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Chapter 8: E8-12 (page 426)

Question: Shania Twain Company was formed on December 1, 2016. The following information is available from Twain’s inventory records for Product BAP.

Units Unit Cost

January 1, 2017 (beginning inventory) 600 $ 8.00

Purchases:

January 5, 2017 1,200 9.00

January 25, 2017 1,300 10.00

February 16, 2017 800 11.00

March 26, 2017 600 12.00

A physical inventory on March 31, 2017, shows 1,600 units on hand.

Instructions

Prepare schedules to compute the ending inventory at March 31, 2017, under each of the following inventory methods.

(a) FIFO (b) LIFO. (c) Weighted-average (round unit costs to two decimal places).

Short Answer

Expert verified

The value of ending inventory under FIFO, LIFO, and the Average cost method are $18,000, $13,800, and $15,856, respectively.

Step by step solution

01

Value of ending inventory under FIFO

Under FIFO, the earliest inventories are issued first. So the latest inventories remain in the closing inventory list.

Based on this, the schedule for ending inventory of 1,600 units based on FIFO would be as follow –

Date

Units

Cost per unit

Amount

March 26, 2017

600

$12

$7200

Feb 16, 2017

800

$11

$8800

Jan 25, 2007

200

$10

$2000

Total

1,600

$18,000

So the value of ending inventory under FIFO is $18,000.

02

Value of ending inventory under LIFO

Under LIFO, the latest inventories are issued first. So the earliest inventories remain in the ending inventory list.

Based on this, the schedule for ending inventory of 1,600 units based on LIFO would be as follow –

Date

Units

Cost per unit

Amount

Beginning

600

$8

$4800

Jan 5, 2007

1000

$9

$9000

Total

1,600

$13,800

So the value of ending inventory under LIFO is $13,800.

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Most popular questions from this chapter

Some of the information found on a detail inventory card for Slatkin Inc. for the first month of operations is as follows.

Received

Issued, Balance,

Date No. of Units Unit Cost No. of Units No. of Units

January 2 1,200 $3.00 1,200

7 700 500

10 600 3.20 1,100

13 500 600

18 1,000 3.30 300 1,300

20 1,100 200

23 1,300 3.40 1,500

26 800 700

28 1,600 3.50 2,300

31 1,300 1,000

Instructions

(a) From these data compute the ending inventory on each of the following bases. Assume that perpetual inventory records are kept in units only. (Carry unit costs to the nearest cent and ending inventory to the nearest dollar.)

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

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

(3) Average cost.

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

How might a company obtain a price index in order to apply dollar-value LIFO?

Oasis Company has used the dollar-value LIFO method for inventory cost determination for many years. The following data were extracted from Oasis’ records.

Price Ending Inventory Ending Inventory

Date Index at Base Prices at Dollar-Value LIFO

December 31, 2017 105 \(92,000 \)92,600

December 31, 2018 ? 97,000 98,350

Instructions

Calculate the index used for 2018 that yielded the above results.

Case 2: Noven Pharmaceuticals, Inc.

Noven Pharmaceuticals, Inc., headquartered in Miami, Florida, describes itself in a recent annual report as follows.

Noven Pharmaceuticals, Inc.

Noven is a place of ideas—a company where scientific excellence and state-of-the-art manufacturing combine to create new answers to human needs. Our transdermal delivery systems speed drugs painlessly and effortlessly into the bloodstream by means of a simple skin patch. This technology has proven application sinestrogen replacement, but at Noven we are developing a variety of systems incorporating best selling drugs that fight everything from asthma, anxiety and dental pain to cancer, heart disease and neurological illness. Our research portfolio also includes new technologies, such as iontophoresis, in which drugs are delivered through the skin by means of electrical currents, as well as products that could satisfy broad consumer needs, such as our anti-microbial mouth rinse.

Noven also reported in its annual report that its activities to date have consisted of product development efforts, some of which have been independent and some of which have been completed in conjunction with Rhone-Poulenc Rorer (RPR) and Ciba-Geigy. The revenues so far have consisted of money received from licensing fees, “milestone” payments (payments made under licensing agreements when certain stages of the development of a certain product have been completed), and interest on its investments. The company expects that it will have significant revenue in the upcoming fiscal year from the launch of its first product, a transdermal estrogen delivery system.

The current assets portion of Noven’s balance sheet follows.

Cash and cash equivalents \(12,070,272

Securities held to maturity 23,445,070

Inventory of supplies 1,264,553

Prepaid and other current assets 825,159

Total current assets \)37,605,054

Inventory of supplies is recorded at the lower-of-cost (first-in, first-out)-or-net realizable value and consists mainly of supplies for research and development.

Instructions

(a) What would you expect the physical flow of goods for a pharmaceutical manufacturer to be most like: FIFO, LIFO, or random (flow of goods does not follow a set pattern)? Explain.

(b) What are some of the factors that Noven should consider as it selects an inventory measurement method?

(c) Suppose that Noven had $49,000 in an inventory of transdermal estrogen delivery patches. These patches are from an initial production run and will be sold during the coming year. Why do you think that this amount is not shown in a separate inventory account? In which of the accounts shown is the inventory likely to be? At what point will the inventory be transferred to a separate inventory account?

Some of the transactions of Torres Company during August are listed below. Torres uses the periodic inventory method.

August 10 Purchased merchandise on account, \(12,000, terms 2/10, n/30.

13 Returned part of the purchase of August 10, \)1,200, and received

credit on account.

15 Purchased merchandise on account, \(16,000, terms 1/10, n/60.

25 Purchased merchandise on account, \)20,000, terms 2/10, n/30.

28 Paid invo

ice of August 15 in full.

Instructions

(a) Assuming that purchases are recorded at gross amounts and that discounts are to be recorded when taken:

(1) Prepare general journal entries to record the transactions.

(2) Describe how the various items would be shown in the financial statements.

(b) Assuming that purchases are recorded at net amounts and that discounts lost are treated as financial expenses:

(1) Prepare general journal entries to enter the transactions.

(2) Prepare the adjusting entry necessary on August 31 if financial statements are to be prepared at that time.

(3) Describe how the various items would be shown in the financial statements.

(c) Which of the two methods do you prefer and why?
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