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Chapter 8: Q.8-10BE (page 423)

Bienvenu Enterprises reported cost of goods sold for 2017 of \(1,400,000 and retained earnings of \)5,200,000 at December 31, 2017. Bienvenu later discovered that its ending inventories at December 31, 2016 and 2017, were overstated by\(110,000 and \)35,000, respectively. Determine the corrected amounts for 2017 cost of goods sold and December 31, 2017,retained earnings.

Short Answer

Expert verified

Corrected COGS and retained earnings are$1,325,000 and $5,275,000, respectively.

Step by step solution

01

Correct amount of cost of goods sold for 2017

As the ending inventory for 2016 is overstated by $110,000, the opening inventory for 2017 would have the same effect.

The ending inventory for 2017 is overstated by $35,000.

Overstatedamountofcostofgoodssold=overstatedopeninginventory-overstatedclosinginventory=$110,000-$35,000=75,000

correctamountofcostofgoodssold=currentCOGS-overstatedamount=$1,400,000-$75,000=1,325,000

02

Correct amount of retained earnings for 2017

As the COGS has been overstated, there would be an opposite effect on the retained earnings. Thus the retained earnings have been underestimated.

Correctamountofretainedearnings=currentretainedearnings+overstatedCOGS=$5,200,000+$75,000=5,275,000

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Most popular questions from this chapter

Question: In January 2017, Susquehanna Inc. requested and secured permission from the commissioner of the Internal Revenue Service to compute inventories under the last-in, first-out (LIFO) method and elected to determine inventory cost under the dollar-value LIFO method. Susquehanna Inc. satisfied the commissioner that cost could be accurately determined by use of an index number computed from a representative sample selected from the company’s single inventory pool.

Instructions

(a) Why should inventories be included in (1) a balance sheet and (2) the computation of net income?

(b) The Internal Revenue Code allows some accountable events to be considered differently for income tax reporting purposes and financial accounting purposes, while other accountable events must be reported the same for both purposes. Discuss why it might be desirable to report some accountable events differently for financial accounting purposes than for income tax reporting purposes.

(c) Discuss the ways and conditions under which the FIFO and LIFO inventory costing methods produce different inventory valuations. Do not discuss procedures for computing inventory cost.

Ann M. Martin Company makes the following errors during the current year.

(Evaluate each case independently and assume ending inventory in the following year is correctly stated.)

1. Ending inventory is overstated, but purchases and related accounts payable are recorded correctly.

2. Both ending inventory and purchases and related accounts payable are understated. (Assume this purchase was recordedand paid for in the following year.)

3. Ending inventory is correct, but a purchase on account was not recorded. (Assume this purchase was recorded and paidfor in the following year.)

Instructions

Indicate the effect of each of these errors on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for the current year and the subsequent year.

On January 1, 2017, Bonanza Wholesalers Inc. adopted the dollar-value LIFO inventory method for income tax and external financial reporting purposes. However, Bonanza continuedto use the FIFO inventory method for internal accounting and management purposes. In applying the LIFO method, Bonanzauses internal conversion price indexes and the multiple pools approach under which substantially identical inventory items aregrouped into LIFO inventory pools. The following data were available for inventory pool no. 1, which comprises products A andB, for the 2 years following the adoption of LIFO.

FIFO Basis per Records

Unit Total

Units Cost Cost

Inventory, 1/1/17

Product A 10,000 \(30 \)300,000

Product B 9,000 25 225,000

\(525,000

Inventory, 12/31/17

Product A 17,000 36 \)612,000

Product B 9,000 26 234,000

\(846,000

Inventory, 12/31/18

Product A 13,000 40 \)520,000

Product B 10,000 32 320,000

$840,000

Instructions

(a) Prepare a schedule to compute the internal conversion price indexes for 2017 and 2018. Round indexes to two decimal places.

(b) Prepare a schedule to compute the inventory amounts at December 31, 2017 and 2018, using the dollar-value LIFO inventory method.

Specific identification is sometimes said to be the ideal method of assigning a cost to inventory and to the cost of goods sold. Briefly indicate the arguments for and againstthis method of inventory valuation.

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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