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Chapter 8: Question 8Q (page 421)
Distinguish between product costs and period costs as they relate to inventory.
Product costs are directly attached to the inventory, whereas period costs are indirectly related to inventory.
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Colin Davis Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, which is debited for materials purchased and credited for materials requisitioned for use.
1. An invoice for \(8,100, terms f.o.b. destination, was received and entered January 2, 2017. The receiving report shows that the materials were received December 28, 2016.
2. Materials costing \)28,000, shipped f.o.b. destination, were not entered by December 31, 2016, “because they were in a railroad car on the company’s siding on that date and had not been unloaded.”
3. Materials costing \(7,300 were returned to the supplier on December 29, 2016, and were shipped f.o.b. shipping point. The return was entered on that date, even though the materials are not expected to reach the supplier’s place of business until January 6, 2017.
4. An invoice for \)7,500, terms f.o.b. shipping point, was received and entered December 30, 2016. The receiving report shows that the materials were received January 4, 2017, and the bill of lading shows that they were shipped January 2, 2017.
5. Materials costing $19,800 were received December 30, 2016, but no entry was made for them because “they were ordered with a specified delivery of no earlier than January 10, 2017.”
Instructions -
Prepare correcting general journal entries required at December 31, 2016, assuming that the books have not been closed.
John Adams Company’s record of transactions for the month of April was as follows.
Purchases Sales
April 1 (balance on hand) 600 @ \( 6.00 April 3 500 @ \)10.00
4 1,500 @ 6.08 9 1,400 @ 10.00
8 800 @ 6.40 11 600 @ 11.00
13 1,200 @ 6.50 23 1,200 @ 11.00
21 700 @ 6.60 27 900 @ 12.00
29 500 @ 6.79 4,600
5,300
Instructions
(a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and(2) average-cost.
(b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO.
(c) Compute the cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.
(d) In an inflationary period, which inventory method—FIFO, LIFO, average cost—will show the highest net income?
Question:Stallman Company took a physical inventory on December 31 and determined that goods costing \(200,000 were on hand. Not included in the physical count were \)25,000 of goods purchased from Pelzer Corporation, f.o.b. shipping point, and \(22,000 of goods sold to Alvarez Company for \)30,000, f.o.b. destination. Both the Pelzer purchase and the Alvarez sale werein transit at year-end. What amount should Stallman report as its December 31 inventory?
Richardson Company cans a variety of vegetable-type soups. Recently, the company decided to value its inventories using dollar-value LIFO pools. The clerk who accounts for inventories does not understand how to valuethe inventory pools using this new method, so, as a private consultant, you have been asked to teach him how this new method works.
He has provided you with the following information about purchases made over a 6-year period.
Ending Inventory
Date (End-of-Year Prices) Price Index
Dec. 31, 2013 $ 80,000 100
Dec. 31, 2014 111,300 105
Dec. 31, 2015 108,000 120
Dec. 31, 2016 128,700 130
Dec. 31, 2017 147,000 140
Dec. 31, 2018 174,000 145
You have already explained to him how this inventory method is maintained, but he would feel better about it if you were to leavehim detailed instructions explaining how these calculations are done and why he needs to put all inventories at a base-year value.
Instructions
(a) Compute the ending inventory for Richardson Company for 2013 through 2018 using dollar-value LIFO.
(b) Using your computation schedules as your illustration, write a step-by-step set of instructions explaining how the calculationsare done. Begin your explanation by briefly explaining the theory behind this inventory method, includingthe purpose of putting all amounts into base-year price levels.
You are the vice president of finance of Sandy Alomar Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2017. These schedulesappear below.
Sales Cost of Gross
(\(5 per unit) Goods Sold Margin
Schedule 1 \)150,000 \(124,900 \)25,100
Schedule 2 150,000 129,400 20,600
The computation of cost of goods sold in each schedule is based on the following data.
Cost Total
Units per Unit Cost
Beginning inventory, January 1 10,000 \(4.00 \)40,000
Purchase, January 10 8,000 4.20 33,600
Purchase, January 30 6,000 4.25 25,500
Purchase, February 11 9,000 4.30 38,700
Purchase, March 17 11,000 4.40 48,400
Jane Torville, the president of the corporation, cannot understand how two different gross margins can be computed from thesame set of data. As the vice president of finance, you have explained to Ms. Torville that the two schedules are based on differentassumptions concerning the flow of inventory costs, i.e., FIFO and LIFO. Schedules 1 and 2 were not necessarily prepared inthis sequence of cost flow assumptions.
Instructions
Prepare two separate schedules computing cost of goods sold and supporting schedules showing the composition of the endinginventory under both cost flow assumptions.
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