ACCT 550 Assignment 5

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E8-3 (Inventoriable Costs) Assume that in an annual audit of Webber Inc. at December 31, 2012, you find the following transactions near the closing date.

A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shipping room on December 31, 2012. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2013.

A: It should not be included, because it was made to order and the client was already billed by the end of the period.

Merchandise costing $2,800 was received on January 3, 2013, and the related purchase invoice recorded January 5. The invoice showed the shipment was made on December 29, 2012, f.o.b. destination.

A: It should not be included, because the terms are FOB destination and it didn’t arrive before the closing of the period.

A packing case containing a product costing $3,400 was standing in the shipping room when the physical inventory was taken. It was not included in the inventory because it was marked “Hold for shipping instructions.” Your investigation revealed that the customer’s order was dated December 18, 2012, but that the case was shipped and the customer billed on January 10, 2013. The product was a stock item of your client.

A: It should be included, because the item was not shipped on time.

Merchandise costing $720 was received on December 28, 2012, and the invoice was not recorded. You located it in the hands of the purchasing agent; it was marked “on consignment.”

A: It should not be included, because it is consignment.

Merchandise received on January 6, 2013, costing $680 was entered in the purchases journal on January 7, 2013. The invoice showed shipment was made f.o.b. supplier’s warehouse on December 31, 2012. Because it was not on hand at December 31, it was not included in inventory

A: It should be included, because the terms are FOB supplier’s warehouse, so our client had the “rights” to the merchandise before the end of the year.

Instructions

Assuming that each of the amounts is material, state whether the merchandise should be included in the client’s inventory, and give your reason for your decision on each item.

(Kieso 471-472)

Kieso, Donald E. Intermediate Accounting, 14th Edition. John Wiley & Sons, 02/2011. VitalBook file.

P8-4 (Compute FIFO, LIFO, and Average Cost) Hull Company’s record of transactions concerning part X for the month of April was as follows.

Purchases	Sales
April 1(balance on hand)	100 @ $5.00	April 5	300
4	400 @ 5.10	12	200
11	300 @ 5.30	27	800
18	200 @5.35	28	150
26	600 @5.60
30	200 @5.80

Instructions

(a) Compute the inventory at April 30 on each of the following bases. Assume that perpetual inventory records are kept in units only. Carry unit costs to the nearest cent.

(1) First-in, first-out (FIFO).

(200@5.80 + 150@5.60) = 1,160+840 = 2,000

(2) Last-in, first-out (LIFO).

(100@5.00 + 250@5.10) = 500+1,275 = 1,775

(3) Average cost.

Average cost of all units is 5.40. There were 350 units in inventory, for a total of $1,890.

(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, what amount would be shown as ending inventory in (1), (2), and (3) above? Carry average unit costs to four decimal places.

For (1), it would be the same.

For (2), it would be $1,915. (see below

)

Purchases	Sales
April 1(balance on hand)	100 @ $5.00
4	400 @ 5.10
5-Apr	300	100@5.00 + 100@5.10
11	300 @ 5.30	100@5.00 + 100@5.10 + 300@5.30
12	200	100@5.00 + 100@5.10 + 100@5.30
18	200 @5.35	100@5.00 + 100@5.10 + 100@5.30 + 200@5.35
26	600 @5.60	100@5.00 + 100@5.10 + 100@5.30 + 200@5.35 + 600@5.60
27	800	100@5.00 + 100@5.10 + 100@5.30
28	150	100@5.00 + 50@5.10
30	200 @5.80	100@5.00 + 50@5.10 + 200@5.80
TOTAL FINAL:	1915

For (3), it would be $1,977.31 (see below)

Purchases	Sales	average cost
April 1(balance on hand)	100 @ $5.00	5.00
4	400 @ 5.10	5.08
5-Apr	300	200@5.08
11	300 @ 5.30	5.2120
12	200	300@5.2120
18	200 @5.35
26	600 @5.60	5.4487
27	800	300@5.4487
28	150	150@5.4487
30	200 @5.80	5.6495
TOTAL FINAL:	1,977.31

(Kieso 480-481)

Kieso, Donald E. Intermediate Accounting, 14th Edition. John Wiley & Sons, 02/2011. VitalBook file.

E9-1 (Lower-of-Cost-or-Market) The inventory of Oheto Company on December 31, 2013, consists of the following items.

Part No.	Quantity	Cost per Unit	Cost to Replace per Unit	TOTAL COST	TOTAL MARKET	LCM
110	600	$95	$100	57,000	60,000	57,000
111	1,000	60	52	60,000	52,000	52,000
112	500	80	76	40,000	38,000	38,000
113	200	170	180	34,000	36,000	34,000
120	400	205	208	82,000	83,200	82,000
121^a	1,600	16	0.50	25,600	800	800
122	300	240	235	72,000	70,500	70,500
370,600	340,500	334,300

^aPart No. 121 is obsolete and has a realizable value of $0.50 each as scrap.

Instructions

Determine the inventory as of December 31, 2013, by the lower-of-cost-or-market method, applying this method directly to each item.

$334,300

(b) Determine the inventory by the lower-of-cost-or-market method, applying the method to the total of the inventory.

$340,500

(Kieso 526)

Kieso, Donald E. Intermediate Accounting, 14th Edition. John Wiley & Sons, 02/2011. VitalBook file.

P9-12 (Retail, LIFO Retail, and Inventory Shortage) Late in 2009, Joan Seceda and four other investors took the chain of Becker Department Stores private, and the company has just completed its third year of operations under the ownership of the investment group. Andrea Selig, controller of Becker Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Becker Department Stores contain the following amounts on November 30, 2012, the end of the fiscal year.

Cost	Retail
Beginning inventory	$ 68,000	$100,000
Purchases	255,000	400,000
Net markups	50,000
Net markdowns	110,000
Sales revenue	320,000

According to the November 30, 2012, physical inventory, the actual inventory at retail is $115,000.

Instructions

(a) Describe the circumstances under which the retail inventory method would be applied and the advantages of using the retail inventory method.

(b) Assuming that prices have been stable, calculate the value, at cost, of Becker Department Stores’ ending inventory using the last-in, first-out (LIFO) retail method. Be sure to furnish supporting calculations.

(c) Estimate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended November 30, 2012.

(d) Complications in the retail method can be caused by such items as (1) freight-in costs, (2) purchase returns and allowances, (3) sales returns and allowances, and (4) employee discounts. Explain how each of these four special items is handled in the retail inventory method.

(CMA adapted)

(Kieso 537)

Kieso, Donald E. Intermediate Accounting, 14th Edition. John Wiley & Sons, 02/2011. VitalBook file.

(a) The retail method is appropriate in businesses that sell many different items at relatively low unit costs and that have a large volume of transactions (Wal-Mart). The advantages of the retail method in these circumstances:

Interim physical inventories can be estimated.
The retail method acts as a control as deviations from the physical count will have to be explained.

(b) (I had to copy this from the answer, because I couldn’t do it myself – now I understand it). Becker Department Stores’ ending inventory value, at cost, is $83,000, calculated as follows:

Cost	Retail
Beginning inventory.................	$ 68,000	$100,000
Purchases...........................................................	$255,000	$400,000
Net markups..............................................	50,000
Net markdowns.........................................	(110,000)
Net purchases............................................	$255,000	340,000
Goods available..................................................	440,000
Sales	(320,000)
Estimated ending inventory at retail.....................	$120,000
Cost-to-retail percentage: $255,000 ÷ $340,000 = 75%.
Beginning inventory layer.........	$ 68,000	$100,000
Incremental increase
At retail ($120,000 – $100,000).......	20,000
At cost ($20,000 X 75%).........	15,000
Estimated ending inventory at LIFO cost.............	$ 83,000	$120,000

(c) The estimated shortagt, at retail, for Becker is $5,000 calculated as follows, by the difference between estimated inventory and actual inventory at retail:

Estimated ending inventory at retail – 120,000

Actual ending inventory at retail – (115,000)

Estimated shortage – 5,000

(d)

Freight costs should be added to purchase costs.
Purchase returns and allowances are reductions to both the cost price and the retail price
Sales returns and allowances are subtracted as an adjustment to sales.
Employee discounts should be deducted from the retail column the same way as sales.

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