost of $780)………………………………………
a.

$ 30,240

45,240
16,320
25,200
$117,000

First-in, first-out:
Merchandise inventory:
30 units at $840…………………………………………………..……………
18 units at $816………………………………………...………………………
48 units……………………………………………………..……………………

$25,200
14,688
$39,888

Merchandise sold:
$117,000 – $39,888…………………………………….…………………………

$77,112

b. Last-in, first-out:
Merchandise inventory:
42 units at $720……………………………………………...…………………
6 units at $780………………………………………….………………………

$30,240
4,680

48 units…………………………………………………………...………………

$34,920

Merchandise sold:
$117,000 – $34,920……………………………………………..…………………
c.

$82,080

Weighted average cost:
Merchandise inventory:
48 units at $780 ($117,000 ÷ 150 units)…………………………………………

$37,440

Merchandise sold:
$117,000 – $37,440…………………………………...……………………………

$79,560

7-16
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Ex. 7–14
a. 1.
2.
3.
4.
b.

FIFO
FIFO
FIFO
FIFO

inventory
cost of goods sold
net income
income taxes

> (greater than)
< (less than)
> (greater than)
> (greater than)

LIFO
LIFO
LIFO
LIFO

inventory
cost of goods sold
net income
income taxes

In periods of rising prices, the income shown on the company’s tax return
would be lower if LIFO rather than FIFO were used; thus, there is a tax advantage of
using LIFO.

Note to Instructors: The federal tax laws require that if LIFO is used for tax

purposes, LIFO must also be used for financial reporting purposes. This is known
as the LIFO conformity rule. Thus, selecting LIFO for tax purposes means that the
company’s reported income will also be lower than if FIFO had been used.
Companies using LIFO believe the tax advantages from using LIFO outweigh any
negative impact of reporting a lower income to shareholders.
Ex. 7–15

Commodity

C300
F679
K200
MN23
XX51
Total

Inventory
Quantity

77
115
3,180
190
226

Unit

Unit

Cost

Price

Market
Price

$40
8
3
29
19

$39
9
2
26
18

Total
Cost

Market

$ 3,080
920
9,540
5,510
4,294
$23,344

$ 3,003

1,035
6,360
4,940
4,068
$19,406

Lower of
C or M

$ 3,003
920
6,360
4,940
4,068
$19,291

Ex. 7–16
The merchandise inventory would appear in the Current Assets section, as
follows:
Merchandise inventory—at lower of cost (FIFO) or market………………………
Alternatively, the details of the method of determining cost and the method of
valuation could be presented in a note.

$19,291


Ex. 7–17
a.
Merchandise inventory*…………………………………………
Current assets……………………………………………………

Total assets………………………………………………………
Owner’s equity…………………………………………………

Balance Sheet

$13,850
$13,850
$13,850
$13,850

understated
understated
understated
understated

* $13,850 = $338,500 – $324,650
b.
Cost of merchandise sold………………………………………
Gross profit………………………………………………………
Net income………………………………………………………
c.
Cost of merchandise sold………………………………………
Gross profit………………………………………………………
Net income………………………………………………………

Income Statement

$13,850 overstated
$13,850 understated
$13,850 understated

Income Statement

$13,850 understated
$13,850 overstated
$13,850 overstated

d. The December 31, 2015, balance sheet would be correct, since the 2014
inventory error reverses itself in 2015.

Ex. 7–18
a.
Merchandise inventory*…………………………………………
Current assets……………………………………………………
Total assets………………………………………………………
Owner’s equity…………………………………………………

Balance Sheet

$21,600
$21,600
$21,600
$21,600

overstated
overstated
overstated
overstated

* $21,600 = $640,500 – $618,900
b.

Cost of merchandise sold………………………………………
Gross profit………………………………………………………
Net income………………………………………………………
c.
Cost of merchandise sold………………………………………
Gross profit………………………………………………………
Net income………………………………………………………

Income Statement

$21,600 understated
$21,600 overstated
$21,600 overstated
Income Statement

$21,600 overstated
$21,600 understated
$21,600 understated

d. The December 31, 2015, balance sheet would be correct, since the 2014
inventory error reverses itself in 2015.


Ex. 7–19
When an error is discovered affecting the prior period, it should be corrected. In
this case, the merchandise inventory account should be debited and the owner’s
capital account credited for $33,000.
Failure to correct the error for 2013 and purposely misstating the inventory and
the cost of merchandise sold in 2014 would cause the income statements for the
two years to not be comparable. The balance sheet at the end of 2014 would be

correct, however, since the 2013 inventory error reverses itself in 2014.

Ex. 7–20
a.

Apple: 52.5 {$39,541,000 ÷ [($1,051,000 + $455,000) ÷ 2]}
American Greetings: 4.0 {$682,368 ÷ [($179,730 + $163,956) ÷ 2]}

b. Lower. Although American Greetings’ business is seasonal in nature, with
most of its revenue generated during the major holidays, much of its
nonholiday inventory may turn over very slowly. Apple, on the other hand,
turns its inventory over very fast because it maintains a low inventory, which
allows it to respond quickly to customer needs. Additionally, Apple’s
computer products can quickly become obsolete, so it cannot risk building
large inventories.


Ex. 7–21
a.

Average Inventory

Number of Days’ Sales in Inventory =

Cost of Goods Sold ÷ 365

Kroger:

($4,966 + $4,935) ÷ 2
$63,927 ÷ 365

=

Safeway:

($2,623 + $2,509) ÷ 2
$29,443 ÷ 365

=

($658 + $665) ÷ 2
$5,182 ÷ 365

=

Winn-Dixie:
Inventory Turnover =

$4,950.5
175.1

= 28 days

$2,566.0

= 32 days

80.7
$661.5
14.2

= 47 days

Cost of Goods Sold
Average Inventory
12.9

Kroger:

$63,927
($4,966 + $4,935) ÷ 2

=

Safeway:

$29,443
($2,623 + $2,509) ÷ 2

=

Winn-Dixie:

$5,182
($658 + $665) ÷ 2

11.5

= 7.8

b. The number of days’ sales in inventory and the inventory turnover ratios are
relatively the same for Kroger and Safeway. Winn-Dixie has a significantly
higher number of days’ sales in inventory and a significantly lower inventory
turnover than Kroger and Safeway. These results suggest that Kroger and
Safeway are more efficient than Winn-Dixie in managing inventory.
c. If Winn-Dixie matched Kroger’s days’ sales in inventory, then its hypothetical
ending inventory would be determined as follows,
Number of Days’ Sales in Inventory =
28 days =

Average Inventory
Cost of Goods Sold ÷ 365
X
($5,182 ÷ 365)

X =

28 × ($5,182 ÷ 365) = 28 × $14.2

X =

$397.6

Thus, the additional cash flow that would have been generated is the difference
between the actual average inventory and the hypothetical average inventory, as
follows:
Actual average inventory………………………………………
Hypothetical average inventory……………………………
Positive cash flow potential…………………………………

$661.5 million
397.6 million
$263.9 million


That is, a lower average inventory amount would have required less cash than
actually was required.


Appendix Ex. 7–22
$666,900 ($1,235,000 × 54%)

Appendix Ex. 7–23
$241,804 ($396,400 × 61%)

Appendix Ex. 7–24
$511,500 ($775,000 × 66%)

Appendix Ex. 7–25
Cost

Retail

Merchandise inventory, June 1
Purchases in June (net)

$ 165,000
2,361,500

$ 275,000

3,800,000

Merchandise available for sale

$2,526,500

$4,075,000

Ratio of cost to retail price:

$2,526,500
$4,075,000

= 62%

Sales for June (net)

3,550,000
$ 525,000

Merchandise inventory, June 30, at retail price
Merchandise inventory, June 30,
at estimated cost ($525,000 × 62%)

$ 325,500

Appendix Ex. 7–26
a.

Merchandise inventory, January 1

Purchases (net), January 1–December 31
Merchandise available for sale
Sales (net), January 1–December 31
Less estimated gross profit ($4,440,000 × 35%)

$ 350,000
2,950,000
$3,300,000
$4,440,000
1,554,000

Estimated cost of merchandise sold
Estimated merchandise inventory, December 31
b. The gross profit method is useful for estimating inventories for monthly or
quarterly financial statements. It is also useful in estimating the cost of
merchandise destroyed by fire or other disasters.

2,886,000
$ 414,000


Appendix Ex. 7–27
Merchandise available for sale…………………………………………………
Less cost of merchandise sold [$9,250,000 × (100% – 36%)]……………
Estimated ending merchandise inventory……………………………………

$6,125,000
5,920,000
$ 205,000

Appendix Ex. 7–28
Merchandise available for sale…………………………………………………
Less cost of merchandise sold [$1,450,000 × (100% – 42%)]………………
Estimated ending merchandise inventory……………………………………

$960,000
841,000
$119,000


CHAPTER 7

Inventories

PROBLEMS
Prob. 7–1A
1.
Purchases
Date
2014

June

Quantity

1
10

1,500

Unit
Cost

34.00

Cost of Merchandise Sold
Total
Cost

30
5
10

3,600

35.00

Aug.

3,000

35.80

500

30
31

36.00

500
250
250
100

30.00
34.00
34.00
34.00

15,000
8,500
8,500
3,400

900
900
1,700

34.00
35.00
35.00

30,600
31,500
59,500

1,000
1,000

35.00
35.80

35,000
35,800

1,750

35.80

62,650

107,400

14
25

Total
Cost

126,000

16
28
5

Unit
Cost

51,000

28

July

Quantity

18,000

Balances

Inventory
Quantity

Unit
Cost

Total
Cost

500
500
1,500

30.00
30.00
34.00

15,000
15,000

51,000

1,250
1,000
900
900
3,600

34.00
34.00
34.00
34.00
35.00

42,500
34,000
30,600
30,600
126,000

2,700
1,000
1,000
3,000

35.00
35.00
35.00
35.80

94,500
35,000
35,000
107,400

2,000
2,000
500
250
500

35.80
35.80
36.00
35.80
36.00

71,600
71,600
18,000
8,950
18,000
26,950

290,450

7-23
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CHAPTER 7

Inventories

Prob. 7–1A (Concluded)
2.

Accounts Receivable
Sales

483,800

Cost of Merchandise Sold
Merchandise Inventory

290,450

483,800*

290,450

*$483,800 = $37,500 + $13,000 + $5,500 + $100,800 + $102,000 + $120,000 + $105,000

3.

$193,350 ($483,800 – $290,450)

4.

$26,950 ($8,950 + $18,000)

5.

Since the prices rose from $30 for the June 1 inventory to $36 for the purchase
on August 25, we would expect that under the last-in, first-out method the inventory
would be lower.
Note to Instructors: Problem 7–2A shows that the inventory is $23,500 under LIFO.

7-24
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