Final Review Intermediate 1 Page 1 of 33 Ehab Abdou (97672930) PROBLEMS Pr. 3-178—Adjusting entries and account classification. Selected amounts from Trent Company's trial balance of 12/31/10 appear below: 1. Accounts Payable € 160,000 2. Accounts Receivable 150,000 3. Accumulated Depreciation—Equipment 200,000 4. Allowance for Doubtful Accounts 20,000 5. Bonds Payable 500,000 6. Cash 150,000 7. Equipment 840,000 8. Insurance Expense 30,000 9. Interest Expense 10,000 10. Merchandise Inventory 300,000 11. Notes Payable (due 6/1/11) 200,000 12. Prepaid Rent 150,000 13. Retained Earnings 818,000 14. Salaries and Wages Expense 328,000 15. Share Capital–Ordinary 60,000 (All of the above accounts have their standard or normal debit or credit balance.) Part A. Prepare adjusting journal entries at year end, December 31, 2010, based on the following supplemental information. a. The equipment has a useful life of 15 years with no salvage value. (Straight-line method being used.) b. Interest accrued on the bonds payable is €15,000 as of 12/31/10. c. Expired insurance at 12/31/10 is €20,000. d. The rent payment of €150,000 covered the six months from November 30, 2010 through May 31, 2011. e. Salaries and wages earned but unpaid at 12/31/10, €22,000. Part B. Indicate the proper statement of financial position classification of each of the 15 numbered accounts in the 12/31/10 trial balance before adjustments by placing appropriate numbers after each of the following classifications. If the account title would appear on the income statement, do not put the number in any of the classifications. a. Property, plant, and equipment b. Current assets c. Equity d. Non-current liabilities e. Current liabilities Solution 3-178 Part A. a. Depreciation Expense—Equipment (€840,000 – 0) 15 ............... 56,000 Accumulated Depreciation—Equipment ............................. 56,000 b. Interest Expense ........................................................................... 15,000 Interest Payable ................................................................. 15,000
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Final Review Intermediate 1
Page 1 of 33 Ehab Abdou (97672930)
PROBLEMS Pr. 3-178—Adjusting entries and account classification.
Selected amounts from Trent Company's trial balance of 12/31/10 appear below:
(All of the above accounts have their standard or normal debit or credit balance.) Part A. Prepare adjusting journal entries at year end, December 31, 2010, based on the
following supplemental information. a. The equipment has a useful life of 15 years with no salvage value. (Straight-line method being
used.) b. Interest accrued on the bonds payable is €15,000 as of 12/31/10. c. Expired insurance at 12/31/10 is €20,000. d. The rent payment of €150,000 covered the six months from November 30, 2010 through May
31, 2011. e. Salaries and wages earned but unpaid at 12/31/10, €22,000.
Part B. Indicate the proper statement of financial position classification of each of the 15 numbered accounts in the 12/31/10 trial balance before adjustments by placing appropriate numbers after each of the following classifications. If the account title would appear on the income statement, do not put the number in any of the classifications.
a. Property, plant, and equipment b. Current assets c. Equity d. Non-current liabilities e. Current liabilities Solution 3-178
d. Rent Expense (€150,000 6) ......................................................... 25,000 Prepaid Rent ..................................................................... 25,000 e. Salaries and Wages Expense ....................................................... 22,000 Salaries and Wages Payable ............................................. 22,000 Part B.
a. Property, plant, and equipment—3, 7
b. Current assets—2, 4, 6, 10, 12
c. Equity—13, 15
d. Non-current liabilities—5
e. Current liabilities—1, 11 Pr. 3-180—Adjusting and closing entries.
The following trial balance was taken from the books of Fisk Corporation on December 31, 2010.
Account Debit Credit Cash $ 12,000 Accounts Receivable 40,000 Note Receivable 7,000 Allowance for Doubtful Accounts $ 1,800 Merchandise Inventory 44,000 Prepaid Insurance 4,800 Furniture and Equipment 125,000 Accumulated Depreciation--F. & E. 15,000 Accounts Payable 10,800 Share Capital–Ordinary 44,000 Retained Earnings 55,000 Sales 280,000 Cost of Goods Sold 111,000 Salaries Expense 50,000 Rent Expense 12,800 Totals $406,600 $406,600 At year end, the following items have not yet been recorded. a. Insurance expired during the year, $2,000. b. Estimated bad debts, 1% of gross sales. c. Depreciation on furniture and equipment, 10% per year. d. Interest at 6% is receivable on the note for one full year. *e. Rent paid in advance at December 31, $5,400 (originally charged to expense). f. Accrued salaries at December 31, $5,800.
Instructions (a) Prepare the necessary adjusting entries. (b) Prepare the necessary closing entries.
Solution 3-180
(a) Adjusting Entries
a. Insurance Expense ............................................................... 2,000 Prepaid Insurance ........................................................ 2,000
b. Bad Debt Expense ................................................................ 2,800 Allowance for Doubtful Accounts .................................. 2,800
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c. Depreciation Expense .......................................................... 12,500 Accumulated Depreciation--F. & E. .............................. 12,500
d. Interest Receivable ............................................................... 420 Interest Revenue ......................................................... 420
Sales ........................................................................................... 280,000 Interest Revenue ......................................................................... 420 Income Summary .............................................................. 280,420 Income Summary ......................................................................... 191,500 Salaries Expense ............................................................... 55,800 Rent Expense .................................................................... 7,400 Depreciation Expense ........................................................ 12,500 Bad Debt Expense ............................................................. 2,800 Insurance Expense ............................................................ 2,000 Cost of Goods Sold ............................................................ 111,000 Income Summary ......................................................................... 88,920 Retained Earnings ............................................................. 88,920 Ex. 3-170—Adjusting entries.
Present, in journal form, the adjustments that would be made on July 31, 2011, the end of the fiscal year, for each of the following.
1. The supplies inventory on August 1, 2010 was €7,350. Supplies costing €20,150 were acquired during the year and charged to the supplies inventory. A count on July 31, 2011 indicated supplies on hand of €8,810.
2. On April 30, a ten-month, 9% note for €20,000 was received from a customer.
*3. On March 1, €12,000 was collected as rent for one year and a nominal account was credited. Solution 3-170
Presented below is information (in thousands) related to Chen Company. Retained earnings, December 31, 2010 ¥ 650,000 Sales 1,400,000 Selling and administrative expenses 240,000 Loss on disposal of component (pre-tax) 290,000 Cash dividends declared on common stock 33,600 Cost of goods sold 780,000 Gain resulting from computation error on depreciation charge in 2009 (pre-tax) 520,000 Rent revenue 120,000 Impairment loss 90,000 Interest expense 10,000 Instructions Prepare in good form an income statement for the year 2011. Assume a 30% tax rate and that there were 80,000 ordinary shares outstanding during the year. Solution 4-146
Chen Company INCOME STATEMENT
For the Year Ended December 31, 2011 Sales ¥1,400,000 Cost of goods sold 780,000 Gross profit 620,000 Selling and administrative expenses 240,000 Other income and expense 120,000 Impairment loss 90,000 Income from operations 410,000 Interest expense 10,000 Income before taxes 400,000 Income taxes (120,000) Income from continuing operations 280,000 Discontinued operations, net of applicable income taxes of ¥87,000 (203,000) Net income ¥ 77,000 Per share— Income from continuing operating ¥ 3.50 Discontinued operations net of tax (2.54) Net income ¥ 0.96
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Pr. 4-147—Income statement form.
Wilcox Corporation had income from continuing operations of $800,000 (after taxes) in 2011. In addition, the following information has not been considered. 1. A machine was sold for $140,000 cash during the year at a time when its book value was
$110,000. (Depreciation has been properly recorded.) The company often sells machinery of this type.
2. Wilcox decided to discontinue its stereo division in 2011. During the current year, the loss on
the disposal of this component of the business was $150,000 less applicable taxes. Instructions Present in good form the income statement of Wilcox Corporation for 2011 starting with "income from continuing operations." Assume that Wilcox's tax rate is 30% and 200,000 ordinary shares were outstanding during the year. Solution 4-147
Wilcox Corporation Partial Income Statement
For the Year Ended December 31, 2011 Income from continuing operations $821,000* Discontinued operations Loss on disposal of a component of a business, $150,000, less applicable income taxes, $45,000 (105,000) Net income $716,000 Per share—Income from cont. operations $4.11 Discontinued operations, net of tax (0.53) Net income $3.58 *Income from cont. operations (unadjusted) $800,000 Gain on sale of machinery (after tax) 21,000 Income from cont. operations (adjusted) $821,000
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Pr. 4-148—Income statement.
Shown below is an income statement for 2011 that was prepared by a poorly trained bookkeeper of Howell Corporation.
Howell Corporation INCOME STATEMENT
December 31, 2011 Sales revenue $945,000 Investment revenue 19,500 Cost of merchandise sold (408,500) Selling expenses (145,000) Administrative expense (215,000) Interest expense (13,000) Income before special item 183,000 Special item Loss on disposal of a component of the business (30,000) Net income tax liability (45,900) Net income $107,100 Instructions Prepare a multiple-step income statement for 2011 for Howell Corporation that is presented in accordance with IFRS (including format and terminology). Howell Corporation has 50,000 ordinary shares outstanding and has a 30% income tax rate on all tax related items. Round all earnings per share figures to the nearest cent. Solution 4-148
Howell Corporation INCOME STATEMENT
For the Year Ended December 31, 2011 Sales $945,000 Cost of goods sold 408,500 Gross profit 536,500 Selling expenses $145,000 Administrative expenses 215,000 360,000 Other income: Investment revenue 19,500 Income from operations 196,000 Interest expense 13,000 Income before income taxes 183,000 Income taxes 54,900 Income from continuing operations 128,100 Loss from discontinued operations, net of applicable income tax of $9,000 21,000 Net income $107,100
Per share of share— Income from continuing operations $2.56 Discontinued operations loss net of tax (0.42) Net income $2.14
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Pr. 4-149—Income statement.
Presented below is an income statement for Kinder Company for the year ended December 31, 2011.
Kinder Company Income Statement
For the Year Ended December 31, 2011 Net sales $800,000 Costs and expenses: Cost of goods sold 640,000 Selling, general, and administrative expenses 70,000 Other, net 20,000 730,000 Income before income taxes 70,000 Income taxes 21,000 Net income $ 49,000 Additional information:
1. "Selling, general, and administrative expenses" included a charge of $7,000 for impairment of intangibles.
2. "Other, net" consisted of interest expense, $10,000, and a discontinued operations loss of $10,000 before taxes. If the loss had not occurred, income taxes for 2011 would have been $24,000 instead of $21,000.
3. Kinder had 20,000 ordinary shares outstanding during 2011. Instructions Prepare a corrected income statement, including the appropriate per share disclosures.
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Solution 4-149
Kinder Company Income Statement
For the Year Ended December 31, 2011 Net sales $800,000 Cost of goods sold 640,000 Gross profit $160,000 Selling, general, and administrative expenses 63,000 Other income and expense Loss on impairment 7,000 Income from operations 90,000 Interest expense 10,000 Income before taxes 80,000 Income taxes 24,000 Income from continuing operations 56,000 Discontinued operations Loss on disposal of component 10,000 Less applicable taxes 3,000 7,000 Net income $ 49,000 Per share— Income from continuing operations $2.80 Discontinued operations, net of tax (0.35) Net income $2.45
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Pr. 4-150—Income statement and retained earnings statement.
Wang Corporation's capital structure consists of 50,000 ordinary shares. At December 31, 2011 an analysis of the accounts and discussions with company officials revealed the following information: Sales ¥1,100,000 Purchase discounts 18,000 Purchases 642,000 Loss on discontinued operations (net of tax) 42,000 Selling expenses 128,000 Cash 60,000 Accounts receivable 90,000 Share capital 200,000 Accumulated depreciation 180,000 Dividend revenue 8,000 Inventory, January 1, 2011 152,000 Inventory, December 31, 2011 125,000 Unearned service revenue 4,400 Accrued interest payable 1,000 Land 370,000 Patents 100,000 Retained earnings, January 1, 2011 290,000 Interest expense 17,000 General and administrative expenses 150,000 Dividends declared 29,000 Allowance for doubtful accounts 5,000 Notes payable (maturity 7/1/14) 200,000 Machinery and equipment 450,000 Materials and supplies 40,000 Accounts payable 60,000 The amount of income taxes applicable to ordinary income was ¥48,600, excluding the tax effect of the discontinued operations loss which amounted to ¥18,000. Instructions (a) Prepare an income statement.
(b) Prepare a retained earnings statement.
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Solution 4-150 Wang Corporation
INCOME STATEMENT For the Year Ended December 31, 2011
Sales ¥1,100,000 Cost of goods sold: Merchandise inventory, Jan. 1 ¥152,000 Purchases ¥642,000 Less purchase discounts 18,000 Net purchases 624,000 Merchandise available for sale 776,000 Less merchandise inv., Dec. 31 125,000 Cost of goods sold 651,000 Gross profit 449,000 Selling expenses 128,000 General and administrative expenses 150,000 278,000 Other income and expense: Dividend revenue 8,000 Income from operations 179,000 Interest expense 17,000 Income before income taxes 162,000 Income taxes 48,600 Income from continuing operations 113,400 Discontinued operations Loss on disposal, less applicable taxes of $18,000 42,000 Net income ¥ 71,400 Per share of share capital— Income from continuing operations ¥2.27 Discontinued operations, (0.84) Net income ¥1.43
Wang Corporation RETAINED EARNINGS STATEMENT
For the Year Ended December 31, 2011 Retained earnings, January 1, 2011 ¥290,000 Add: Net income ¥71,400 Deduct: Dividends declared 29,000 42,400 Retained earnings, December 31, 2011 ¥332,400
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PROBLEMS
Pr. 5-130—Statement of financial position presentation.
The following statement of financial position was prepared by the bookkeeper for Kraus Company as of December 31, 2012.
Kraus Company Statement of Financial Position
as of December 31, 2012
Investments £ 76,300 Shareholders' equity £218,500 Equipment (net) 96,000 Non-current liabilities 100,000 Patents 32,000 Accounts payable 75,000 Inventories 57,000 Accounts receivable (net) 52,200 Cash 80,000 £393,500 £393,500 The following additional information is provided:
1. Cash includes the cash surrender value of a life insurance policy £9,400, and a bank overdraft of £2,500 has been deducted.
3. Inventories do not include goods costing £3,000 shipped out on consignment. Receivables of £3,000 were recorded on these goods.
4. Investments include investments in share capital–ordinary, trading £19,000 and available-for-sale £48,300, and franchises £9,000.
5. Equipment costing £5,000 with accumulated depreciation £4,000 is no longer used and is held for sale. Accumulated depreciation on the other equipment is £40,000.
Instructions
Prepare a statement of financial position in good form (shareholders' equity details can be
omitted.)
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Solution 5-130
Kraus Company Statement of Financial Position
As of December 31, 2012
Assets Investments Available-for-sale securities £48,300 Cash surrender value 9,400 £57,700 Property, plant, and equipment Equipment 135,000 (5) Less accumulated depreciation 40,000 95,000 Intangible assets Patents 32,000
Franchises 9,000 41,000 Current assets *Equipment held for sale 1,000 (4) Inventories 60,000 (3) Accounts receivable £ 57,000 (2) Less: Allowance for doubtful accounts 3,800 53,200 Trading securities 19,000 Cash 73,100 (1) Total current assets 206,300 Total assets £400,000
Equity and Liabilities Shareholders' equity £ 218,500 Non-current liabilities £100,000 Current liabilities Accounts payable £ 79,000 (6) Bank overdraft 2,500 Total current liabilities 81,500 Total liabilities 181,500 Total liabilities and shareholders' equity £400,000 (1) (£80,000 – £9,400 + £2,500) (2) (6£0,000 – £3,000) (3) (£57,000 + £3,000) (4) (£5,000 – £4,000) (5) (£96,000 + £40,000 – £5,000 + £4,000) (6) (£75,000 + £4,000) *An alternative is to show it as an other asset.
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Pr. 5-131—Statement of financial position presentation.
Given the following account information for Leong Corporation, prepare a statement of financial position in report form for the company as of December 31, 2012. All accounts have normal balances.
Selected financial statement information and additional data for Stanislaus Co. is presented below. Prepare a statement of cash flows for the year ending December 31, 2012
TOTAL ........................................ €856,800 €1,226,400
Additional data for 2012: 1. Net income was €235,200. 2. Depreciation was €31,600. 3. Land was sold at its original cost. 4. Dividends of €96,600 were paid. 5. Equipment was purchased for €84,000 cash. 6. A long-term note for €201,600 was used to pay for an equipment purchase. 7. Share capital–ordinary was issued to pay a €67,200 long-term note payable.
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Solution 5-132
Stanislaus Co. Statement of Cash Flows
For the year ended December 31, 2012
Net Income €235,200 Cash flow from operating activities
Depreciation expense €31,600 Increase in accounts receivable (67,200) Increase in inventory (33,600) Increase in accounts payable 35,600 Decrease in short-term notes payable (37,800) (71,400)
Net cash provided by operating activities 163,800 Cash flow from investing activities
Purchase equipment (84,000) Sale of land 37,800
Net cash used by investing activities (46,200) Cash flow from financing activities
Payment of cash dividend (96,600) Net increase in cash 21,000 Cash at beginning of year 42,000 Cash at end of the year €63,000
Noncash investing and financing activities
Payment of long-term note payable with issuance of €67,200 of share capital–ordinary
Long-term note issued as payment of equipment purchase, €201,600
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Pr. 5-133—Statement of cash flows preparation.
Selected financial statement information and additional data for Johnston Enterprises is presented below. Prepare a statement of cash flows for the year ending December 31, 2012
Johnston Enterprises Statement of Financial Position and Income Statement Data
December 31, December 31, 2012 2011___
Property, Plant, and Equipment HK$1,241,000 HK$1,122,000 Less: Accumulated Depreciation (476,000) (442,000) 765,000 680,000 Current Assets:
Total Current Liabilities 323,000 246,500 Total Liabilities 663,000 637,500 Total Liabilities & Shareholders' Equity HK$1,547,000 HK$1,445,000 Sales HK$1,615,000 HK$1,513,000 Less Cost of Goods Sold 731,000 731,000 Gross Profit 884,000 782,000 Expenses:
Depreciation Expense 153,000 136,000 Salary Expense 391,000 357,000 Interest Expense 34,000 34,000 Loss on Sale of Equipment 17,000 0
Income Before Taxes 289,000 255,000 Less Income Tax Expense 119,000 102,000 Net Income HK$ 170,000 HK$ 153,000
Additional Information: During the year, Johnston sold equipment with an original cost of HK$153,000 and accumulated depreciation of HK$119,000 and purchased new equipment for HK$272,000.
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Solution 5-133
Johnston Enterprises Statement of Cash Flows
For the Year Ended December 31, 2012
Net Income HK$ 170,000 Cash flow from operating activities
Depreciation expense HK$153,000 Loss on sale of equipment 17,000 Decrease in accounts receivable 68,000 Increase in inventory (51,000) Increase in accounts payable 85,000 Decrease in notes payable (17,000) Increase in tax payable 8,500 263,500
Net cash provided by operating activities 433,500 Cash flow from investing activities
Sale of equipment 17,000 Purchase of equipment (272,000)
Net cash used by investing activities (255,000) Cash flow from financing activities
Retirement of bonds payable (51,000) Issuance of share capital–ordinary 42,500 Payment of dividends (136,000)**
Net cash used by financing activities (144,500) Net increase in cash 34,000 Beginning cash 119,000 Cash at end of year HK$153,000
**Beginning R/E Net income Dividends Ending R/E
HK$340,000 HK$170,000 Dividends HK$374,000
Dividends HK$136,000
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PROBLEMS Pr. 7-159—Entries for bad debt expense.
The trial balance before adjustment of Risen Company reports the following balances:
Dr. Cr. Accounts receivable $100,000 Allowance for doubtful accounts $ 2,500 Sales (all on credit) 750,000 Sales returns and allowances 40,000
Instructions
(a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be (1) 6% of gross accounts receivable and (2) 1% of net sales.
(b) Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $2,500 instead of a credit balance. How will this difference affect the journal entries in part (a)?
Solution 7-159
(a) (1) Bad Debt Expense ......................................................... 3,500 Allowance for Doubtful Accounts ........................ 3,500
Gross receivables $100,000 Rate 6% Total allowance needed 6,000 Present allowance (2,500) Bad debt expense $ 3,500 (2) Bad Debt Expense ......................................................... 7,100 Allowance for Doubtful Accounts ........................ 7,100
Sales $750,000 Sales returns and allowances (40,000) Net sales 710,000 Rate 1% Bad debt expense $ 7,100
(b) The percentage of receivables approach would be affected as follows:
Gross receivables $100,000 Rate 6% Total allowance needed 6,000 Present allowance 2,500 Additional amount required $ 8,500 The journal entry is therefore as follows: Bad Debt Expense ......................................................... 8,500 Allowance for Doubtful Accounts ........................ 8,500
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Pr. 7-160—Amortization of discount on note.
On December 31, 2010, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $400,000, a due date of December 31, 2013, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%. The following interest factors are provided: Interest Rate Table Factors For Three Periods 5% 10% Future Value of 1 1.15763 1.33100 Present Value of 1 .86384 .75132 Future Value of Ordinary Annuity of 1 3.15250 3.31000 Present Value of Ordinary Annuity of 1 2.72325 2.48685 Instructions (a) Determine the present value of the note.
(b) Prepare a Schedule of Note Discount Amortization for Green Company under the effective interest method. (Round to whole dollars.)
Solution 7-160
(a) Present value of interest = $20,000 × 2.48685 = $ 49,737 Present value of maturity value = $400,000 × .75132 = 300,528 $350,265
(b) Green Company Schedule of Note Discount Amortization
Effective Interest Method 5% Note Discounted at 10% (Imputed)
Cash Effective Unamortized Present Interest Interest Discount Discount Value Date (5%) (10%) Amortized Balance of Note
(a) Accounts receivable in the amount of $500,000 were assigned to Utley Finance Co. by Mars as security for a loan of $425,000. Utley charged a 3% commission on the accounts; the interest rate on the note is 12%.
(b) During the first month, Mars collected $200,000 on assigned accounts after deducting $450 of discounts. Mars wrote off a $530 assigned account.
(c) Mars paid to Utley the amount collected plus one month's interest on the note.
On May 1, Dexter, Inc. factored $800,000 of accounts receivable with Quick Finance on a without recourse basis. Under the arrangement, Dexter was to handle disputes concerning service, and Quick Finance was to make the collections, handle the sales discounts, and absorb the credit losses. Quick Finance assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts. Instructions
(a) Prepare the journal entry required on Dexter's books on May 1.
(b) Prepare the journal entry required on Quick Finance’s books on May 1.
(c) Assume Dexter factors the $800,000 of accounts receivable with Quick Finance on a with recourse basis instead. Prepare the journal entry required on Dexter’s books on May 1.
Solution 7-162
(a) Cash ............................................................................................. 736,000 Due from Factor (2% × $800,000)................................................. 16,000 Loss on Sale of Receivables (6% × $800,000) ............................. 48,000 Accounts Receivable .................................................... 800,000 (b) Accounts Receivable .................................................................... 800,000 Due to Dexter ..................................................................... 16,000 Financing Revenue ............................................................. 48,000 Cash .................................................................................. 736,000 (c) Cash ............................................................................................. 736,000 Due from Factor .......................................................................... 16,000 Finance Charge.. .......................................................................... 48,000 Accounts Receivable .......................................................... 800,000
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Ex. 8-173—FIFO and Average Cost Mitchell Company’s record of transactions for the month of June was as follows. Purchases Sales June 1 (balance on hand) 600 @ $3.00 June 3 (balance on hand) 500 @ $5.00 4 1,500 @ 3.04 9 1,300 @ 5.00 8 800 @ 3.20 11 600 @ 5.50 13 1,200 @ 3.25 23 1,200 @ 5.50 21 700 @ 3.30 27 900 @ 6.00 29 500 @ 3.13 4,500 5,300
Instructions (a) Assuming that periodic inventory records are kept, compute the inventory at June 30 using (1) FIFO and (2) average cost. (b) Assuming that perpetual inventory records are kept in both units and dollars, determine the inventory at June 30 using (1) FIFO and (2) average cost.
Solution 8-173 (Continued) (b) 1. FIFO 500 @ 3.13 = $1,565 300 @ 3.30 = 990 $2,555 2. Average Cost Purchase Sold Balance No. of Unit No. of Unit No. of Unit Date units cost units cost units cost Amount June 1 600 $3.0000 $1,800 3 500 $3.000 100 3.0000 300 4 1,500 $3.04 1,600 3.0375 4,860 8 800 3.20 2,400 3.0917 7,420 9 1,300 3.0917 1,100 3.0917 3,401 11 600 3.0917 500 3.0917 1,546 13 1,200 3.25 1,700 3.2035 5,446 21 700 3.30 2,400 3.2317 7,756 23 1,200 3.2317 1,200 3.2317 3,878 27 900 3.2317 300 3.2317 969 29 500 3.13 800 3.1675 2,534 Inventory June 30 is $2,534
PROBLEMS Pr. 8-178—Inventory cut-off.
Vogts Company sells TVs. The perpetual inventory was stated as $28,500 on the books at December 31, 2010. At the close of the year, a new approach for compiling inventory was used and apparently a satisfactory cut-off for preparation of financial statements was not made. Some events that occurred are as follows.
1. TVs shipped to a customer January 2, 2011, costing $5,000 were included in inventory at
December 31, 2010. The sale was recorded in 2011.
2. TVs costing $12,000 received December 30, 2010, were recorded as received on January 2, 2011.
3. TVs received during 2010 costing $4,600 were recorded twice in the inventory account.
4. TVs shipped to a customer December 28, 2010, f.o.b. shipping point, which cost $10,000, were not received by the customer until January, 2011. The TVs were included in the ending inventory.
5. TVs on hand that cost $6,100 were never recorded on the books.
Instructions Compute the correct inventory at December 31, 2010.
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Solution 8-178
Inventory per books $28,500 Add: Shipment received 12/30/10 $12,000 TVs on hand 6,100 18,100 46,600 Deduct: TVs recorded twice 4,600 TVs shipped 12/28/10 10,000 14,600 Correct inventory 12/31/10 $32,000 Pr. 8-179—Analysis of errors.
(All sales and purchases are on credit.) Indicate in each of the spaces provided the effect of the described errors on the various elements of a company's financial statements. Use the following codes: O = amount is overstated; U = amount is understated; NE = no effect. Assume a periodic inventory system. Accounts Accounts Cost of Receivable Inventory Payable Sales Goods Sold EXAMPLE: Excluded goods in rented warehouse from inventory NE U NE NE O count.
1. NE NE O NE O 2. NE O O NE NE 3. U O NE U U 4. U NE NE U NE
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Ex. 9-145—Lower-of-cost-or-net realizable value.
The December 31, 2010 inventory of Gwynn Company consisted of four products, for which certain information is provided below.
Estimated Expected Estimated Product Original Cost Completion Cost Selling Price Cost to sell A $25 $6 $40 $4 B $42 $12 $58 $8 C $120 $25 $150 $15 D $18 $3 $26 $2 Instructions Using the lower-of-cost-or-net realizable value approach applied on an individual-item basis, compute the inventory valuation that should be reported for each product on December 31, 2010.
Solution 9-145 Lower-of- Net Real. Cost-or- Product Value Cost NRV A $30 $25 $25
B $38 $42 $38
C $110 $120 $110
D $21 $18 $18 Ex. 9-146—LCNRV
Pinkel Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2011, consists of products D,E,F,G,H, and I, Relavant per-unit data for these products appear below.
Item Item Item Item Item Item D E F G H I Estimated selling price €180 €165 €140 €135 €165 €135 Cost 110 120 120 120 75 54 Cost to complete 45 45 35 50 45 45 Selling costs 15 27 15 30 15 30
Instructions Using the LCNRV rule, determine the proper unit value for statement of financial position reporting purposes at December 31, 2011, for each of the inventory items above.
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Solution 9-146 Net Realizable. Item Value Cost LCNRV D €120* €110 €110
E 93 120 93
F 90 120 90
G 55 120 55
H 105 75 75
1 60 54 54 *Estimated selling price – Estimated selling costs and cost to
Dover Company began operations in 2010 and determined its ending inventory at cost and at a LCNRV at December 31, 2010, and December 31, 2011. This information is presented below.
Cost Net Realizable Value
12/31/10 £520,000 £485,000
12/31/11 615,000 585,000
Instructions (a) Prepare the journal entries required at December 31, 2010, and December 31, 2011,
assuming that the inventory is recorded at LCNRV, using a perpetual inventory system and the cost-of-goods-sold method.
(b) Prepare the journal entries required at December 31, 2010, and December 31, 2011, assuming that the inventory is recorded at cost, using a perpetual system and the loss method.
(c) Which of the two methods above provides the higher net income in each year?
Solution 9-147 (a) 12/31/10 Cost of Goods Sold …………………………………35,000 Allowance to Reduce Inventory to NRV…………………….. 35,000 12/31/11 Allowance to Reduce Inventory to NRV……………………………..5,000 Costs of Goods Sold………………… 5,000 ₤35,000 – (₤615,000 – ₤585,000) (b) 12/31/10 Loss Due to Decline of Inventory to NRV……………………………35,000 Allowance to Reduce Inventory to NRV………….. 35,000
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Solution 9-147 cont. 12/31/11 Allowance to Reduce Inventory to NRV……………………………..5,000 Recovery or Inventory Loss………… 5,000 (c) Both methods provide the same net income. Ex. 9-150—Gross profit method.
An inventory taken the morning after a large theft discloses $60,000 of goods on hand as of March 12. The following additional data is available from the books:
Inventory on hand, March 1 $ 84,000 Purchases received, March 1 – 11 63,000 Sales (goods delivered to customers) 120,000 Past records indicate that sales are made at 50% above cost. Instructions Estimate the inventory of goods on hand at the close of business on March 11 by the gross profit method and determine the amount of the theft loss. Show appropriate titles for all amounts in your presentation.
Solution 9-150
Beginning Inventory $ 84,000 Purchases 63,000 Goods Available 147,000 Goods Sold ($120,000 ÷ 150%) 80,000 Estimated Ending Inventory 67,000 Physical Inventory 60,000 Theft Loss $ 7,000
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Ex. 9-151—Gross profit method.
On January 1, a store had inventory of $48,000. January purchases were $46,000 and January sales were $90,000. On February 1 a fire destroyed most of the inventory. The rate of gross profit was 25% of cost. Merchandise with a selling price of $5,000 remained undamaged after the fire. Compute the amount of the fire loss, assuming the store had no insurance coverage. Label all figures.
Solution 9-151
Beginning Inventory $ 48,000 Purchases 46,000 Goods available 94,000 Cost of sale ($90,000 ÷ 125%) (72,000) Estimated ending inventory 22,000 Cost of undamaged inventory ($5,000 ÷ 125%) (4,000) Estimated fire loss $18,000 Ex. 9-152—Gross profit method.
Utley Co. prepares monthly income statements. Inventory is counted only at year end; thus, month-end inventories must be estimated. All sales are made on account. The rate of mark-up on cost is 20%. The following information relates to the month of May.
Accounts receivable, May 1 $21,000 Accounts receivable, May 31 27,000 Collections of accounts during May 90,000 Inventory, May 1 45,000 Purchases during May 58,000 Instructions Calculate the estimated cost of the inventory on May 31. Solution 9-152
Collections of accounts $ 90,000 Add accounts receivable, May 31 27,000 Deduct accounts receivable, May 1 (21,000) Sales during May $ 96,000 Inventory, May 1 $ 45,000 Purchases during May 58,000 Goods available 103,000 Cost of sales ($96,000 ÷ 120%) (80,000) Estimated cost of inventory, May 31 $ 23,000
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Ex. 9-153—Retail Inventory Method.
Presented below is information related to Kuchinsky Company.
Cost Retail
Beginning inventory € 280,000 € 390,000
Purchases 1,820,000 3,000,000
Markups 130,000
Markup cancellations 20,000
Markdowns 47,000
Markdown cancellations 7,000
Sales 3,150,000
Instructions Compute the inventory by the conventional retail inventory method. Solution 9-153 Cost Retail Beginning inventory……………………………. € 280,000 € 390,000 Purchases………………………………………. 1,820,000 3,000,000 Totals……………………………………….. 2,100,000 3,390,000 Add: Net marksups Markups………………………………………. € 130,000 Markup cancellations………………………… (20,000) 110,000 Totals……………………………………………… €2,100,000 3,500,000 Deduct: Net markdowns Markdowns…………………………………… 47,000 Markup cancellations………………………… (7,000) 40,000 Sales price of goods available………………….. 3,460,000 Deduct: Sales…………………………………….. 3,150,000 Ending Inventory ay retail……………………….. € 310,000
Cost-to-retail ratio = €2,100,000
60%€3,500,000
Ending inventory at cost = 60% × €310,000 = €186,000
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Pr. 9-155—Gross profit method.
On December 31, 2010 Felt Company's inventory burned. Sales and purchases for the year had been $1,400,000 and $980,000, respectively. The beginning inventory (Jan. 1, 2010) was $170,000; in the past Felt's gross profit has averaged 40% of selling price.
Instructions Compute the estimated cost of inventory burned, and give entries as of December 31, 2010 to close merchandise accounts. Solution 9-155
Beginning inventory $ 170,000 Add: Purchases 980,000 Cost of goods available 1,150,000 Sales $1,400,000 Less 40% (560,000) 840,000 Estimated inventory lost $ 310,000 Sales ............................................................................................... 1,400,000 Income Summary ................................................................ 1,400,000 Cost of Goods Sold ......................................................................... 840,000 Fire Loss ......................................................................................... 310,000 Inventory ............................................................................. 170,000 Purchases ........................................................................... 980,000 Pr. 9-156—Retail inventory method.
When you undertook the preparation of the financial statements for Telfer Company at January 31, 2011, the following data were available: At Cost At Retail
Inventory, February 1, 2010 $70,800 $ 98,500 Markdowns 35,000 Markups 63,000 Markdown cancellations 20,000 Markup cancellations 10,000 Purchases 219,500 294,000 Sales 345,000 Purchases returns and allowances 4,300 5,500 Sales returns and allowances 10,000 Instructions Compute the ending inventory at cost as of January 31, 2011, using the retail method which approximates lower of cost or net realizable value. Your solution should be in good form with amounts clearly labeled.
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Solution 9-156 At Cost At Retail Beginning inventory, 2/1/10 $ 70,800 $ 98,500 Purchases $219,500 $294,000 Less purchase returns 4,300 215,200 5,500 288,500 Totals $286,000 387,000 Add markups (net) 53,000 Totals 440,000 Deduct markdowns (net) 15,000 Sales price of goods available 425,000 Sales less sales returns 335,000 Ending inventory, 1/31/11 at retail $ 90,000 Ending inventory at cost: Ratio of cost to retail = $286,000 ÷ $440,000 = 65%; $90,000 × 65% = $58,500 $ 58,500
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Pr. 9-157—Retail inventory method.
Presented below is information related to Carpenter Inc. Cost Retail
Inventory, 12/31/10 $375,000 $ 550,000 Purchases 1,369,000 2,050,000 Purchase returns 90,000 120,000 Purchase discounts 27,000 – Gross sales (after employee discounts) – 2,110,000 Sales returns – 145,000 Markups – 180,000 Markup cancellations – 60,000 Markdowns – 65,000 Markdown cancellations 30,000 Freight-in 63,000 – Employee discounts granted – 12,000 Loss from breakage (normal) – 8,000 Instructions Assuming that carpenter Inc. uses the conventional retail inventory method, compute the cost of its ending inventory at December 31, 2011.
