To download more slides, ebook, solutions and test bank, visit

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

2.

3.

4.

5.

6.

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)?
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.
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.
(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.
The general rule of thumb is that inventoryrelated costs incurred inside the factory wall
are allocated to the cost of inventory, and
costs incurred outside the factory wall (e.g.,

7.

8.

9.


10.

301

in the finished goods warehouse) are expensed as incurred.
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.
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.
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.
(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.
(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


To download more slides, ebook, solutions and test bank, visit
302

Chapter 9

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


To download more slides, ebook, solutions and test bank, visit
Chapter 9

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.
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.
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. Under IAS 2, LIFO is not currently an acceptable inventory valuation method.
23. 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

303

occurred. Similar arguments could be presented for recording gains in value if they occur.
24. 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.
25. 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.
26. 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.
27. Under IAS 2, the rule governing inventory
write-downs can best be labeled ―lower of
cost or net realizable value.‖ Also, inventory
write-downs can be reversed if inventory selling prices subsequently recover.
28. 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).



To download more slides, ebook, solutions and test bank, visit
304

Chapter 9

29.

(1)
Effect on Statements of
Current Period

(2)
Effect on Statements of
Succeeding Period

(a) Ending inventory overstated 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.

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


Nature of Error

30. 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.

FIFO assumption is made, the cost percentage used to convert ending inventory at retail into cost is the cost percentage for the
purchases. If a LIFO assumption is made,
the conversion from retail to cost is done by
first using the cost percentage applicable to
beginning inventory and then applying the
purchases cost percentage to the new
LIFO layer, if any.
‡

33. a. When using the retail inventory method
to estimate average cost, markdowns
are included in the computation of the
cost percentage.

‡


31. The retail inventory method is more flexible
than the gross profit method in that it allows
estimates to be based on FIFO, LIFO, or
average cost assumptions and even permits estimation of lower-of-cost-or-market
values. The retail inventory method also offers the advantage that when a physical inventory is actually taken for financial statement purposes, the inventory can be taken
at retail and then converted to cost without
reference to individual costs and invoices,
thus saving time and expense.
‡

32. FIFO and LIFO assumptions can be incorporated into the retail inventory method by
computing a different cost percentage for
beginning inventory and for purchases. If a

b. When using the retail inventory method
to estimate lower of cost or market,
markdowns are excluded from the
computation of the cost percentage.
However, markdowns are included in
the computation of ending inventory at
retail.
‡

34. The purpose of forming LIFO pools is to
simplify the LIFO calculations, so simplification should be a major factor. In addition, all
items in the pool should have some similarity, such as being in the same product
line. Finally, a company should carefully
consider potential income tax effects when
forming LIFO pools.

‡

Relates to Expanded Material.


To download more slides, ebook, solutions and test bank, visit
Chapter 9

305

‡

35. Dollar-value LIFO has the advantage of
using dollar values identified with the inventory rather than physical units, and therefore the LIFO inventory valuation process is
simplified. Dollar-value LIFO makes the
clerical routine less tedious and costly and
permits the use of the LIFO valuation method in situations where it would not be
feasible to use the unit method.
‡

36. Indexes are used to adjust current prices to
a base-year period. This adjustment is necessary to identify incremental layers. If
there is a new layer, another index must
be used to adjust the incremental layer to
current-year prices. The incremental layer
may be computed using beginning-of-year
prices, average prices, or end-of-year
prices.
‡


37. When using dollar-value LIFO, a new LIFO
layer can be valued using a year-end price
index, a first purchase price index, or an
average price index. Use of a first purchase
price index is most consistent with the LIFO
assumption.
‡

38. a. When computing the cost percentage
for the dollar-value LIFO retail method,
beginning inventory values are ignored.
Any new inventory layer is converted
from retail to cost using the cost percentage applicable to current year
purchases.

b. Both markdowns and markups are included in the retail number used to
compute the cost percentage for use
with the dollar-value LIFO retail method.
‡

39. 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
is an exchange of promises about future
actions and is known as an executory contract.
‡

40. 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.
‡

41. 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.


To download more slides, ebook, solutions and test bank, visit
306

Chapter 9

PRACTICE EXERCISES
PRACTICE 9–1
1.

2.

PERPETUAL AND PERIODIC JOURNAL ENTRIES


Periodic:
Purchases ..............................................................................
Accounts Payable ............................................................

3,000

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

11,200

Cash .......................................................................................
Accounts Receivable .......................................................

9,750

3,000
11,200
9,750

Perpetual:
Inventory ................................................................................
Accounts Payable ............................................................

3,000

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


11,200

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

4,500

Cash .......................................................................................
Accounts Receivable .......................................................

9,750

PRACTICE 9–2

3,000
11,200
4,500
9,750

PERPETUAL AND PERIODIC COMPUTATIONS

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

$220,000
720,000

$940,000
145,000
$795,000

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 .............................................

$220,000
720,000
$940,000
710,000
$230,000
145,000
$ 85,000

2.

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

85,000
85,000


To download more slides, ebook, solutions and test bank, visit

Chapter 9

PRACTICE 9–3

307

GOODS IN TRANSIT AND ON CONSIGNMENT

Before adjustment
Consignment
Sold, FOB destination
Purchased, FOB shipping point
Sold, FOB shipping point
Adjusted total
PRACTICE 9–4

$ 225,000
no adjustment needed, correctly excluded
+ $20,000
+ $30,000
no adjustment needed, correctly excluded
$ 275,000

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

198,000
$ 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 ............................................................

490,000

Accounts Payable .................................................................
Cash ..................................................................................

490,000

490,000
490,000

Net method, paid after discount period
Inventory ................................................................................
Accounts Payable ............................................................

490,000

Accounts Payable .................................................................
Discounts Lost ......................................................................
Cash ..................................................................................

490,000

10,000

490,000

500,000


To download more slides, ebook, solutions and test bank, visit
308

Chapter 9

PRACTICE 9–5
3.

4.

(Concluded)

Gross method, paid within discount period
Inventory ................................................................................
Accounts Payable ............................................................

500,000

Accounts Payable .................................................................
Inventory ..........................................................................
Cash ..................................................................................

500,000


500,000
10,000
490,000

Gross method, paid after discount period
Inventory ................................................................................
Accounts Payable ............................................................

500,000

Accounts Payable .................................................................
Cash ..................................................................................

500,000

PRACTICE 9–6

500,000
500,000

INVENTORY VALUATION: FIFO, LIFO, AND AVERAGE
Units
300

Beginning inventory
Purchases:
March 23
September 16


Cost per
Unit
$17.50

900
1,200
2,400

18.00
18.25

Total
Cost
$ 5,250
16,200
21,900
$43,350

Units remaining: 400, meaning that 2,000 (2,400 – 400) units were sold
1. Cost of Goods Sold
a.

300
900
800
b.

$17.50
18.00
18.25

Total

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

400

$18.25 = $7,300

$18.25 = $21,900
18.00 = 14,400
Total = $36,300

300
100

$17.50 = $5,250
18.00 = 1,800
Total = $7,050

400

$18.0625 = $7,225

LIFO
1,200
800


c.

2. Ending Inventory

FIFO

Average Cost
$43,350/2,400 units = $18.0625
2,000

$18.0625 = $36,125


To download more slides, ebook, solutions and test bank, visit
Chapter 9

PRACTICE 9–7

309

INVENTORY VALUATION: COMPLICATIONS WITH A PERPETUAL
SYSTEM
1. Cost of Goods Sold

2. Ending Inventory

January 16 (100 units)

100


$17.50 = $ 1,750

200

$17.50 = $3,500

July 15 (600 units)

200
400

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

500

$18.00 = $9,000

November 1 (1,300 units)

500
800

$18.00 = $ 9,000
18.25 = 14,600

400

$18.25 = $7,300


a. FIFO

Total = $36,050

Total = $7,300

b. LIFO
January 16 (100 units)

100

$17.50 = $ 1,750

200

$17.50 = $3,500

July 15 (600 units)

600

$18.00 = $10,800

200
300

$17.50 = $3,500
18.00 = 5,400


November 1 (1,300 units) 1,200
100

$18.25 = $21,900
18.00 =
1,800

200
200

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

Total = $36,250

Total = $7,100

c. Average Cost
January 16 (100 units)

100

$17.50 = $ 1,750

200
900
1,100

$17.50 = $ 3,500
18.00 = 16,200

$19,700

200

$17.50 = $3,500

July 15 (600 units)

$19,700/1,100 = $17.909 per unit
600

$17.909 = $10,745

500
1,200
1,700

$17.909 = $ 8,955
18.25 = 21,900
$30,855

500

$17.909 = $8,955

400

$18.150 = $7,260

November 1 (1,300 units)


$30,855/1,700 = $18.150 per unit
1,300

$18.150 = $23,595
Total = $36,090

Total = $7,260


To download more slides, ebook, solutions and test bank, visit
310

Chapter 9

PRACTICE 9–8

LIFO LAYERS

Year 1

Units
Purchased
100

Cost
per Unit
$2.50

Units

Sold
80

Year 2

160

$3.00

130

20
30

$2.50 = $50
$3.00 =
90

Year 3

180

$3.40

180

20
30

$2.50 = $50

$3.00 =
90

20
30
60

$2.50 = $ 50
$3.00 =
90
$4.00 = 240
Total = $380

Ending Inventory
20 $2.50 = $50

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

260

PRACTICE 9–9

$4.00

200

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 ......................................................................
2. Cost of goods sold in Year 4: 200 units sold

$440
380
$ 60

$4.00 = $800

3. Cost of goods sold in Year 4 if the number of units purchased had been 150:
Purchases during the year: 150 units $4.00 .................
Beginning LIFO inventory of 50 units ..............................
Total cost of goods sold .............................................

$600
140
$740

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


To download more slides, ebook, solutions and test bank, visit
Chapter 9

311


PRACTICE 9–10 LIFO AND INCOME TAXES
1. LIFO income taxes

Year 1
Year 2
Year 3
Year 4
Total

Sales
$ 480
780
1,080
1,200

Cost of
Goods Sold
$200
390
612
800

Income before
Taxes
$280
390
468
400

Income

Taxes (40%)
$112
156
187
160
$615

Cost of
Goods Sold*
$200
380
592
770

Income before
Taxes
$280
400
488
430

Income
Taxes (40%)
$112
160
195
172
$639

2. FIFO income taxes


Year 1
Year 2
Year 3
Year 4
Total

Sales
$ 480
780
1,080
1,200

*FIFO cost of goods sold computations:
Year 1: 80 $2.50 = $200
Year 2: (20 $2.50) + (110 $3.00) = $380
Year 3: (50 $3.00) + (130 $3.40) = $592
Year 4: (50 $3.40) + (150 $4.00) = $770
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 .................................................................................
Item B .................................................................................
Item C .................................................................................
Total ..............................................................................


$ 575
590
1,100
$2,265


To download more slides, ebook, solutions and test bank, visit
312

Chapter 9

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 ..........................

400

Allowance for Decline in Value of Inventory .................................
Cost of Goods Sold ..................................................................

300

400

300

$300 = $400 beginning balance in the allowance account – $100 required ending
balance
PRACTICE 9–14
1.


RETURNED INVENTORY

Loss on return: $250,000 recorded amount of returned inventory – $250,000 original cost = $0 loss
Sales ............................................................................
Cost of goods sold .....................................................
Gross profit (loss) .................................................

2.

Loss on return: $225,000 recorded amount of returned inventory – $250,000 original cost = $25,000 loss
Sales ............................................................................
Cost of goods sold .....................................................
Gross profit ...........................................................

3.

$ 225,000
(250,000)
$ (25,000)

$ 225,000
(225,000)
$
0

Loss on return: $144,225 recorded amount of returned inventory – $250,000 original cost = $105,775 loss
Sales ............................................................................
Cost of goods sold .....................................................
Gross profit ...........................................................


$ 225,000
(144,225)
$ 80,775


To download more slides, ebook, solutions and test bank, visit
Chapter 9

313

PRACTICE 9–15 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)
PRACTICE 9–16

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

INVENTORY ERRORS

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

correct
correct
correct
overstated by $2,200
understated by $2,200
overstated by $2,200


Correct net income: $3,000 – $2,200 = $800
2. Year 2
Beginning inventory
Plus: Purchases
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
Net income

overstated by $2,200
correct
overstated by $2,200
understated by $450
overstated by $2,650
understated by $2,650

Correct net income: $3,000 + $2,650 = $5,650
Note that the effect of the inventory error in Year 1 was reversed in Year 2.
3. Year 3
Beginning inventory
Plus: Purchases
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
Net income

understated by $450
correct
understated by $450

correct
understated by $450
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.


To download more slides, ebook, solutions and test bank, visit
314

Chapter 9

PRACTICE 9–17 COMPUTING INVENTORY RATIOS
1. Inventory turnover = Cost of goods sold/Average inventory
= $4,200/[($2,600 + $3,000)/2]
= 1.50 times
2. Number of days’ sales in inventory = Average inventory/Average daily cost of
goods sold
= [($2,600 + $3,000)/2]/($4,200/365)
= 243.33 days
‡

PRACTICE 9–18

RETAIL INVENTORY METHOD

Inventory, January 1 .....................................................................
Purchases in January...................................................................
Goods available for sale ..............................................................

Cost percentage [($80,000 ÷ $130,000) = 61.5%]
Deduct sales for January .............................................................
Inventory, January 31, at retail ....................................................
Inventory, January 31, at estimated cost ($36,000 61.5%)
‡

PRACTICE 9–19

Markups .........................................................................................
Markdowns ....................................................................................
Cost percentage:
Average cost: ($65,000 ÷ $125,000) = 52.0%
Goods available for sale ..............................................................
Deduct sales for January .............................................................
Inventory, January 31, at retail ....................................................
Inventory, January 31, at estimated cost:
Average cost: ($45,000 52.0%) ............................................
‡

94,000
$36,000
$22,140

Average Cost
Cost
Retail
$25,000 $ 50,000
40,000
70,000
$65,000 $120,000

30,000
(25,000)
$125,000

$125,000
80,000
$ 45,000
$23,400

LIFO POOLS

Ending inventory in units = 40 (160 available for sale less 120 units sold).
$830 (25 units @ $20 + 15 units @ $22)
‡

Retail
$60,000
70,000
$130,000

MARKUPS AND MARKDOWNS

Inventory, January 1 .....................................................................
Purchases in January...................................................................

PRACTICE 9–20

Cost
$40,000
40,000

$80,000

Relates to Expanded Material.


To download more slides, ebook, solutions and test bank, visit
Chapter 9

315

‡

PRACTICE 9–21 DOLLAR-VALUE LIFO
Inventory at
End-of-Year
Prices
$120,000

Date
Dec. 31

‡

PRACTICE 9–22

Date
Jan. 1
Dec. 31

‡


Year-End
Inventory at
Price
Base-Year
Index
Prices
÷
1.05
=
$114,286

Layers
$100,000
14,286
$114,286

Incremental
Layer
Dollar-Value
Index
LIFO Cost
1.00
= $100,000
1.05
=
15,000
$115,000

DOLLAR-VALUE LIFO RETAIL

Inventory at
End-of-Year
Retail Prices

Year-End
Price
Index

Inventory at
Base-Year
Retail Prices

Layers

Incremental
Layer
Index

Incremental
Cost
Percentage

Dollar-Value
LIFO Retail
Cost

$80,000

÷


1.00

=

$80,000

$ 80,000

1.00

65%

=

$52,000

$110,000

÷

1.10

=

$100,000

$ 80,000
20,000
$100,000


1.00
1.05

65%
70%

=
=

$52,000
14,700
$66,700

Relates to Expanded Material.


To download more slides, ebook, solutions and test bank, visit
316

Chapter 9

‡

PRACTICE 9–23 PURCHASE COMMITMENTS
1.

No entry necessary

2.


Loss on Purchase Commitment ...........................................
Estimated Loss on Purchase Commitment ...................
Loss: 250,000 ounces

3.

8,775,000

($1,075.10 – $1,110.20) = $8,775,000

Estimated Loss on Purchase Commitment .........................
Gain on Purchase Commitment......................................
Gain: 250,000 ounces

8,775,000

4,225,000
4,225,000

($1,092.00 – $1,075.1) = $4,225,000

Gold Inventory ....................................................................... 273,000,000
Estimated Loss on Purchase Commitment .........................
4,550,000
Cash ..................................................................................
277,550,000
Remaining balance in Estimated Loss: $8,775,000 – $4,225,000 = $4,550,000
‡

PRACTICE 9–24

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

‡

Relates to Expanded Material.

10,000
989
10,989


To download more slides, ebook, solutions and test bank, visit
Chapter 9

317

EXERCISES
9–25.
(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

9–26.
1. Purchases ..........................................................................
Accounts Payable ........................................................

2,800

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

5,900

2. Beginning inventory ..........................................................

+ Purchases .......................................................................
= Cost of goods available for sale....................................
– Ending inventory ............................................................
= Cost of goods sold .........................................................

$ 1,600
2,800
$ 4,400
800
$ 3,600

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

$ 1,600
2,800
$ 4,400
3,200
$ 1,200
800
$ 400

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


2,800

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

5,900

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

3,200

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

400

2,800
5,900

2,800
5,900
3,200
400


To download more slides, ebook, solutions and test bank, visit
318

Chapter 9


9–27.

Cost of goods sold—2013 .....................................
Add: December 31, 2013, inventory ......................
Total required .........................................................
Less: January 1, 2013, inventory ..........................
Purchases—2013 ...................................................
Less: December 31, 2013, accounts payable .......
Add: January 1, 2013, accounts payable .............
Cash expended for inventory—2013 ....................

9–28.

November 30 balance ............................................
December purchases:
Date of Order
Dec. 11, 2012 ...............................................
Dec. 13, 2012 ...............................................
Total available for sale...........................................
Less: December sales:
Consignment sales...........................................
Other sales ........................................................
Ending inventory quantity as of December 31 ....

9–29.

$ 1,125,000
540,000
$ 1,665,000

(600,000)
$ 1,065,000
(525,000)
350,000
$ 890,000
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

Anson 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 written special orders when
segregated for shipment.

(e)

Excluded

The merchandise was shipped FOB destination and was not received until January 3,
2014.

(f)

Excluded

Historical experience suggests that Anson will
collect the full purchase price, so the sale is

recognized even though legal title has not
passed. This treatment as a sale and exclusion
of inventory may be opposed by Anson’s auditor because SAB 101 typically requires that legal title pass before a sale is recognized.

(g)

Included

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


To download more slides, ebook, solutions and test bank, visit
Chapter 9

9–30.

319

Oakeson Mfg. Inc.
Schedule of Cost of Goods Manufactured
For the Quarter Ended March 31, 2013
Raw materials:
Beginning inventory.......................................................
Purchases [(75 $8) + (120 $8.50)] ............................
Cost of raw materials available for use ........................
Less: Ending inventory (80 $8.50)..............................
Raw materials used in production ...................................
Direct labor ........................................................................
Manufacturing overhead ..................................................

Total manufacturing costs ...............................................
Add: Work-in-process inventory, Jan. 1 (53 $14.00)....

$ 520
1,620
$ 2,140
680
$ 1,460
3,100
2,950
$ 7,510
742
$ 8,252
670
$ 7,582

Less: Work-in-process inventory, Mar. 31 (47 $14.25)
Cost of goods manufactured ...........................................
9–31.

9–32.

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 Craig Paper Supply.
*$7,400 0.03 = $222; $7,400 – $222 = $7,178

15,225

15,536

7,178*
7,178

10 Purchases .......................................................
9,991*
Accounts Payable ......................................
To record purchase of inventory at net
from Tippetts Ink Wholesale.
*$10,300 0.03 = $309; $10,300 – $309 = $9,991
16 Accounts Payable ..........................................
Discounts Lost ...............................................
Cash ............................................................

To record payment of December 3
and 10 invoices.

9,991

17,169
222
17,391


To download more slides, ebook, solutions and test bank, visit
320

9–32.

Chapter 9

(Concluded)
(b) Gross method
Dec. 3 Purchases .......................................................
Accounts Payable ......................................
To record purchase of inventory at gross
from Craig Paper Supply.

7,400
7,400

10 Purchases ....................................................... 10,300
Accounts Payable ......................................
10,300

To record purchase of inventory at gross
from Tippetts Ink Wholesale.
16 Accounts Payable .......................................... 17,700
Purchase Discounts ..................................
309
Cash ............................................................
17,391
To record payment of December 3 and 10
invoices.
2.

Dec. 31 Discounts Lost ($222 + $309) ........................
Accounts Payable ......................................
To record lost discounts from Craig Paper
Supply and Tippetts Ink Wholesale as of
December 31.

531
531

9–33.
1. Purchases ..........................................................................
Accounts Payable ........................................................
Accounts Payable .............................................................
Purchase Returns and Allowances ............................

6,000

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

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

6,000

6,000
450
450
6,000
450
450


To download more slides, ebook, solutions and test bank, visit
Chapter 9

9–34.

321

Periodic inventory system
1. FIFO:
Most recent purchase ........................

350 units @ $19.50 = $ 6,825

2. LIFO:
Oldest costs ........................................
Next oldest costs ................................


250 units @ $17.00 = $ 4,250
100
@ 18.00 =
1,800
350 units
$ 6,050

3. Average:
Beginning inventory ...........................
Purchases ...........................................

250 units @ $17.00 = $ 4,250
900
@ 18.00 = 16,200
1,200
@ 19.50 = 23,400
2,350 units
$43,850

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

$43,850 2,350 = $18.66 per unit
Ending inventory valuation:
350 units $18.66 (average unit cost) = $6,531
9–35.

Beginning inventory
600

+

+

Purchases
600

–
–

Sales
800

=
=

Ending inventory
400 units


To download more slides, ebook, solutions and test bank, visit
322

Chapter 9

9–35.

(Continued)

1.

FIFO Inventory Record—Product X

Received
Date
9–1
9–6

Quantity
200

Unit Cost
$2.00

Cost

Quantity

Unit Cost

Balance
Cost

$400

9–12

400

$1.50

$600


9–13

100

1.50

150

100
200

1.50
2.00

150
400

9–18

250

3.00

750

9–20

150

3.50


525

9–25

Ending inventory value:

2.

Issued

250 units @ $3.00 = $ 750
150
@ 3.50 =
525
400 units
$ 1,275

250 units @ $3.00 = $ 750
150
@ 3.50 =
525
400 units
$1,275

Quantity

Unit Cost

Cost


600
600
200
200
200
100
200
100
200
250
100
200
250
150
250
150

$1.50
1.50
2.00
1.50
2.00
1.50
2.00
1.50
2.00
3.00
1.50
2.00

3.00
3.50
3.00
3.50

$900
900
400
300
400
150
400
150
400
750
150
400
750
525
750
525


To download more slides, ebook, solutions and test bank, visit
Chapter 9

9–35.

323


(Concluded)

3.

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

Quantity
200

Unit Cost
$2.00

Issued
Cost

9–13
9–18

250

3.00

750

9–20


150

3.50

525

9–25

4.

Unit Cost

Cost

$400

9–12

Ending inventory value:

Quantity

Balance

200
200
100

$1.50
2.00

1.50

$300
400
150

150
150

3.00
3.50

450
525

300 units @ $1.50 = $450
100
@ 3.00 = 300
400 units
$750

400 units @ $1.50 (earliest costs) = $600

Quantity

Unit Cost

Cost

600

600
200

$1.50
1.50
2.00

$900
900
400

400
300
300
250
300
250
150
300
100

1.50
1.50
1.50
3.00
1.50
3.00
3.50
1.50
3.00


600
450
450
750
450
750
525
450
300


To download more slides, ebook, solutions and test bank, visit
324

Chapter 9

9–36.

1.

(a) $13,000 ($86,000 – $73,000)
(b) $7,500 ($86,000 – $78,500)
(c) $15,000 ($86,000 – $71,000)

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, Dutch has managed to maximize reported income
if specific identification is used. Thus, there is some potential for income manipulation.
9–37.
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).


To download more slides, ebook, solutions and test bank, visit
Chapter 9

9–38.

325

Purchases:
Units
55,000
53,000
45,000
47,000
200,000


Unit Cost
$0.51
0.50
0.55
0.53

Total Cost
$ 28,050
26,500
24,750
24,910
$104,210

1. Beginning inventory + Purchases = Cost of units available for sale
?
+ $104,210 = $145,210
Beginning inventory =
$41,000
$41,000 (Beginning inventory value)
= 102,500 units
$0.40 (Beginning inventory unit cost)

2. Beginning inventory + Purchases
102,500 units
+ 200,000

3.

–
–


Sales = Ending inventory
? =
60,000 units
Sales = 242,500 units

$145,210 (Cost of units available for sale)
= $0.48 per unit cost*
302,500 (Quantity of units available for sale)

*An alternative method would be:
Cost of units
available for sale

–

$145,210

–

Cost of
= Ending
goods sold
inventory
$116,410

= $28,800;

4. Ending inventory value = 60,000 units
9–39.


$28,800
= $0.48
60,000

$0.48 (unit cost) = $28,800

Quantity available for sale – Sales
? – 82,100
Quantity available for sale

= Ending inventory
= 24,000 units
= 106,100 units

Beginning inventory + Purchases
? + 71,900
Beginning inventory

= Quantity available for sale
= 106,100 units
= 34,200 units

Sales – Cost of goods sold
$738,900 – ?
Cost of goods sold

= Gross profit on sales
= $358,100
= $380,800


Cost of Goods Sold
Beginning inventory 34,200 @
?
=
?
Purchases:
17,000 @ $ 4.50 = $ 76,500
17,800 @
5.25 =
93,450
13,100 @
5.00 =
65,500*
82,100
$380,800