Demonstration Problems

Chapter 6

Merchandise Inventory

6-1© 2016 Pearson Education, Inc.

6-2

Galaxy Traders, which uses the FIFO inventory costing method, has the following account balances at March 31, 2017, prior to releasing the financial statements for the year:

Demonstration of E6-21

Merchandise Inventory, ending $25,000Cost of Goods Sold 120,000Sales Revenue 200,000

Galaxy has determined that the current replacement cost (current market value) of the March 31, 2017, ending merchandise inventory is $24,600

Requirements

1. Prepare any adjusting journal entry required from the information given.

2. What value would Galaxy report on the balance sheet at March 31, 2017, for merchandise inventory?

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Date Accounts and Explanation Debit Credit

Mar. 31 Cost of Goods Sold 400

Merchandise Inventory 400

To write merchandise inventory down to market value.

Calculations:

Current replacement cost of inventory $24,600

Cost of inventory prior to adjustment ﴾25,000﴿

Adjustment needed

$﴾400﴿

Demonstration of E6-21-Req. 1

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Calculations:

Current replacement cost of inventory $24,600

Cost of inventory prior to adjustment ﴾25,000﴿

Adjustment needed

$﴾400﴿

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Date Accounts and Explanation Debit Credit

Mar. 31 Cost of Goods Sold 400

Merchandise Inventory 400

To write merchandise inventory down to market value.

Merchandise inventory would be reported at $24,600 on the March 31, 2017 balance sheet.

Demonstration of E6-21-Req. 2

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6-5

White Traders reported the following comparative income statements for the years ended June 30, 2017 and 2016:

Demonstration of E6-24

WHITE TRADERSIncome Statements

Years Ended June 30, 2017 and 2016  2017 2016

Sales Revenue   $200,000 $150,000 Cost of Goods Sold:      

Beginning Merchandise Inventory $25,000   $20,000  Net Cost of Purchases 120,000   100,000  Cost of Goods Available for Sale 145,000   120,000  Less: Ending Merchandise Inventory 23,000   25,000  Cost of Goods Sold   122,000 95,000

Gross Profit   78,000 55,000 Operating Expenses   20,000 18,000 Net Income   $58,000 $37,000

         

During 2017, White Traders discovered that ending 2016 merchandise inventory was overstated by $3,000.

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Requirements

1. Prepare corrected income statements for the two years.

2. State whether each year’s net income—before your corrections—is understated or overstated and indicate the amount of the understatement or overstatement.

Demonstration of E6-24

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WHITE TRADERSIncome Statements

Years Ended June 30, 2017 and 2016  2017

Sales Revenue   $200,000 Cost of Goods Sold:    

Beginning Merchandise Inventory (a) $22,000  Net Cost of Purchases 120,000  Cost of Goods Available for Sale 142,000  Less: Ending Merchandise Inventory 23,000  Cost of Goods Sold   119,000

Gross Profit   81,000 Operating Expenses   20,000

Net Income   $61,000

Calculations:

(a) Incorrect Merchandise Inventory $25,000

Overstatement (3,000)

Correct Merchandise Inventory $22,000

Demonstration of E6-24-Req. 1

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Calculations:

(a) Incorrect Merchandise Inventory $25,000

Overstatement (3,000)

Correct Merchandise Inventory $22,000

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WHITE TRADERSIncome Statements

Years Ended June 30, 2017 and 2016  2017 2016

Sales Revenue   $200,000 $150,000 Cost of Goods Sold:      

Beginning Merchandise Inventory (a) $22,000   $20,000  Net Cost of Purchases 120,000   100,000  Cost of Goods Available for Sale 142,000   120,000  Less: Ending Merchandise Inventory 23,000   (a) 22,000  Cost of Goods Sold   119,000 98,000

Gross Profit   81,000 52,000 Operating Expenses   20,000 18,000

Net Income   $61,000 $34,000

Demonstration of E6-24-Req. 1

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Before correction, net income for the year ended June 30, 2017 is understated by $3,000 and net income for the year ended June 30, 2016 is overstated by $3,000.

Calculations:  Year Ended

June 30, 2017 June 30, 2016Incorrect net income $58,000 $37,000 Correct net income ﴾61,000﴿ ﴾34,000﴿

Overstatement (understatement) of net income

$﴾3,000﴿ $3,000

     

June 30, 2017 June 30, 2016

Net Income before correction $58,000 $37,000

Net Income after correction $61,000 $34,000

Demonstration of E6-24-Req. 2

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6-10

Excellence Business Services reported the following income statement for the year ended December 31, 2017:

Demonstration of E6-27

EXCELLENCE BUSINESS SERVICESIncome Statement

Year Ended December 31, 2017Sales Revenue   $300,000  Cost of Goods Sold:     

Beginning Merchandise Inventory $35,000   Net Cost of Purchases 180,000   Cost of Goods Available for Sale 215,000   Less: Ending Merchandise Inventory 45,000   Cost of Goods Sold   170,000  

Gross Profit   130,000  Operating Expenses   80,000  Net Income   $50,000  

       

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Requirements

1. Compute Excellence Business Services’ inventory turnover rate for the year. (Round to two decimal places.)

2. Compute Excellence Business Services’ days’ sales in inventory for the year. (Round to two decimal places.)

Demonstration of E6-25

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Average Merchandise Inventory ═﴾Beginning merchandise inventory+ Ending merchandise inventory﴿

2

Beginning Merchandise Inventory $35,000

Ending Merchandise Inventory 45,000

Cost of Goods Sold 170,000

Demonstration of E6-25-Req. 1

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Average Merchandise Inventory ═﴾Beginning merchandise inventory+ Ending merchandise inventory﴿

2═ ﴾$35,000 + $45,000﴿

2

   

Beginning Merchandise Inventory $35,000

Ending Merchandise Inventory 45,000

Cost of Goods Sold 170,000

Demonstration of E6-25-Req. 1

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Average Merchandise Inventory ═﴾Beginning merchandise inventory+ Ending merchandise inventory﴿

2═ ﴾$35,000 + $45,000﴿

2═ $40,000

   

Beginning Merchandise Inventory $35,000

Ending Merchandise Inventory 45,000

Cost of Goods Sold 170,000

Demonstration of E6-25-Req. 1

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Average Merchandise Inventory ═﴾Beginning merchandise inventory+ Ending merchandise inventory﴿

2═ ﴾$35,000 + $45,000﴿

2═ $40,000

   

Beginning Merchandise Inventory $35,000

Ending Merchandise Inventory 45,000

Cost of Goods Sold 170,000

Inventory Turnover═ Cost of goods sold

Average merchandise inventory

Demonstration of E6-25-Req. 1

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Average Merchandise Inventory ═﴾Beginning merchandise inventory+ Ending merchandise inventory﴿

2═ ﴾$35,000 + $45,000﴿

2═ $40,000

   

Beginning Merchandise Inventory $35,000

Ending Merchandise Inventory 45,000

Cost of Goods Sold 170,000

Inventory Turnover═ Cost of goods sold

Average merchandise inventory═ $170,000

$40,000

Demonstration of E6-25-Req. 1

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Average Merchandise Inventory ═﴾Beginning merchandise inventory+ Ending merchandise inventory﴿

2═ ﴾$35,000 + $45,000﴿

2═ $40,000

   

Beginning Merchandise Inventory $35,000

Ending Merchandise Inventory 45,000

Cost of Goods Sold 170,000

Inventory Turnover═ Cost of goods sold

Average merchandise inventory═ $170,000

$40,000═ 4.25

Demonstration of E6-25-Req. 1

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Inventory turnover 4.25

Days’ Sales in Inventory═ 365 days

Inventory turnover

Demonstration of E6-25-Req. 2

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Inventory turnover 4.25

Days’ Sales in Inventory═ 365 days

Inventory turnover═ 365

4.25

Demonstration of E6-25-Req. 2

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Inventory turnover 4.25

Days’ Sales in Inventory═ 365 days

Inventory turnover═ 365

4.25═ 85.88 days

Demonstration of E6-25-Req. 2

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End of Chapter 6

6-21© 2016 Pearson Education, Inc.