E7–20. (Supplement A)
Req. 1
This actual footnote from Eastman Kodak illustrates the impact of ―dipping into a LIFO layer.'' Under LIFO, the cost of recently purchased items is assigned to cost of goods sold. When prices are rising, cost of goods sold, under LIFO, will include unit costs that are much higher than the unit costs assigned to ending inventory. This process will continue year after year so that the unit costs assigned to the ending inventory often will be significantly less than unit costs assigned to cost of goods sold. When a business permits inventory quantity to decline, old (and often very low) costs are allocated to cost of goods sold and are matched with revenues that usually are based on the current (higher) costs. As a result, a decline in LIFO inventory quantity often will produce a dramatic increase in net income for the company.
Req. 2
When FIFO is used, a decline in inventory quantity will not result in the dramatic increase in net income that was discussed in requirement (1) because FIFO inventory costs are represented by the most recent purchases.
E7–21. (Supplement B)
Req. 1 Accounts receivable (+A) ..............................................900 Sales (+R, +SE) ....................................................... 900
Req. 2
Req. 3
Req. 4
Req. 5
Req. 6
Cost of goods sold (+E, ?SE) ........................................Inventory (?A) ...........................................................
600
600 900 900 8,400 294 8,106 8,400
Cash (+A) ($900 x 0.975) ..............................................877.5 Sales discounts (+E or +XR, ?SE) ($900 x 0.025) .........22.5
Accounts receivable (?A) .........................................Cash (+A) ......................................................................
Accounts receivable (?A) .........................................
900
Inventory (+A) ................................................................8,400 Accounts payable (+L) ............................................. Accounts payable (?L) ...................................................8,400
Inventory (?A) ($8,400 x 0.035) ...............................
Cash (?A) ($8,400 x 0.965) .....................................Accounts payable (?L) ...................................................8,400 Cash (?A) ................................................................
McGraw-Hill/Irwin Financial Accounting, 6/e ? The McGraw-Hill Companies, Inc., 2009 7-25
E7–22. (Supplement C)
CASE A: Perpetual inventory system:
January 14 Accounts receivable (+A) ............................................... Sales (+R, +SE) (20 units at $45) ............................
900
900 400 300 2,250 900
Cost of goods sold (+E, ?SE) ........................................400 Inventory (?A) (20 units at $20) ................................
April 9 Inventory (+A) (15 units at $20) .....................................300 Accounts payable (+L) .............................................
September 2 Accounts receivable (+A) ...............................................2,250 Sales (+R, +SE) (45 units at $50) ............................ Cost of goods sold (+E, ?SE) ........................................900 Inventory (?A) (45 units at $20) ................................
End of year No year-end adjusting entry needed.
CASE B: Periodic inventory system:
January 14 Accounts receivable (+A) ...............................................900 Sales (+R, +SE) (20 units at $45) ............................
April 9 Purchases (+A) (15 units at $20) ...................................300 Accounts payable (+L) .............................................
September 2 Accounts receivable (+A) ...............................................2,250 Sales (+R, +SE) (45 units at $50) ............................
End of year Cost of goods sold (+E, ?SE) (goods avail. for sale) .......2,300 Purchases (?A) .......................................................... Inventory (?A) (Beginning: 100 units at $20) .............
Inventory (+A) (Ending: 50 units at $20) .........................1,000
Cost of goods sold (?E, +SE) .....................................
Calculation of cost of goods sold: Beginning inventory (100 units at $20) $2,000 Add purchases 300 Goods available for sale 2,300 Ending inventory (physical count—50 units at $20) 1,000 Cost of goods sold $1,300
900 300 2,250 300 2,000 1,000
McGraw-Hill/Irwin 7-26 ? The McGraw-Hill Companies, Inc., 2009 Solutions Manual
PROBLEMS
P7–1.
Item
Ending inventory (physical count on December 31, 2010) a.
Goods out on trial to customer
Amount
Explanation
$65,000 Per physical inventory.
+ 750 Goods held by a customer on trial
are still owned by the vendor; no sale or transfer of ownership has occurred.
Goods shipped by a supplier, F.O.B. destination, are owned by the supplier until delivery at destination.
Goods shipped to customers, F.O.B. shipping point, are owned by the customer because
ownership passed when they were delivered to the transportation company. The inventory correctly excluded these items.
b. Goods in transit from supplier
c. Goods in transit to customer
d.
Goods held for customer pickup – 1,590 The goods sold, but held for
customer pickup, are owned by the customer. Ownership has passed. Goods purchased and in transit + 2,550 Goods purchased and in transit,
F.O.B. shipping point, are owned by the purchaser. Goods sold and in transit
+ 850 Goods sold and in transit, F.O.B.
destination, are owned by the seller until they reach destination. – 5,700 Goods held on consignment are
owned by the consignor (the manufacturer), not by the consignee.
$61,860
e.
f.
g. Goods held on consignment
Correct inventory, December 31,2010
McGraw-Hill/Irwin Financial Accounting, 6/e ? The McGraw-Hill Companies, Inc., 2009 7-27
P7–2.
a) Goods available for sale for all methods: Unit Units Cost
January 1, 2012–Beginning inventory 400 $3.00 January 30, 2012–Purchase 600 3.20 May 1, 2012–Purchase 460 3.50 Goods available for sale 1,460 Ending inventory: 1,460 units – (130 + 700) = 630 units
b) and c) 1. Weighted-average cost: Average unit cost $4,730 ÷ 1,460 = $3.24 Ending inventory (630 units x $3.24) Cost of goods sold ($4,730 – $2,041) 2. First-in, first-out: Ending inventory (460 units x $3.50) + (170 units x $3.20) Cost of goods sold ($4,730 – $2,154) 3. Last-in, first-out: Ending inventory (400 units x $3.00) + (230 units x $3.20) Cost of goods sold ($4,730 – $1,936) 4. Specific identification: Ending inventory ( 0 units x $3.00) + ( 522 units x $3.20) + ( 108 units x $3.50) Cost of goods sold ($4,730 – $2,048)
Total Cost $ 1,200 1,920 1,610 $4,730 $2,041 $2,689 $2,154 $2,576 $1,936 $2,794 $2,048 $2,682 McGraw-Hill/Irwin 7-28 ? The McGraw-Hill Companies, Inc., 2009 Solutions Manual