ACCT 210 Homework Chapter 8, Fall 2011

30 Minutes, Strong PROBLEM 8.2A SPEED WORLD CYCLES: PERPETUAL SYSTEM a. Cost of goods sold and ending inventory (1) Average-cost method: (a) Cost of goods sold on July 28: $ 4,980 Cost of goods sold (4 units @ $4,980) (b) Ending inventory (4 units) at September 30: 1 unit at July 22 average cost of $4,980 $ 4,980 15,300 Total $ 20,280 $ 5,070 Ending inventory, September 30 (4 units @ $5,070) (2) First-in, first-out (FIFO) method: (a) Cost of goods sold on July 28: 2 units from July 22 purchase @ $5,000 Cost of goods sold (4 units) (b) Ending inventory (4 units) at September 30: 1 unit from July 22 purchase @$5,000 $ 5,000 15,300 (3) Last-in, first-out (LIFO) method: (a) Cost of goods sold on July 28: $ 15,000 1 unit from purchase of July 1 @ $4,950 4,950 Cost of goods sold (4 units) (b) Ending inventory (4 units) at September 30: $ 4,950 15,300 Average cost (as of July 22; $24,900 ÷ 5 units) Average unit cost following August 3 purchase: 3 units purchased on August 3 Average unit cost as of August 3 ($20,280 ÷ 4 units) 3 units from August 3 purchase @ $5,100 Ending inventory, September 30 3 units from purchase of July 22 @ $5,000 1 unit from purchase on July 1 @ $4,950 3 units from purchase on August 3 @ $5,100 Ending inventory, September 30 PROBLEM 8.2A ORLD CYCLES: PERPETUAL SYSTEM $ 19,920 $ 20,280 $ 9,900 10,000 $ 19,900 $ 20,300 $ 19,950 $ 20,250 Problem 8.2A SPEED WORLD CYCLES: PERPETUAL SYSTEM (concluded) b. (1) (2) (3) The FIFO method will result in the highest net income, as it assigns the oldest (lowest) costs to the cost of goods sold. FIFO will result in the highest net income whenever the oldest purchase costs are also the lowest—that is, in the common situation of rising prices. In this situation, the LIFO method will minimize income taxes, as it assigns the most recent (and highest) costs to the cost of goods sold. The high cost of goods sold, in turn, minimizes taxable income. The LIFO method will minimize taxes whenever the most recent purchase costs are the highest, which, as mentioned above, is the normal situation in an inflationary environment. No. Speed World may not use FIFO in its financial statements and LIFO in its income tax returns. Normally a company may use different accounting methods in its financial statements and income tax returns. However, tax laws require a taxpayer using LIFO in its income tax return also to use the LIFO method in its financial statements. Problem 8.2A UAL SYSTEM (concluded) will result in the highest net income, as it owest) costs to the cost of goods sold. the highest net income whenever the ts are also the lowest—that is, in the f rising prices. e LIFO method will minimize income he most recent (and highest) costs to the The high cost of goods sold, in turn, ncome. The LIFO method will minimize most recent purchase costs are the mentioned above, is the normal situation nvironment. ay not use FIFO in its financial O in its income tax returns. Normally a ifferent accounting methods in its s and income tax returns. However, tax ayer using LIFO in its income tax return O method in its financial statements. 20 Minutes, Medium PROBL SPEED WORLD CYCLES: PERIODIC a. Cost of goods sold and ending inventory (1) Average-cost method: Ending inventory at September 30: $ 5,025 Ending inventory (4 units @ $5,025) Cost of goods sold through September 30: Cost of goods available for sale Cost of goods sold (2) First-in, first-out (FIFO) method: Ending inventory (4 units) at September 30: 1 unit from purchase on July 22 (@ $5,000) Cost of goods sold through September 30: Cost of goods available for sale Cost of goods sold (3) Last-in, first-out (LIFO) method: Ending inventory at September 30: 2 units from purchase on July 1 (@ $4,950) Ending inventory Cost of goods sold Cost of goods available for sale Cost of goods sold Average cost ($40,200 ÷ 8 units) Less: Ending inventory at September 30 (above) 3 units from purchase on August 3 (@ $5,100) Less: Ending inventory at September 30 (above) 2 units from purchase on July 22 (@ $5,000) Less: Ending inventory at September 30 (above) Note to instructor: Students may point out that ending inventory computed under LIFO is the same figure goods sold computed under FIFO. Likewise, the cost of goods sold figure computed under LIFO is the sam ending inventory figure computed under FIFO. The fact that these numbers are the same is merely a coinc b. Note to instructor: Students may point out that ending inventory computed under LIFO is the same figure goods sold computed under FIFO. Likewise, the cost of goods sold figure computed under LIFO is the sam ending inventory figure computed under FIFO. The fact that these numbers are the same is merely a coinc Yes. Income tax regulations influence the inventory method used in financial reports only when method is used for income tax purposes. If the company selects the FIFO method for income tax is free to choose another method for financial reporting purposes. PROBLEM 8.3A PEED WORLD CYCLES: PERIODIC SYSTEM $ 20,100 $ 40,200 20,100 $ 20,100 $ 15,300 5,000 $ 20,300 $ 40,200 20,300 $ 19,900 $ 9,900 10,000 $ 19,900 $ 40,200 19,900 $ 20,300 ing inventory computed under LIFO is the same figure as the cost of st of goods sold figure computed under LIFO is the same as the he fact that these numbers are the same is merely a coincidence. ing inventory computed under LIFO is the same figure as the cost of st of goods sold figure computed under LIFO is the same as the he fact that these numbers are the same is merely a coincidence. e inventory method used in financial reports only when the LIFO If the company selects the FIFO method for income tax reporting, it ancial reporting purposes. 20 Minutes, Medium PROBLEM MARIO'S NURS a. Shrinkage loss - 40 trees (1) Average-cost method: Cost of Goods Sold 1,208 Inventory (2) Last-in first-out (LIFO) method: Cost of Goods Sold 1,560 Inventory b. Shrinkage loss and LCM adjustment Cost of Goods Sold 1,000 Inventory assumption (40 trees @ $25). (2) Write-down of inventory to the lower-of-cost-or Cost of Goods Sold 3,370 Inventory Cost (after shrinkage loss: $10,570 - $1,000) $ 9,570 Market (310 trees x $20 per tree) 6,200 Loss from write-down to market value $ 3,370 To record shrinkage loss of 40 trees using average cost of $30.20 ($10,570 ÷ 350 trees = $30.20 per tree). To record shrinkage loss of 40 trees using the LIFO flow assumption (40 trees @ $39). (1) Shrinkage loss, first-in, first-out (FIFO) method: To record shrinkage loss of 40 trees using the FIFO flow To write down inventory to a market value below cost: c. The only unethical act in this situation was committed by the employee against his employer. Th nothing unethical about using a hidden security camera to protect one’s assets. The camera was used to entice (or entrap) the employee. In short, he made a conscious decision to steal trees from employer and should be held completely responsible for doing so. PROBLEM 8.4A MARIO'S NURSERY 1,208 1,560 1,000 3,370 was committed by the employee against his employer. There is security camera to protect one’s assets. The camera was not In short, he made a conscious decision to steal trees from his responsible for doing so. 25 Minutes, Easy PR MAC Units Unit Cost a. Inventory and cost of goods sold: (1) FIFO: Inventory: Fourth pur 19 $ 320 Third purc 2 315 Ending inv 21 Cost of goods sold, (2) LIFO: Inventory: 10 $ 299 11 306 Ending inv 21 Cost of goods sold, (3) Average cost: Inventory: Total good 72 72 units) $ 310.28 Cost of goods sold: Cost of goods available for sale Less: Ending inventory , FIFO Beginnin g inventory First purchase (May 12) Cost of goods sold: Cost of goods available for sale Less: Ending inventory , LIFO Average unit cost ($22,340 ÷ average 21 310.28 51 310.28 b. Ending inventory , weighted Cost of goods sold, weighted $310.28 per unit average of $310.28 per unit The FIFO method, by assigning the costs of the most recent purchases to inventory, provides the balance sheet amount for inventory in terms of replacement costs. A weakness in the FIFO meth the costs assigned to the cost of goods sold are relatively old costs. Because the replacement costs been rising throughout the year, the FIFO method tends to understate the cost of goods sold in t actually being incurred by MACH IV to replenish its inventory. The LIFO inventory method as recent costs to the cost of goods sold and therefore provides a more realistic measure of income, replacement costs, than does the FIFO method. PROBLEM 8.5A MACH IV AUDIO Total Cost $ 6,080 630 $ 6,710 $ 22,340 6,710 $ 15,630 $ 2,990 3,366 $ 6,356 $ 22,340 6,356 $ 15,984 $ 22,340 $ 6,516 $ 15,824 s of the most recent purchases to inventory, provides the most realistic rms of replacement costs. A weakness in the FIFO method, however, is that ld are relatively old costs. Because the replacement costs of the units has O method tends to understate the cost of goods sold in terms of the costs replenish its inventory. The LIFO inventory method assigns the more therefore provides a more realistic measure of income, in terms of current method. 20 Minutes, Medium a. 2011 Net sales $ 875,000 Cost of goods sold 563,000 Gross profit on sales $ 312,000 Gross profit percentage 36% Cost of Goods Sold: 2009: 2010: 2011: b. $480,000 - $40,000 = $440,000 $487,200 + $40,000 = $527,200 $481,250 + $81,750 = $563,000 The current owners of this business have no reason to be enthusiastic over the trend of gross pro inventory errors, it is apparent that both the dollar amount of gross profit and the gross profit p the last three years. PROBLEM 8.6A HEXAGON HEALTH FOODS 2010 2009 $ 840,000 $ 820,000 527,200 $ 440,000 $ 312,800 $ 380,000 37% 46% son to be enthusiastic over the trend of gross profit or gross profit percentage. After correction of the lar amount of gross profit and the gross profit percentage have declined, rather than increased, during