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Chapter 8: Question 9Q (page 421)

Ford Motor Co. is considering alternate methods of accounting for the cash discounts it takes when paying suppliers promptly. One method suggested was to report these discounts as financial income when payments are made. Comment on the propriety of this approach.

Short Answer

Expert verified

The gross method of reporting discount income is applied due to simplicity and cost constraints.

Step by step solution

01

Cash discount treatment

Cash discounts received on inventory purchases can be treated by gross method or net method.

Under the gross method, the discount received are recognized at the time of payment. In contrast, the purchase is recognized at a discount under the net method, and at the time of payment, the purchase discount lost is recognized.

02

Priority of gross method

The gross method is given priority because of two reasons –

a) Because of the simplicity and widespread of the method

b) To avoid the reporting of discount loss

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Most popular questions from this chapter

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).

What is a repurchase agreement (product financing) arrangement? How should a product repurchase agreement be reported in the financial statements?

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.

What is the dollar-value method of LIFO inventory valuation? What advantage does the dollar-value method have over the specific goods approach of LIFO inventory valuation? Why will the traditional LIFO inventory costing method and the dollar-value LIFO inventory costing method produce different inventory valuations if the composition of the inventory base changes?

Presented below is information related to Kaisson Corporation for the last 3 years.

Quantities Base-Year Cost Current-Year Cost

in Ending

Item Inventories Unit Cost Amount Unit Cost Amount

December 31, 2016

A 9,000 \(2.00 \)18,000 \(2.20 \)19,800

B 6,000 3.00 18,000 3.55 21,300

C 4,000 5.00 20,000 5.40 21,600

Totals \(56,000 \)62,700

December 31, 2017

A 9,000 \(2.00 \)18,000 \(2.60 \)23,400

B 6,800 3.00 20,400 3.75 25,500

C 6,000 5.00 30,000 6.40 38,400

Totals \(68,400 \)87,300

December 31, 2018

A 8,000 \(2.00 \)16,000 \(2.70 \)21,600

B 8,000 3.00 24,000 4.00 32,000

C 6,000 5.00 30,000 6.20 37,200

Totals \(70,000 \)90,800

Instructions

Compute the ending inventories under the dollar-value LIFO method for 2016, 2017, and 2018. The base period is January 1, 2016,and the beginning inventory cost at that date was $45,000. Compute indexes to two decimal places.
See all solutions

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