12 questions

E8-8 (Purchases Recorded, Gross Method) Cruise Industries purchased $10,800 of merchandise on February 1, 2014, subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned $2,500 (gross price before trade or cash discount) on February 4. The invoice was paid on February 13.

Instructions

• (a)Assuming that Cruise uses the perpetual method for recording merchandise transactions, record the purchase, return, and payment using the gross method.
• (b)Assuming that Cruise uses the periodic method for recording merchandise transactions, record the purchase, return, and payment using the gross method.
• (c)At what amount would the purchase on February 1 be recorded if the net method were used?

E8-9 (Periodic versus Perpetual Entries) Fong Sai-Yuk Company sells one product. Presented below is information for January for Fong Sai-Yuk Company.

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 closing entry 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.

E8-10 (Inventory Errors—Periodic) Ann M. Martin Company makes the following errors during the current year. (Evaluate each case independently and assume ending inventory in the following year is correctly stated.)

• 1.Ending inventory is overstated, but purchases and related accounts payable are recorded correctly.
• 2.Both ending inventory and purchases and related accounts payable are understated. (Assume this purchase was recorded and paid for in the following year.)
• 3.Ending inventory is correct, but a purchase on account was not recorded. (Assume this purchase was recorded and paid for in the following year.)

Instructions

Indicate the effect of each of these errors on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for the current year and the subsequent year.

E8-11 (Inventory Errors) At December 31, 2013, Stacy McGill Corporation reported current assets of $370,000 and current liabilities of $200,000. The following items may have been recorded incorrectly.

• 1.Goods purchased costing $22,000 were shipped f.o.b. shipping point by a supplier on December 28. McGill received and recorded the invoice on December 29, 2013, but the goods were not included in McGill’s physical count of inventory because they were not received until January 4, 2014.
• 2.Goods purchased costing $15,000 were shipped f.o.b. destination by a supplier on December 26. McGill received and recorded the invoice on December 31, but the goods were not included in McGill’s 2013 physical count of inventory because they were not received until January 2, 2014.
• 3.Goods held on consignment from Claudia Kishi Company were included in McGill’s December 31, 2013, physical count of inventory at $13,000.
• 4.Freight-in of $3,000 was debited to advertising expense on December 28, 2013.

Instructions

• (a)Compute the current ratio based on McGill’s balance sheet.
• (b)Recompute the current ratio after corrections are made.
• (c)By what amount will income (before taxes) be adjusted up or down as a result of the corrections?

E8-12 (Inventory Errors) The net income per books of Linda Patrick Company was determined without knowledge of the errors indicated.

Instructions

Prepare a worksheet to show the adjusted net income figure for each of the 6 years after taking into account the inventory errors.

E8-13 (FIFO and LIFO—Periodic and Perpetual) Inventory information for Part 311 of Monique Aaron Corp. discloses the following information for the month of June.

Instructions

• (a)Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under (1) LIFO and (2) FIFO.
• (b)Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the value of the ending inventory at LIFO?
• (c)Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the gross profit if the inventory is valued at FIFO?
• (d)Why is it stated that LIFO usually produces a lower gross profit than FIFO?

E8-14 (FIFO, LIFO and Average-Cost Determination) John Adams Company’s record of transactions for the month of April was as follows.

Instructions

• (a)Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and (2) average-cost.
• (b)Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO.
• (c)Compute cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.
• (d)In an inflationary period, which inventory method—FIFO, LIFO, average-cost—will show the highest net income?

E8-15 (FIFO, LIFO, Average-Cost Inventory) Shania Twain Company was formed on December 1, 2013. The following information is available from Twain’s inventory records for Product BAP. A physical inventory on March 31, 2014, shows 1,600 units on hand.

Instructions

Prepare schedules to compute the ending inventory at March 31, 2014, under each of the following inventory methods.

• (a)FIFO.
• (b)LIFO.
• (c)Weighted-average (round unit costs to two decimal places).

E8-16 (Compute FIFO, LIFO, Average-Cost—Periodic) Presented below is information related to Blowfish radios for the Hootie Company for the month of July.

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.

E8-17 (FIFO and LIFO—Periodic and Perpetual) The following is a record of Pervis Ellison Company’s transactions for Boston Teapots for the month of May 2014.

Instructions

• (a)Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 560 units on hand, what is the cost of the ending inventory using (1) FIFO and (2) LIFO?
• (b)Assuming that perpetual records are maintained and they tie into the general ledger, calculate the ending inventory using (1) FIFO and (2) LIFO.

E8-18 (FIFO and LIFO; Income Statement Presentation) The board of directors of Ichiro Corporation is considering whether or not it should instruct the accounting department to shift from a first-in, first-out (FIFO) basis of pricing inventories to a last-in, first-out (LIFO) basis. The following information is available.

Instructions

Prepare a condensed income statement for the year on both bases for comparative purposes.

E8-19 (FIFO and LIFO Effects) You are the vice president of finance of Sandy Alomar Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2014. These schedules appear below.

The computation of cost of goods sold in each schedule is based on the following data.

Jane Torville, the president of the corporation, cannot understand how two different gross margins can be computed from the same set of data. As the vice president of finance, you have explained to Ms. Torville that the two schedules are based on different assumptions concerning the flow of inventory costs, i.e., FIFO and LIFO. Schedules 1 and 2 were not necessarily prepared in this sequence of cost flow assumptions.

Instructions

Prepare two separate schedules computing cost of goods sold and supporting schedules showing the composition of the ending inventory under both cost flow assumptions.

E8-20 (FIFO and LIFO—Periodic) Johnny Football Shop began operations on January 2, 2014. The following stock record card for footballs was taken from the records at the end of the year.

A physical inventory on December 31, 2014, reveals that 100 footballs were in stock. The bookkeeper informs you that all the discounts were taken. Assume that Johnny Football Shop uses the invoice price less discount for recording purchases.

Instructions

• (a)Compute the December 31, 2014, inventory using the FIFO method.
• (b)Compute the 2014 cost of goods sold using the LIFO method.
• (c)What method would you recommend to the owner to minimize income taxes in 2014, using the inventory information for footballs as a guide?

E8-21 (LIFO Effect) The following example was provided to encourage the use of the LIFO method. In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a LIFO reserve account on the books. The LIFO benefit grows as inflation widens the gap between current-year and past-year (minus inflation) inventory costs. This gap is:

Instructions

• (a)Explain what is meant by the LIFO reserve account.
• (b)How does LIFO subtract inflation from inventory costs?
• (c)Explain how the cash flow of $174,400 in this example was computed. Explain why this amount may not be correct.
• (d)Why does a company that uses LIFO have extra cash? Explain whether this situation will always exist.