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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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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

121a

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:

  1. Interim physical inventories can be estimated.
  2. 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)

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

This problem has been solved.


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