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Chapter 8: Q4CA. (page 436)

Shawnee Corp., a household appliances dealer, purchases its inventories from various suppliers. Shawnee has consistently stated its inventories at FIFO cost.

Instructions

Shawnee is considering alternate methods of accounting for the cash discounts it takes when paying its suppliers promptly.From a theoretical standpoint, discuss the acceptability of each of the following methods.

(a) Financial income when payments are made.

(b) Reduction of cost of goods sold for the period when payments are made.

(c) Direct reduction of the purchase cost.

Short Answer

Expert verified

a) Acceptable

b) Not acceptable

c) Note acceptable

Step by step solution

01

Step1: Financial income when payments are made

A cash discount is like an income for the business. It is earned when obligations are paid off. So this is an acceptable way of recording the cash discount received.

02

Step 2: Reduction of cost of goods sold for the period when payments are made.

This is not an acceptable way of recognizing the cash discount. A cash discount is received on the selling price and is earned when the obligation is paid. On the other hand cost of goods sold is based on inventory acquisition costs. So this is not a GAAP-acceptable practice.

03

Step 3: Direct reduction of the purchase cost.

This is also not an acceptable method. Cash discounts are received on the selling price. In contrast, the purchase cost is incurred at the time of purchasing goods. So the income earned is not matched with the expense incurred.

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Most popular questions from this chapter

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?

Distinguish between product costs and period costs as they relate to inventory.

Assume that in an annual audit of Harlowe Inc. at December 31, 2017, you findthe 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 shippingroom on December 31, 2017. The customer was billed on that date and the machine excluded from inventory althoughit was shipped on January 4, 2018.

2. Merchandise costing \(2,800 was received on January 3, 2018, and the related purchase invoice recorded January 5. Theinvoice showed the shipment was made on December 29, 2017, f.o.b. destination.

3. A packing case containing a product costing \)3,400 was standing in the shipping room when the physical inventory wastaken. It was not included in the inventory because it was marked “Hold for shipping instructions.” Your investigationrevealed that the customer’s order was dated December 18, 2017, but that the case was shipped and the customer billedon January 10, 2018. The product was a stock item of your client.

4. Merchandise received on January 6, 2018, costing \(680 was entered in the purchase journal on January 7, 2018. The invoiceshowed shipment was made f.o.b. supplier’s warehouse on December 31, 2017. Because it was not on hand at December31, it was not included in inventory.

5. Merchandise costing \)720 was received on December 28, 2017, and the invoice was not recorded. You located it in thehands of the purchasing agent; it was marked “on consignment.”

Instructions

Assuming that each of the amounts is material, state whether the merchandise should be included in the client’s inventory, andgive your reason for your decision on each item.

Question:Data for Amsterdam Company are presented in BE8-4. Compute the April 30 inventory and the April cost of

goods sold using the FIFO method.

Zonker Inc. purchases 500 units of an item at an invoice cost of \(30,000. What is the cost per unit? If the goods are shipped f.o.b. shipping point and the freight bill was\)1,500, what is the cost per unit if Zonker Inc. pays the freight charges? If these items were bought on 2/10, n/30terms and the invoice and the freight bill were paid within the 10-day period, what would be the cost per unit?
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