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Chapter 8: Q8P. (page 434)

Norman’s Televisions produces television sets in three categories: portable, midsize, and flat-screen. On January 1, 2017, Norman adopted dollar-value LIFO and decided to use a single inventory pool. The company’sJanuary 1 inventory consists of:

Category Quantity Cost per Unit Total Cost

Portable 6,000 \(100 \) 600,000

Midsize 8,000 250 2,000,000

Flat-screen 3,000 400 1,200,000

17,000 \(3,800,000

During 2017, the company had the following purchases and sales.

QuantitySelling Price

Category Purchased Cost per Unit Sold per Unit

Portable 15,000 \)110 14,000 $150

Midsize 20,000 300 24,000 405

Flat-screen 10,000 500 6,000 600

45,000 44,000

Instructions

(Round to four decimals.)

(a) Compute ending inventory, cost of goods sold, and gross profit.

(b) Assume the company uses three inventory pools instead of one. Repeat instruction (a).

Short Answer

Expert verified

Under Single pool

Ending Inventory $4,654,000

COGS $11,796,000

Gross Profit $3,624,000

Under Multiple Pool

Ending Inventory

Portable Size $720,000

Mid-Size $3,200,000

Flat-screen $3,200,000

COGS

Portable Size $1,540,000

Mid-Size $4,800,000

Flat-screen $3,000,000

Gross Profit

Portable Size $560,000

Mid-Size $4,920,000

Flat-screen $600,000

Step by step solution

01

Ending inventory, COGS, and gross profit under the single pool

Computation of ending inventory

Category

Opening Quantity

+ Purchases

  • Quantity sold

Ending inventory

Portable

6000

+15000

-14000

7000

Midsize

8000

+20000

-24000

4000

Flat-screen

3000

+10000

-6000

7000

Ending inventories in values

Category

Ending Inventory

Base year cost

Inventory at base year

Current year cost

Inventory at the current year

Portable

7000

$100

$700000

110

$770000

Midsize

4000

$250

$1000000

300

$1200000

Flat-screen

7000

$400

$2800000

500

$3500000

Total

$4500000

$5470000

PriceIndex=EndinginventoryatcurrentyearcostEndinginventoryatbaseyearcost=54700004500000=1.22or122%

Ending Inventory at dollar value LIFO

Date

Inventory at base year cost

Layer

X

Price Index

=

Dollar Value LIFO

1 Jan 2017

$3800000

$3800000

X

100

=

$3800000

31 Dec 2017

$4500000

$700000

X

122

=

$854000

Total

$4500000

=

$4654000

Ending inventory at dollar value LIFO comes out to be $4,654,000.

Costofgoodssold=TotalCostofavailablegoods-EndinginventoryatdollarvalueLIFO=$3800000+(15000×$110+20000×$300+10000×$500)-$4654000=$3800000+$12650000-$4654000=$11,796,000

GrossProfit=Totalsalevalue-Costofgoodssold=(14000×$150+24000×$405+6000×$600)-$11796000=$15420000-$11796000=$3,624,000

02

Ending inventory, COGS, and Gross Profit under three pools

Computation of ending inventory

Category

Ending Inventory

Base year cost

Inventory at base year

Current year cost

Inventory at the current year

Price Index

Portable

7000

$100

$700000

110

$770000

1.1 or 110%

Midsize

4000

$250

$1000000

300

$1200000

1.2 or 120%

Flat-screen

7000

$400

$2800000

500

$3500000

1.25 or 125%

Ending Inventory at dollar value LIFO

Date

Inventory at base year cost

Layer

X

Price Index

=

Dollar Value LIFO

Portable Size

1 Jan 2017

$600000

$600000

X

100

=

$600000

31 Dec 2017

$700000

$100000

X

110

=

$110000

Total

$700000

=

$710000

MidSize

1 Jan 2017

$2000000

$2000000

X

100

=

$2000000

31 Dec 2017

$1000000

$1000000

X

120

=

$1200000

Total

$3000000

=

$3200000

Flat Screen

1 Jan 2017

$1200000

$1200000

X

100

=

$1200000

31 Dec 2017

$2800000

$1600000

X

125

=

$2000000

Total

$2800000

=

$3200000

Computation of cost of goods sold

Category

Total cost of goods available for sale

-

Ending Inventory at dollar value LIFO

=

COGS

Portable Size

$2250000

-

$710000

=

$1540000

Midsize

$8000000

-

$3200000

=

$4800000

Flat Screen

$6200000

-

$3200000

=

$3000000

Computation of gross profit

Category

Total Sales Revenue

-

COGS

=

Gross Profit

Portable Size

$2100000

-

$1540000

=

$560000

Midsize

$9720000

-

$4800000

=

$4920000

Flat Screen

$3600000

-

$3000000

=

$600000

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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.

Explain the following terms.

(a) LIFO layer.

(b) LIFO reserve.

(c) LIFO effect.

The management of Tritt Company has asked its accounting department to describe the effect upon the company’s financial position and its income statements of accounting for inventorieson the LIFO rather than the FIFO basis during 2017 and 2018. The accounting department is to assume that the change to LIFO wouldhave been effective on January 1, 2017, and that the initial LIFO base would have been the inventory value on December 31, 2016. Thefollowing are the company’s financial statements and other data for the years 2017 and 2018 when the FIFO method was employed.

Financial Position as of

12/31/16 12/31/17 12/31/18

Cash \( 90,000 \)130,000 \(154,000

Accounts receivable 80,000 100,000 120,000

Inventory 120,000 140,000 176,000

Other assets 160,000 170,000 200,000

Total assets \)450,000 \(540,000 \)650,000

Accounts payable \( 40,000 \) 60,000 \( 80,000

Other liabilities 70,000 80,000 110,000

Common stock 200,000 200,000 200,000

Retained earnings 140,000 200,000 260,000

Total liabilities and equity \)450,000 \(540,000 \)650,000

Income for Years Ended

12/31/17 12/31/18

Sales revenue \(900,000 \)1,350,000

Less: Cost of goods sold 505,000 756,000

Other expenses 205,000 304,000

710,000 1,060,000

Income before income taxes 190,000 290,000

Income taxes (40%) 76,000 116,000

Net income \(114,000 \) 174,000

Other data:

1. Inventory on hand at December 31, 2016, consisted of 40,000 units valued at \(3.00 each.

2. Sales (all units sold at the same price in a given year):

2017—150,000 units @ \)6.00 each 2018—180,000 units @ \(7.50 each

3. Purchases (all units purchased at the same price in given year):

2017—150,000 units @ \)3.50 each 2018—180,000 units @ $4.40 each

4. Income taxes at the effective rate of 40% are paid on December 31 each year.

Instructions

Name the account(s) presented in the financial statements that would have different amounts for 2018 if LIFO rather than FIFOhad been used, and state the new amount for each account that is named. Show computations.

As compared with the FIFO method of costing inventories, does the LIFO method result in a larger or smaller net income in a period of rising prices? What is the comparative effect on net income in a period of falling prices?

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.
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