Challenge Exercise 1

Chapter Six

Challenge Exercise 1 Expands on: E6-1 LO: 1

Premier Bank and Trust is considering giving Bean Company a loan. Before doing so, they decide that further discussions with Bean’s accountant may be desirable. One area of particular concern is the inventory account, which has a year-end balance of $326,000. Discussions with the accountant reveal the following.

1. Bean received goods costing $49,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was supposed to arrive December 31. This purchase was included in the ending inventory of $326,000. 2. Bean sold goods costing $41,000 to Cusa Company, FOB shipping point, on December 28 for $65,000.The goods are not expected to arrive at Cusa until January 12.The goods were not included in the physical inventory because they were not in the warehouse. 3. The physical count of the inventory did not include goods costing $89,000 that were shipped to Bean FOB destination on December 27 and were still in transit at year-end. 4. Bean received goods costing $27,000 on January 2. The goods were shipped FOB shipping point on December 26 by Noble Co. The goods were not included in the physical count. 5. Bean sold, for $55,000 goods costing $38,000 to Limerick Co., FOB destination, on December 30. The goods were received at Limerick on January 8. They were not included in Bean’s physical inventory.

Instructions: (a) Determine the correct inventory amount on December 31. (b) What correcting entry would have to be made for item 4?

Flying Tomato sells a snowboard, WhiteOut, that is popular with snowboard enthusiasts. Presented below is information relating to Flying Tomato’s purchases of WhiteOut snowboards during September. During the same month, 121 WhiteOut snowboards were sold at $170 each. Flying Tomato uses a periodic inventory system.

Date Explanation Units Unit Cost Total Cost Sept. 1 Inventory 25 $ 100 $ 2,500 Sept. 12 Purchases 45 106 4,770 Sept. 19 Purchases 24 110 2,640 Sept. 26 Purchases 50 112 5,600 Totals 144 $ 15,510

Instructions: (a) Compute the ending inventory at September 30 and cost of goods sold using the FIFO and LIFO methods. Prove the amount allocated to cost of goods sold under each method. (b) For both FIFO and LIFO, calculate the sum of ending inventory and cost of goods sold. What do you notice about the answers you found for each method? (c) What is gross profit under each method? (d) Which method results in a larger amount reported for assets on the balance sheet? Which results in a larger amount reported for stockholders’ equity on the balance sheet?

Root Beer Company had 200 units in beginning inventory at a total cost of $16,000. The company purchased 100 units at a total cost of $11,000. At the end of the year, Root Beer had 70 units in ending inventory.

Instructions: (a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO, (2) LIFO, and (3) average-cost. (b) Which cost flow method would result in the highest net income? (c) Which cost flow method would result in inventories approximating current cost in the balance sheet? (d) Which cost flow method would result in Root Beer paying the least taxes in the first year? (e) Suppose Root Beer decides at yearend that they want to report a lower net income. Would they be able to manipulate net income when using FIFO or LIFO?

Naughty Dog Disc Golf Shop uses the lower-of-cost-or-market basis for its inventory. The following data are available at December 31.

Item Units Unit Cost Market Baskets: Innova 10 $190 $200 Discraft 20 175 160

Disc bags: Lightning 15 20 16 Wham-O 14 30 28

Instructions: (a) Determine the amount of the ending inventory by applying the lower-of-cost-or-market basis. (b) When determining “lower of cost or market”, what is “market? Why is market defined in this way?

Scaggs Hardware reported cost of goods sold as follows. 2013 2014 Beginning inventory $ 30,000 $ 40,000 Cost of goods purchased 170,000 195,000 Cost of goods available for sale 200,000 235,000 Ending inventory 40,000 45,000 Cost of goods sold $160,000 $190,000

Scaggs made two errors: (1) 2013 ending inventory was overstated $4,000, and (2) 2014 ending inventory was understated $7,000.

Instructions: a) Compute the correct cost of goods sold for each year. b) What correcting entry would Scaggs make for error (2)?

The cost of goods sold computations for Letterman Company and Schaeffer Company are shown below.

Letterman Company Schaeffer Company Beginning inventory $ 55,000 $ 81,000 Cost of goods purchased 220,000 310,000 Cost of goods available for sale 275,000 391,000 Ending inventory 65,000 79,000 Cost of goods sold $210,000 $312,000

Instructions: (a) Compute inventory turnover and days in inventory for each company. (b) Which company moves its inventory more quickly? (c) Why is it generally considered to be better for a company to move its inventory more quickly? (d) What are possible concerns you might have about a company with a very high inventory turnover?

Doc Gibbs Company reported the following information for November and December 2014.

November December Cost of goods purchased $ 700,000 $ 915,000 Inventory, beginning-of-month 140,000 168,000 Inventory, end-of-month 168,000 ???? Sales 1,120,000 1,500,000

Doc Gibbs’s ending inventory at December 31 was damaged in a fire. After the fire, inventory which originally cost $60,000 is salvageable. It can be sold at approximately 70% of cost.

Instructions: (a) Compute the gross profit rate for November. (b) Using the gross profit rate for November, determine the estimated loss on inventory lost due to the fire.

Challenge Exercise 8

Dan’s Threads uses the retail inventory method for its two departments, Men‘s Clothes and Women‘s Clothes. The following information for each department is obtained.

Item Men’s Dept. Women’s Dept. Beginning inventory at cost $ 40,000 $ 50,000 Cost of goods purchased at cost 160,160 175,700 Net sales 192,000 245,000 Beginning inventory at retail 58,000 65,000 Cost of goods purchased at retail 220,000 240,000

Instructions: a) Compute the estimated cost of the ending inventory for each department under the retail inventory method.