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Chapter 8: 13Q (page 421)
How might a company obtain a price index in order to apply dollar-value LIFO?
The price index is the ratio of ending inventory level at the current price level and base level.
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Dimitri Company, a manufacturer of small tools, provided the following information from its accounting records for the year ended December 31, 2017.
Inventory at December 31, 2017 (based on physical count of goods in Dimitri’s plant, at cost, on December 31, 2017) \(1,520,000
Accounts payable at December 31, 2017 1,200,000
Net sales (sales less sales returns) 8,150,000
Additional information is as follows.
1. Included in the physical count were tools billed to a customer f.o.b. shipping point on December 31, 2017. These tools had a cost of \)31,000 and were billed at \(40,000. The shipment was on Dimitri’s loading dock waiting to be picked up by the common carrier.
2. Goods were in transit from a vendor to Dimitri on December 31, 2017. The invoice cost was \)76,000, and the goods were shipped f.o.b. shipping point on December 29, 2017.
3. Work in process inventory costing \(30,000 was sent to an outside processor for plating on December 30, 2017.
4. Tools returned by customers and held pending inspection in the returned goods area on December 31, 2017, were not included in the physical count. On January 8, 2018, the tools costing \)32,000 were inspected and returned to inventory. Credit memos totaling \(47,000 were issued to the customers on the same date.
5. Tools shipped to a customer f.o.b. destination on December 26, 2017, were in transit at December 31, 2017, and had a cost of \)26,000. Upon notification of receipt by the customer on January 2, 2018, Dimitri issued a sales invoice for \(42,000.
6. Goods, with an invoice cost of \)27,000, received from a vendor at 5:00 p.m. on December 31, 2017, were recorded on a receiving report dated January 2, 2018. The goods were not included in the physical count, but the invoice was included in accounts payable at December 31, 2017.
7. Goods received from a vendor on December 26, 2017, were included in the physical count. However, the related \(56,000 vendor invoice was not included in accounts payable at December 31, 2017, because the accounts payable copy of the receiving report was lost.
8. On January 3, 2018, a monthly freight bill in the amount of \)8,000 was received. The bill specifically related to merchandise purchased in December 2017, one-half of which was still in the inventory at December 31, 2017. The freight charges were not included in either the inventory or in accounts payable at December 31, 2017.
Instructions
Using the format shown below, prepare a schedule of adjustments as of December 31, 2017, to the initial amounts per Dimitri’s accounting records. Show separately the effect, if any, of each of the eight transactions on the December 31, 2017, amounts. If the transactions would have no effect on the initial amount shown, enter NONE.
Accounts Net
Inventory Payable Sales
Initial amounts \(1,520,000 \)1,200,000 \(8,150,000
Adjustments—increase
(decrease)
1
2
3
4
5
6
7
8
Total adjustments
Adjusted amounts \) \( \)
The following example was provided to encourage the use of the LIFO method. In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a LIFO reserve account on the books. The LIFO benefit grows as inflation widens the gap between current-year and past-year (minus inflation) inventory costs.
This gap is:
With LIFO Without LIFO
Revenues \(3,200,000 \)3,200,000
Cost of goods sold 2,800,000 2,800,000
Operating expenses 150,000 150,000
Operating income 250,000 250,000
LIFO adjustment 40,000 0
Taxable income \( 210,000 \) 250,000
Income taxes @ 36% \( 75,600 \) 90,000
Cash flow \( 174,400 \) 160,000
Extra cash \( 14,400 0
Increased cash flow 9% 0%
Instructions
(a) Explain what is meant by the LIFO reserve account.
(b) How does LIFO subtract inflation from inventory costs?
(c) Explain how the cash flow of \)174,400 in this example was computed. Explain why this amount may not be correct.
(d) Why does a company that uses LIFO have extra cash? Explain whether this situation will always exist.
At December 31, 2016, Stacy McGill Corporation reported current assets of \(370,000 and current liabilities of \)200,000. The following items may have been recorded incorrectly.
1. Goods purchased costing \(22,000 were shipped f.o.b. shipping point by a supplier on December 28. McGill received andrecorded the invoice on December 29, 2016, but the goods were not included in McGill’s physical count of inventorybecause they were not received until January 4, 2017.
2. Goods purchased costing \)15,000 were shipped f.o.b. destination by a supplier on December 26. McGill received andrecorded the invoice on December 31, but the goods were not included in McGill’s 2016 physical count of inventorybecause they were not received until January 2, 2017.
3. Goods held on consignment from Claudia Kishi Company were included in McGill’s December 31, 2016, physical countof inventory at \(13,000.
4. Freight-in of \)3,000 was debited to advertising expense on December 28, 2016.
Instructions
(a) Compute the current ratio based on McGill’s balance sheet.
(b) Recompute the current ratio after corrections are made.
(c) By what amount will income (before taxes) be adjusted up or down as a result of the corrections?
Question:Matlock Company uses a perpetual inventory system. Its beginning inventory consists of 50 units that cost \(34 each. During June, the company purchased 150 units at \)34 each, returned 6 units for credit, and sold 125 units at $50 each.
Journalize the June transactions.
Geddes Corporation is a medium-sized manufacturing company with two divisions and three subsidiaries, all located in the United States. The Metallic Division manufactures metal castings for the automotive industry, and the Plastic Division produces small plastic items for electrical products and other uses. The three subsidiaries manufacture various products for other industrial users.
Geddes Corporation plans to change from the lower of first-in, first-out (FIFO)-cost-or market method of inventory valuation to the last-in, first-out (LIFO) method of inventory valuation to obtain tax benefits. To make the method acceptable for tax purposes, the change also will be made for its annual financial statements.
Instructions
(a) Describe the establishment of and subsequent pricing procedures for each of the following LIFO inventory methods.
(1) LIFO applied to units of product when the periodic inventory system is
used.
(2) Application of the dollar-value method to LIFO units of product.
(b) Discuss the specific advantages and disadvantages of using the dollar-value LIFO application as compared to specific goods LIFO (unit LIFO). (Ignore income tax considerations.)
(c) Discuss the general advantages and disadvantages claimed for LIFO methods.
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