Exercise 8. 1
The listed below are eight technical accounting terms introduced in this chapter.
Retail method FIFO method Lower of cost or market
Gross Profit Method LIFO method Specific identifications
Flow assumptions Average cost method
Each of the following statements may or may not describe one of these technical terms. For each statement indicate the term described, or answer None if the statement does not correctly describe any of the term
a) a pattern of transferring unit costs from the inventory account to the cost of goods sold that may or may not parallel the physical flow of merchandise.
b) The only flow assumptions in which all units of merchandise are assigned the same per unit cost
c) The method used to record the cost of goods sold when each unit in the inventory is unique
d) The most conservative of the flow assumptions during a period of sustained inflation.
e) the flow assumption that provides the most current valuation of inventory in the balance sheet.
f) a technique for estimating the cost of good sold and the ending inventory that is based on the relationship between cost and sales price during the current accounting period
Late in the year, software City began carrying WordCrafter, a new word processing software program. At December 31, Software City’s perpetual inventory records included the following cost layers in its inventory of WordCrafter programs:
Purchase Date Qty Unit Cost Total Cost
Nov 14. 8, $400, $3,200
Dec 12. 20, 310, 6,200
Total available for sale at Dec 31. 28, $9,400(TC)
a) At December 31, Software City takes a physical inventory and finds that all 28 units of WordCrafter are on hand. However, the current replacement cost(wholesale price) of this product is only $250 per unit. Prepare the entries to record:
1. This write-down of the inventory to the lower-of-market at December 31. ( company policy is to charge LCM adjustments of less than $2,000 to cost of Goods Sold and larger amounts to a separate loss accounts.)
2. The cash sale of 15 WordCrafter programs on January 9, at a retail price of $350 each. Assume that software City uses the FIFO flow assumption.
b) Now assume that the current replacement cost of the WordCrafter programs is $405 each. A physical inventory finds only 25 of these programs on hand at December 31. (For this part, return to the original information and ignore what you did in part a.)
1. Prepare the journal entry to record the shrinkage loss assuming that Software City uses the FiFO flow assumption.
2. Prepare the journal entry to record the shrinkage loss assuming that Software city uses the LIFO flow assumption.
3. Which cost flow assumption (FIFO or LIFO) results in the lowest net income for the period? Would using this assumption really mean that the company’s operation are less efficient? Explain.
Bosewell electric prepared the following condensed income statement for two successive years
Sales 2,000,000 1,500,000
Cost of goods sold 1,250,000 900,000
gross profit 750,000 600,000
operating expenses 400,000 350,000
net profit 350,000 250,000
At the end of 2010 right hand column above, the inventory was understated by $40,000, but the error was not discovered until after the accounts had been closed and financial statements prepared at the end of 2011. The balance sheets for the two years showed owner equity of $500,000 at the end of 2010 and 580,000 at the end of 2011.
Boswell is organized as a sole proprietorship and does not incur income taxes expense.
a) Compute the corrected net income figure for 2010 and 2011
b) compute the gross profit amounts and the gross profit percentages for each year on the basis of corrected data.
c) what correction, if any should be made in the amounts of the company owner’s equity at the end of 2010 and at the end of 2011.
a. Using the gross profit method, estimate the cost of Rapp’s inventory at the time of the theft.
b. Does Rapp use the periodic inventory method or does she account for inventory using the perpetual method? Defend your answer.
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