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Chapter 8: Question P8-10 (page 435)

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.

Short Answer

Expert verified

Dollar value LIFO for 2016, 2017, and 2018 are $57,320, $73,192, and$75,256 respectively. Price index are 112, 128, and 129 for given years, respectively.

Step by step solution

01

Price index schedule

Inventories at Current Year cost

/

Inventories at Base year cost

=

Price Index

Dec 2016

$62,700

/

$56,000

=

1.12 or 112%

Dec 2017

$87,300

/

$68,400

=

1.28 or 128%

Dec 2018

$90,800

/

$70,000

=

1.29 or 129%

02

Inventories at dollar value LIFO

Date

Ending inventory at base year

Layer

X

Price Index

=

Dollar value LIFO

2015

$45,000

$45,000

X

100

=

$45,000

2016

$56,000

$11,000

X

112

=

$12,320

$57,320

2017

$68,400

$12,400

X

128

=

$15,872

$73,192

2018

$70,000

$1,600

X

129

=

$2,064

$70,000

$75,256

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Most popular questions from this chapter

Presented below is information related to Blowfish radios for the Hootie Company for the month of July.

Units Unit Total Units Selling Total

InCostSoldPrice

Date Transaction

July 1 Balance 100 \(4.10 \) 410

6 Purchase 800 4.20 3,360

7 Sale 300\(7.00 \) 2,100

10 Sale 300 7.30 2,190

12 Purchase 400 4.50 1,800

15 Sale 200 7.40 1,480

18 Purchase 300 4.60 1,380

22 Sale 400 7.40 2,960

25 Purchase 500 4.58 2,290

30 Sale 200 7.50 1,500

Totals 2,100\(9,240 1,400\)10,230

Instructions

(a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions.

(1) FIFO.

(2) LIFO.

(3) Weighted-average.

(b) Answer the following questions.

(1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why.

(2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why.

Fong Sai-Yuk Company sells one product. Presented below is information for January for Fong Sai-Yuk Company.

Jan. 1 Inventory 100 units at \(5 each

4 Sale 80 units at \)8 each

11 Purchase 150 units at \(6 each

13 Sale 120 units at \)8.75 each

20 Purchase 160 units at \(7 each

27 Sale 100 units at \)9 each

Fong Sai-Yuk uses the FIFO cost flow assumption. All purchases and sales are on account.

Instructions

(a) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries, including the end-of-month closingentry to record cost of goods sold. A physical count indicates that the ending inventory for January is 110 units.

(b) Compute gross profit using the periodic system.

(c) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.

(d) Compute gross profit using the perpetual system.

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.

Define “cost” as applied to the valuation of inventories.

Accounting, Analysis, and Principles

Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residentialswimming pools. The following inventory data is available for the month of March.

Price per

Units Unit Total

Residential Pumps

Inventory at Feb. 28: 200 \( 400 \) 80,000

Purchases:

March 10 500 \( 450 \)225,000

March 20 400 \( 475 \)190,000

March 30 300 \( 500 \)150,000

Sales:

March 15 500 \( 540 \)270,000

March 25 400 \( 570 \)228,000

Inventory at March 31: 500

Commercial Pumps

Inventory at Feb. 28: 600 \( 800 \)480,000

Purchases:

March 3 600 \( 900 \)540,000

March 12 300 \( 950 \)285,000

March 21 500 \(1,000 \)500,000

Sales:

March 18 900 \(1,080 \)972,000

March 29 600 \(1,140 \)684,000

Inventory at March 31: 500

Accounting

(a) Assuming Englehart uses a periodic inventory system, determine the cost of inventory on hand at March 31 and thecost of goods sold for March under first-in, first-out (FIFO).

(b) Assume Englehart uses dollar-value LIFO and one pool, consisting of the combination of residential and commercialpumps. Determine the cost of inventory on hand at March 31 and the cost of goods sold for March. Assume Englehart’sinitial adoption of LIFO is on March 1. Use the double-extension method to determine the appropriate price indices.

(Hint:The price index for February 28/March 1 should be 1.00.) (Round the index to three decimal places.)

Analysis

(a) Assume you need to compute a current ratio for Englehart. Which inventory method (FIFO or dollar-value LIFO) doyou think would give you a more meaningful current ratio?

(b) Some of Englehart’s competitors use LIFO inventory costing and some use FIFO. How can an analyst compare theresults of companies in an industry, when some use LIFO and others use FIFO?

Principles

Can companies change from one inventory accounting method to another? If a company changes to an inventory accounting methodused by most of its competitors, what are the trade-offs in terms of the conceptual framework discussed in Chapter 2 of the textbook?
See all solutions

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