PURCHASES - GROSS METHOD
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1 INTERMEDIATE ACCOUNTING 321 MAY 21, 2016 TAD MILLER INVENTORY TEST Round your answers to the nearest cent $xxx.xx PURCHASES - GROSS METHOD - PERIODIC INVENTORY SYSTEM On May 10 th Our Co. ordered merchandise from a supplier with an invoice price of $500 having terms 2/10 n/30 fob shipping point. The supplier shipped the goods on May 12 th and we received the goods on May 15 th. Prepare the following entries. 1. Periodic - Gross The entry to record the purchase. Be sure to date the entry on the date we become liable for the account payable. 2. The entry on May 17 th when we the return of goods having an invoice price of $ Periodic - Gross The entry on May 19 th when we pay our account in full. We should record the purchase on May 12 Purchases Accounts payable Accounts payable Purchase returns Accounts payable Purchase discounts 9.60 Cash PURCHASES - NET METHOD - PERPETUAL INVENTORY SYSTEM On May 12 th Our Co. purchased merchandise with an invoice price of $700 having terms 3/10 n/30 fob destination. The supplier shipped the goods on May 13 th and we received the goods on May 14 th. Prepare the following entries. 4. Perpetual Net The entry to record the purchase. Be sure to date the entry on the date we become liable for the account payable. 5. Perpetual - Net The entry on May 29 th when we write a check for $500. We should record the purchase on May 14 Inventory Accounts payable Accounts payable Interest expense Cash
2 6. FINANCIAL STATEMENT PRESENTATION a. What effect would the two previous entries in problems 4 and 5 have on current assets? b. What effect would the two previous entries have on net income? c. If applicable, in which section or sections the income statement would any resulting revenues, expenses, gains or losses be reported? Increase no effect Decrease Total Assets by what amount: $ 179 Increase no effect Decrease Net Income by what amount: $ 15 Reported in which section of the Income Statement: Operating Non Operating After Income Tax n/a 7. Cost of Goods Sold - calculate cost of goods sold if the ending inventory is $340. In order to receive credit you will need to label your work. Freight IN 75 1/1 250 Freight OUT 80 + purchases 6,500 Inventory purch returns 12 Purchase discounts purch discounts 150 Purchase returns 12 + freight in 75 Purchases 6,500 Goods Available for Sale 6,663 Sales 9, / Sales discounts 120 Cost of Goods Sold 6,323 Sales returns Physical Inventory Count - Goods in Transit Assume all of the following merchandise is in transit as of 12/31/2017. Which merchandise do we include in our physical inventory count as of 12/31/2017? goods we purchased f.o.b. shipping point that are in transit on 12/31 include do not include goods we purchased f.o.b. destination that are in transit on 12/31 include do not include goods we sold f.o.b. shipping point that are in transit on 12/31 include do not include goods we sold f.o.b. destination that are in transit on 12/31 include do not include
3 qty cost average FIFO LIFO sold end sold end 1-May beginning May purchase May purchase available $62.36 sold inventory CoGS Inventory Inventory Purchases COST FLOW ASSUMPTIONS - PERIODIC Our Co. sold 6 units for $100 each, during the month. Use the information presented above to for the next two problems 9. Use FIFO -periodic to calculate both Cost of Goods Sold and ending Inventory to prepare the entry to record Cost of Goods Sold. 10. Use LIFO - Periodic to calculate Cost of Goods Sold and ending Inventory.
4 Purchases Sales sold remain Qty Cost Qty price qty cost qty LIFO 5/1 5 $6.00 5/4 1 $ /10 2 $ /14 3 $7.00 5/20 4 $ /24 4 $ /29 2 $10.00 Accounts Receivable 40 2 $ Sales $ Cost of Goods Sold $6.60 Inventory $4.00 $ COST FLOW ASSUMPTIONS LIFO PERPETUAL Use the above information to calculate cost of goods sold for the May20 th sale (only the May 20 sale) using LIFO - Perpetual and prepare the complete entry to record the sale. 12. COST FLOW ASSUMPTIONS AVERAGE COST PERPETUAL Use the above information to calculate cost of goods sold for the May20 th sale.
5 part no qty cost NRV LoC-NRV item x item cost NRV , , , , , , , , , LOWER OF COST AND NET REALIZABLE VALUE Use the information in the above table to calculate Lower of Cost & NRV on an item by item basis. $ 3,846 $3, LOWER OF COST & NRV Use the information in the above table to calculate Lower of Cost & NRV using the total inventory method. $ 3,876 $3, Using the information from the total inventory method problem, prepare the journal entry to record this adjustment. The 'Allowance to Reduce Inventory to LoC&NRV' has a zero balance. Loss due to Allow to reduce Inv to LoC&NRV OR Cost of Goods Sold Inventory LOWER OF COST AND NET REALIZABLE VALUE MMC pays a sales commission equal to 10% of the selling price and shipping costs equal to 5% of the selling price. The normal profit margin is $2.00 for each item. Use the information in the table below to calculate Net Realizable Value for each of the products. A1 A2 B11 B12 Replacement cost Selling price Sales commission Delivery costs Normal profit NRV(fill in)
6 17. LOWER OF COST AND MARKET MMC pays a sales commission equal to 10% of the selling price and shipping costs equal to 5% of the selling price. The normal profit margin is $2.00 for each item. Use the information in the table below to calculate the Market Value for each of the products. A1 A2 B11 B12 Replacement cost Selling price Sales commission Delivery costs Normal profit Market (fill in) NRV replacement cost floor DOLLAR VALUE LIFO On Jan. 1, 2017 MMC adopted dollar-value LIFO. The inventory value on that date was $300. The inventory value on 12/31/17 was $371 at year-end costs; and the value on 12/31/18 was $418 at year-end costs. The cost index was 1.06 for 2017 and 1.10 for Use dollar-value LIFO to calculate the amount you will report for inventory on the 12/31/17 balance sheet and the 12/31/18 balance sheet. at in LIFO LIFO year-end inex base-year layers index layers costs dollars base-year 1/1/ /31/ /31/
7 19. DOLLAR VALUE LIFO REDUCTION OF A PRIOR LAYER On Jan. 1, 2017 MMC adopted dollar-value LIFO. The inventory value on that date was $2,000. The inventory value on 12/31/17 was $2,310 at year-end costs; and the value on 12/31/18 was $2,408 at year-end costs. The cost index was 1.05 for 2017 and 1.12 for Use dollar-value LIFO to calculate the amount you will report for inventory on the 12/31/17 balance sheet and the 12/31/18 balance sheet. at in LIFO LIFO year-end inex base-year layers index layers costs dollars base-year 1/1/2017 2, ,000 2, , /31/2017 2, , , /31/2018 2, , , , GROSS PROFIT METHOD OF ESTIMATING INVENTORY BALANCE Use the Gross Profit Method to estimate the inventory balance in one of MMC s warehouses. They began the year with $10 in inventory; they purchased $75 of goods during the period and recorded net sales of $90. Over the last three years the gross profit ratio has consistently been 20%. Estimate both cost of goods sold and the expected balance in inventory. Sales Begin 10 GoGS Purchase 75 Gross Profit Available 85 Sold 72 Ending 13
8 21. RETAIL METHOD - AVERAGE COST Use the Retail Method which approximated average cost to estimate both cost of goods sold and the inventory balance you will report on the balance sheet. They began the year with $100 in inventory which was priced to sell for $135; they purchased $560 of merchandise which they priced to sell for $690. During the year they and recorded net sales of $750. Begin Purchase markups markdowns avail sales 750 Inv at retail 75 Inv at cost 60 CoGS PREPARE THE JOURNAL ENTRY TO RECORD INVENTORY BALANCE AT COST This may seem tricky but it is rather simple if you think about it for a minute. INVENTORY 60 COST OF GOODS SOLD 600 INVENTORY 100 PURCHASES RETAIL METHOD AVERAGE COST Use the Retail Method which approximates average cost to estimate both ending inventory you will report on the balance sheet and cost of goods sold. Calculate Ratios to 3 digits. MMC began the year with merchandise costing $ 1,000 which was priced to sell for $ 1,500 They purchases merchandise costing $ 5,600 which they priced to sell for $ 9,800 They had net sales of $10,000 Sales included Markdowns of $ 400 and in Markups of $ 100
9 Ratio.60 available 6,600 11,000 Sales -10,000 Inventory at cost 600 Inventory at retail 1,000 Cost of Goods Sold 6, CONVENTIONAL RETAIL METHOD LOWER OF COST OR MARKET Use Conventional Retail which approximates lower of cost or market to estimate both ending inventory you will report on the balance sheet and cost of goods sold. Calculate Ratios to 3 digits. MMC began the year with merchandise costing $ 1,000 which was priced to sell for $ 1,500 They purchases merchandise costing $ 5,600 which they priced to sell for $ 9,800 They had net sales of $10,000 Sales included Markdowns of $ 400 and in Markups of $ 100 Ratio.579 available 6, ,400 Sales -10,000 Markdowns -400 Inventory at cost inventory at retail 1,000 Cost of Goods Sold 6, CONVENTIONAL RETAIL EMPLOYEE DISCOUNTS Use Conventional Retail which approximates lower of cost or market to estimate both the ending inventory you will report on the balance sheet and cost of goods sold. Calculate Ratios to 3 digits. MMC began the year with merchandise costing $ 1,000 which was priced to sell for $ 1,500 They purchases merchandise costing $ 5,600 which they priced to sell for $ 9,800 They had Sales (does not include $300 of employee discounts) $10,000 Ratio.584 avail 6, ,300 Sales -10,000 Employee discounts Inventory at cost inventory at retail 1,000 Cost of Goods Sold 6,015.93
10 26. RETAIL LIFO Use LIFO Retail to estimate ending inventory you will report on the balance sheet and cost of goods sold. Calculate Ratios to 3 digits. MMC began the year with merchandise costing $40 which was priced to sell for $ 60 They purchases merchandise costing $ 510 which they priced to sell for $ 850 They had net sales of $ 835 Layer # Layer #2 ratio Avail at cost 550 avail at retail 910 Sales -835 Inventory at retail 75 Layer #1 at cost layer #1 at retail Layer # Layer #2 at retail 15 Cost of Goods Sold CHANGE IN INVENTORY METHOD -- FROM LIFO TO FIFO MMC used LIFO to determine an inventory balance of $100 for its 12/31/17 balance sheet. In January of 2018 the company changed to FIFO. If the company had used FIFO from its inception. The 12/31/17 inventory balance would have been $87. a. Is any Journal Entry necessary to record the change from LIFO to FiFO? YES or NO b. If a Journal Entry is necessary, prepare the necessary journal entry. RETAINED EARNINGS 13 INVENTORY CHANGE IN INVENTORY METHOD FROM FIFO TO LIFO ORVC Co. used the average cost method to calculate their $797 12/31/17 inventory balance. In January of 2018 the company changed to LIFO. The company is unable to determine what the 12/31/17 inventory balance would have been if they had used LIFO from its inception. ORVC's 12/31/18 inventory balance using LIFO was $800. a. Is any Journal Entry necessary to record the change from Average Cost to LIFO? YES or NO b. If a Journal Entry is necessary, prepare the necessary journal entry.
11 29. CHANGE IN INVENTORY METHODS Use and X to indicate the proper method to account for each of the four changes described in left-hand columns of the table. this change is accounted for change from to modified prospectively retrospective retrospectively 1 Ave Cost to FIFO x 2 Ave Cost to LIFO x 4 LIFO to FIFO x 6 FIFO to LIFO x 30. INVENTORY ERRORS ORVC uses a Periodic Inventory system. When counting their inventory, ORVC failed to include goods that were in transit. They sold goods costing $23 on Dec. 30, 2017, f.o.b. destination. The customer received the goods on Jan. 3, a. Is a Journal Entry necessary to correct this error? YES or NO b. If a Journal Entry is necessary, prepare the necessary journal entry. INVENTORY 23 RETAINED EARNINGS 23 OR COGS WHAT EFFECT DID THE AFOREMENTIONED ERROR IN ENDING INVENTORY HAVE HAD ON THE 12/31/17 FINANCIAL STATEMENTS. Please notice the question refers to the 12/31/17 financial statements. Current Assets would have been overstated correct understated by $ 23 Net Income would have been overstated correct understated by $ INVENTORY ERRORS In January 2018, ORVC learns that their 12/31/16 ending inventory was overstated by $7. The 12/31/17 ending inventory balance was correct. a. Is a Journal Entry necessary to correct this error? YES or NO b. If a Journal Entry is necessary, prepare the necessary journal entry. c. If a Journal Entry is not necessary, explain why it is not necessary. THE ERROR HAS CORRECTED ITSELF Begin Purchases over OK Available OK 7 over Ending 7 over OK CoGS 7 under 7 over
12 33. What effect did the aforementioned error in the 12/31/16 Ending Inventory balance have on the two year period ending 12/31/17 financial statements. Please notice the question refers to a two year period. Retained Earnings as of 12/31/17 Would have been overstated correct understated by $ Cost of Goods Sold for the two years from 1/1/16-12/31/17 Would have been overstated correct understated by $ Gross Profit for the two years from 1/1/16-12/31/17 Would have been overstated correct understated by $
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