Compute the ending inventory using "dollar value LIFO" as of December 31, 2005, 2006, 2007 and 2008.

Transcription

1 26. XYZ starts business today (no assets or liabilities) uses a PERIODIC inventory method and uses "tax effect" account for all items requiring net of tax treatment & 35% tax rate. Also, on the day that discount periods expire, XYZ records entries to reflect discount expirations. XYZ uses 3% of gross sales for bad debt allowance estimation at the time of sale, and if it is later determined that adjustment to reported allowances is required, adjusts for those changes in estimates when first noted by management INSTRUCTIONS: Record the Journal entry for each of the following items in your blue book. Purchase $60,000 of inventory on credit, terms 2/10n30, using the GROSS method. Sell goods for $85,000 on credit, terms 2/10n30, using the NET method. Collect $73,500 in cash for accounts receivable within the discount period. Pay $40,000 in cash for accounts payables BEFORE expiration of the discount period. The discount period for both the payables and receivables in (1) and (2) above expires. Management reviews the accounts receivable and determines that an additional $5,000 should be added to the allowance for doubtful accounts. Inventory count is performed resulting in $5,000 of inventory on hand. Management writes-off $1,000 of accounts receivable. XYZ collects $500 for an account balance which was previously written-off. XYZ determines that the designated market value of inventory is $500 less than book value, they use the "direct" method for inventory write-downs. 27. Based on the following facts, please compute the ending inventory using only the LIFO Retail method. ROUND PERCENTAGES TO TWO DECIMALS IN YOUR COMPUTATIONS (I.E %= 50.24%) Cost Retail Beginning Inventory 780,000 1,170,000 Purchases 4,000,000 7,200,000 Markups, net 10,000 Markdowns, net (5,000) Net sales (6,500,000) Ending inventory at retail 1,875, Umpteen Inc. utilizes dollar value LIFO and has only one "pool". The following information pertains to their computation of the inventory balance as of December 31, 2008: Inventort at Price Dec. 31 Year-end prices Index ,000, ,500, ,000, ,000, Compute the ending inventory using "dollar value LIFO" as of December 31, 2005, 2006, 2007 and 2008.

2 Purchases 60,000 Accounts payable 60, Accounts receivable 83,300 Sales 83, Purchase $60,000 of inventory on credit, terms 2/10n30, using the GROSS meth Bad debt expense 2,550 (85,000 *3%) Allowance for doubful accounts 2, Sell goods for $85,000 on credit, terms 2/10n30, using the NET method. 3. Cash 73, Collect $73,500 in cash for accounts receivable within the discount period. Accounts receivable 73, Pay $39,200 in cash for accounts payables BEFORE expiration of the discount p 4. Accounts payable 40,816 Purchases (or discounts) 816 Cash 40, The discount period for both the payables and receivables in (1) and (2) above e 5. Accounts receivable 200 (85,000 gross- 75,000 gross collected=10,000 groos* Management reviews the accounts receivable and determines that an additional Sales discounts lost/ or sales 200 discount lost) 7. Inventory count is performed resulting in $5,000 of inventory on hand. 6. Bad debt expense 5,000 Allowance for doubtful accounts 5, Management writes-off $1,000 of accounts receivable. 7. Inventory 59,184 Beg XYZ collects $500 for an account balance which was previously written-off. Purchases 59,184 Purch 59,184 COGS 54,184 Ending (5,000) 10. XYZ determines that the designated market value of inventory is $500 less than Inventory 54,184 COGS 54, Allowance for doubtful accounts 1,000 Accounts receivable 1, Cash 500 Bad debt expense 500 OR- ALSO ACCEPTABLE Accounts receivable 500 Bad debt expense 500 Cash 500 Accounts receivable COGS 500 Inventory 500

3 27. SOLUTION - Cost Retail Beginning Inventory 780,000 1,170,000 RATIO 66.67% Purchases 4,000,000 7,200,000 Markups, net - 10,000 Markdowns, net - (5,000) 4,000,000 7,205,000 RATIO 55.52% Net sales - (6,500,000) Ending inventory at retail - 1,875,000 - Ending retail 1,875,000 Ratio Cost Beginning layer 1,170,000 n/a 780,000 New layer 705, % 391,416 1,171,416

4 28-- SOLUTION Inventort at Price Inventory at Base Yr Appropr. Base Yr ANSWER 31-Dec Year-end prices Index Base-Year Price Change Factor Layer YE Balance ,000, ,000,000 2,000, ,000,000 2,000, ,500, ,272, , ,000 2,300, ,000, ,608, , ,364 2,686, ,000, ,500,000 (108,696) 115 (125,000) 2,561,364 NOTE: Decline came from prior yr. As 2007 increase is larger than the decline, then all of the inventory decline came from 2007 when the index was 115.

5 2/25/09 Anderson ECON 136A- WINTER 2009 MT2 v. 1 Name Answer questions 1-25 (multiple choice) on green scantron. Please answer the remaining questions in your blue book. 1. Inventory is overstated at the beginning of the year by $100,000 and at the end of the year it is properly stated. During the year, the company reported net income of $2,000,000. GAAP net income properly determined should be: a. $2,000,000 b. $0 c. $2,100,000 d. $1,900, Inventory is overstated at the beginning of the year by $100,000 and at the end of the year it is properly stated. Retained earnings is (ignoring tax effect): a. Overstated by $100,000 b. Not enough information c. Properly stated d. Understated by $100, If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices, a. disclosure is required only if prices have declined since the date of the order. b. an appropriation of retained earnings is necessary. c. this fact must be disclosed. d. disclosure is required only if prices have since risen substantially. 4. Goods in transit which are f.o.b. shipping point should be a. included in the inventory of the seller. b. none of these. c. included in the inventory of the buyer. d. included in the inventory of the shipping company. 5. Linn Co.'s allowance for uncollectible accounts was $184,000 at the end of 2004 and $180,000 at the end of For the year ended December 31, 2004, Linn reported bad debt expense of $26,000 in its income statement. What amount did Linn debit to the appropriate account in 2004 to write off actual bad debts? a. $4,000 b. $30,000 c. $22,000 d. $26,000

6 MT2 v. 1--Page 2 6. Designated market value a. should always be equal to net realizable value. b. should always be equal to net realizable value less a normal profit margin. c. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. d. may sometimes exceed net realizable value. 7. Lopez Company had a gross profit of $720,000, total purchases of $840,000, and an ending inventory of $480,000 in its FIRST year of operations as a retailer. Lopez's sales in its first year must have been a. $1,320,000. b. $1,200,000. c. $1,080,000. d. $360, When reconciling from the bank balance TO the general ledger balance, deposits in transit: a. Have no impact b. Need to be compared to bank fees c. Should be added d. Should be deducted 9. Net realizable value is a. acquisition cost plus costs to complete and sell. b. selling price less costs to complete and sell. c. selling price. d. selling price plus costs to complete and sell. 10. When reconciling from the bank balance TO the general ledger balance, bank fees recorded by the bank but not by the company: a. Should result in a journal entry b. Should be deducted and result in a journal entry c. Should be deducted d. Should be added 11. XYZ pledged $50,000 of cash as collateral for a financing arrangement with one of their vendors. XYZ's general ledger shows cash in the amount of $500,000, which includes checks outstanding of $225,000 and deposits in transit of $415,000. T hey hold $100,000 of certificates of deposit (CD's) at the bank with an original maturity of 12 months (but mature next week), 90 day treasury bills of $15,000, and Bonds maturing in 2013 totaling $485,000. How much should XYZ present as cash and cash equivalents on their balance sheet? a. $500,000 b. $465,000 c. $565,000 d. $515,000

7 MT2 v. 1--Page Lynn Corporation has two products in its ending inventory, each accounted for at the lower of cost or market. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follows: Product #1 Product #2 Historical cost $15.00 $30.00 Replacement cost Estimated cost to dispose Estimated selling price In pricing its ending inventory using the lower of cost or market, what unit values should Lynn use for products #1 and #2, respectively? a. $19.50 and $ b. $18.00 and $ c. $15.00 and $ d. $19.50 and $ Queen Co. records purchases at net amounts. On May 5, Queen purchased merchandise on account, $32,000, terms 2/10, n/30. Queen returned $2,000 of the May 5 purchase, and received credit on account. At May 31 the balance had not been paid. 13. The amount to be recorded as a purchase return is a. $2,040. b. $1,960. c. $2,000. d. $1, When using a perpetual inventory system, a. a Cost of Goods Sold account is used. b. all of these. c. two entries are required to record a sale. d. no Purchases account is used. 15. Under recent accounting literature, abnormal costs associated with inventory should be: a. Be capitalized to inventory only if it adds value. b. Be expensed as incurred. c. Be recorded as an expense in the period in which the related inventory is sold. d. Be capitalized to inventory as a cost necessary to make the inventory ready for sale.

8 MT2 v. 1--Page We bought a 3 acre parcel of real estate and paid $999,999 for it. We subdivide into three one acre parcels and plan to sell it in three pieces: A, B & C the estimated selling prices for each are Parcel A $1,200,000 Parcel B $0 Parcel C $800,000 Total $2,000,000 Assuming we do in fact sell parcel A for $1,200,000, what amount of gross profit should there be (if rounding is a problem pick the number which is +/- $1)? a. $600,000 b. $866,667 c. $1,200,000 d. $200, James Co. has the following data related to an item of inventory: Inventory, March $4.20 Purchase, March $4.40 Purchase, March $4.50 Inventory, March units 17. The value assigned to ending inventory if James uses LIFO is a. $1,260. b. $1,334. c. $1,280. d. $1, When using a periodic inventory system: a. Shrinkage will not be considered by the accounting system, and therefore a physical inventory count should be made. b. Physical counts are only required if it is a publicly traded entity. c. A physical count of the inventory must be taken in order to determine the cost of goods sold and ending inventory balance. d. Cycle counts should be taken to verify the inventory recorded by the accounting system Dexter, Inc. is a calendar-year corporation. Its financial statements for the years 2004 and 2003 contained errors as follows: Ending inventory $8,000 overstated $14,000 overstated Depreciation expense $4,000 understated $16,000 overstated

9 MT2 v. 1--Page Assume that NO correcting entries were made at December 31, 2003, or December 31, 2004 and that NO additional errors occurred in IGNORING INCOME TAXES, by how much will working capital at December 31, 2005 be overstated or understated? a. $6,000 understated b. $8,000 understated c. $8,000 overstated d. $0 20. Which of the following is correct? a. All of these. b. Interest costs for routine inventories are product costs. c. Manufacturing overhead costs are product costs. d. Selling costs are product costs. 21. If inventory is overstated, then: a. Only income ratios will be impacted. b. Only balance sheet ratios will be impacted. c. Gross margin and net income will both be understated. d. Gross margin and net income will both be over stated as well. 22. XYZ, Inc. purchases goods FOB shipping point which are in transit at the end of the year. These items should be: a. Excluded from inventory until the associated freight charges have been paid. b. Included in inventory as of the end of the year if the seller paid the freight charges. c. Included in inventory as of the end of the year. d. Excluded from inventory until received. 23. Which statement is true about the gross profit method of inventory valuation? a. None of these. b. It may be used by auditors as an acceptable inventory valuation for GAAP financial statements. c. It may be used to estimate inventories for GAAP financial statements. d. It may be used to estimate inventories for interim statements. 24. On January 1, 2004, the merchandise inventory of Biggs, Inc. was $1,400,000. During 2004, Biggs purchased $2,800,000 of merchandise and recorded sales of $3,500,000. The gross profit rate on these sales was 25%. What is the merchandise inventory of Biggs at December 31, 2004? a. $2,625,000. b. $1,575,000. c. $875,000. d. $700,000.

10 MT2 v. 1--Page The center of gravity for the state of California is: a. Tulare b. Golden state balancing c. Fresno d. WTF

11 MT2 v. 1--Page 7 2/25/09 ANSWER KEY Anderson ECON 136A- WINTER Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page c MChoice c MChoice c MChoice C c MChoice C c MChoice A c MChoice C c MChoice P c MChoice b MChoice C b MChoice b MChoice c MChoice P b MChoice P b MChoice C b MChoice a MChoice c MChoice P c MChoice d MChoice P c MChoice C d MChoice c MChoice d MChoice C b MChoice P c MChoice * Multiple Choice Foils are Jumbled * Test Questions are Scrambled

12 MT2 v. 1--Page 8 2/25/09 5. $180,000 + $26,000 - $184,000 = $22, $720,000 + ($840,000 - $480,000) = $1,080, , ,000+15,000=465, Product 1: RC = $18, NRV = $35 - $5 = $30 NRV - PM = $30 - ($35 x.3) = $19.50, cost = $15. Product 2: RC = $27, NRV = $60 - $13 = $47. NRV - PM = $47 - ($60 x.3) = $29, cost = $ $2,000 - ($2,000 x.02) = $1, (200 x $4.20) + (100 x $4.40) = $1, The effect of the errors in ending inventories reverse themselves in the following year. 24. COGS = $3,500,000 x.75 = $2,625,000 $1,400,000 + $2,800,000 - $2,625,000 = $1,575,000.

13 2/25/09 Anderson ECON 136A- WINTER 2009 MT2 v. 2 Name Answer questions 1-25 (multiple choice) on green scantron. Please answer the remaining questions in your blue book. 1. Net realizable value is a. selling price. b. acquisition cost plus costs to complete and sell. c. selling price less costs to complete and sell. d. selling price plus costs to complete and sell Queen Co. records purchases at net amounts. On May 5, Queen purchased merchandise on account, $32,000, terms 2/10, n/30. Queen returned $2,000 of the May 5 purchase, and received credit on account. At May 31 the balance had not been paid. 2. The amount to be recorded as a purchase return is a. $2,040. b. $1,800. c. $1,960. d. $2, If inventory is overstated, then: a. Gross margin and net income will both be understated. b. Gross margin and net income will both be over stated as well. c. Only income ratios will be impacted. d. Only balance sheet ratios will be impacted. 4. We bought a 3 acre parcel of real estate and paid $999,999 for it. We subdivide into three one acre parcels and plan to sell it in three pieces: A, B & C the estimated selling prices for each are Parcel A $1,200,000 Parcel B $0 Parcel C $800,000 Total $2,000,000 Assuming we do in fact sell parcel A for $1,200,000, what amount of gross profit should there be (if rounding is a problem pick the number which is +/- $1)? a. $1,200,000 b. $866,667 c. $200,000 d. $600,000

14 MT2 v. 2--Page 2 5. When reconciling from the bank balance TO the general ledger balance, bank fees recorded by the bank but not by the company: a. Should result in a journal entry b. Should be deducted and result in a journal entry c. Should be added d. Should be deducted 6. When using a perpetual inventory system, a. no Purchases account is used. b. all of these. c. two entries are required to record a sale. d. a Cost of Goods Sold account is used. 7. Which of the following is correct? a. Selling costs are product costs. b. All of these. c. Interest costs for routine inventories are product costs. d. Manufacturing overhead costs are product costs James Co. has the following data related to an item of inventory: Inventory, March $4.20 Purchase, March $4.40 Purchase, March $4.50 Inventory, March units 8. The value assigned to ending inventory if James uses LIFO is a. $1,334. b. $1,350. c. $1,260. d. $1, If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices, a. disclosure is required only if prices have since risen substantially. b. an appropriation of retained earnings is necessary. c. disclosure is required only if prices have declined since the date of the order. d. this fact must be disclosed. 10. XYZ, Inc. purchases goods FOB shipping point which are in transit at the end of the year. These items should be: a. Excluded from inventory until received. b. Excluded from inventory until the associated freight charges have been paid. c. Included in inventory as of the end of the year if the seller paid the freight charges. d. Included in inventory as of the end of the year.

15 MT2 v. 2--Page Inventory is overstated at the beginning of the year by $100,000 and at the end of the year it is properly stated. During the year, the company reported net income of $2,000,000. GAAP net income properly determined should be: a. $2,000,000 b. $0 c. $1,900,000 d. $2,100, When using a periodic inventory system: a. Cycle counts should be taken to verify the inventory recorded by the accounting system. b. Shrinkage will not be considered by the accounting system, and therefore a physical inventory count should be made. c. Physical counts are only required if it is a publicly traded entity. d. A physical count of the inventory must be taken in order to determine the cost of goods sold and ending inventory balance. 13. The center of gravity for the state of California is: a. WTF b. Tulare c. Golden state balancing d. Fresno 14. Linn Co.'s allowance for uncollectible accounts was $184,000 at the end of 2004 and $180,000 at the end of For the year ended December 31, 2004, Linn reported bad debt expense of $26,000 in its income statement. What amount did Linn debit to the appropriate account in 2004 to write off actual bad debts? a. $4,000 b. $30,000 c. $26,000 d. $22, Dexter, Inc. is a calendar-year corporation. Its financial statements for the years 2004 and 2003 contained errors as follows: Ending inventory $8,000 overstated $14,000 overstated Depreciation expense $4,000 understated $16,000 overstated

16 MT2 v. 2--Page Assume that NO correcting entries were made at December 31, 2003, or December 31, 2004 and that NO additional errors occurred in IGNORING INCOME TAXES, by how much will working capital at December 31, 2005 be overstated or understated? a. $8,000 understated b. $0 c. $8,000 overstated d. $6,000 understated 16. Inventory is overstated at the beginning of the year by $100,000 and at the end of the year it is properly stated. Retained earnings is (ignoring tax effect): a. Understated by $100,000 b. Properly stated c. Overstated by $100,000 d. Not enough information 17. When reconciling from the bank balance TO the general ledger balance, deposits in transit: a. Should be deducted b. Have no impact c. Should be added d. Need to be compared to bank fees 18. Designated market value a. may sometimes exceed net realizable value. b. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. c. should always be equal to net realizable value. d. should always be equal to net realizable value less a normal profit margin. 19. Which statement is true about the gross profit method of inventory valuation? a. It may be used by auditors as an acceptable inventory valuation for GAAP financial statements. b. It may be used to estimate inventories for interim statements. c. It may be used to estimate inventories for GAAP financial statements. d. None of these. 20. Goods in transit which are f.o.b. shipping point should be a. included in the inventory of the shipping company. b. included in the inventory of the seller. c. included in the inventory of the buyer. d. none of these.

17 MT2 v. 2--Page Lynn Corporation has two products in its ending inventory, each accounted for at the lower of cost or market. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follows: Product #1 Product #2 Historical cost $15.00 $30.00 Replacement cost Estimated cost to dispose Estimated selling price In pricing its ending inventory using the lower of cost or market, what unit values should Lynn use for products #1 and #2, respectively? a. $19.50 and $ b. $15.00 and $ c. $19.50 and $ d. $18.00 and $ On January 1, 2004, the merchandise inventory of Biggs, Inc. was $1,400,000. During 2004, Biggs purchased $2,800,000 of merchandise and recorded sales of $3,500,000. The gross profit rate on these sales was 25%. What is the merchandise inventory of Biggs at December 31, 2004? a. $700,000. b. $875,000. c. $2,625,000. d. $1,575, Lopez Company had a gross profit of $720,000, total purchases of $840,000, and an ending inventory of $480,000 in its FIRST year of operations as a retailer. Lopez's sales in its first year must have been a. $1,320,000. b. $1,200,000. c. $1,080,000. d. $360, Under recent accounting literature, abnormal costs associated with inventory should be: a. Be capitalized to inventory as a cost necessary to make the inventory ready for sale. b. Be capitalized to inventory only if it adds value. c. Be expensed as incurred. d. Be recorded as an expense in the period in which the related inventory is sold.

18 MT2 v. 2--Page XYZ pledged $50,000 of cash as collateral for a financing arrangement with one of their vendors. XYZ's general ledger shows cash in the amount of $500,000, which includes checks outstanding of $225,000 and deposits in transit of $415,000. T hey hold $100,000 of certificates of deposit (CD's) at the bank with an original maturity of 12 months (but mature next week), 90 day treasury bills of $15,000, and Bonds maturing in 2013 totaling $485,000. How much should XYZ present as cash and cash equivalents on their balance sheet? a. $500,000 b. $565,000 c. $465,000 d. $515,000

19 MT2 v. 2--Page 7 2/25/09 ANSWER KEY Anderson ECON 136A- WINTER Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page c MChoice C c MChoice P b MChoice d MChoice b MChoice b MChoice C d MChoice C d MChoice P d MChoice C d MChoice d MChoice d MChoice d MChoice d MChoice A b MChoice P b MChoice c MChoice b MChoice C b MChoice C c MChoice C b MChoice P d MChoice P c MChoice P c MChoice c MChoice * Multiple Choice Foils are Jumbled * Test Questions are Scrambled

20 MT2 v. 2--Page 8 2/25/09 2. $2,000 - ($2,000 x.02) = $1, (200 x $4.20) + (100 x $4.40) = $1, $180,000 + $26,000 - $184,000 = $22, The effect of the errors in ending inventories reverse themselves in the following year. 21. Product 1: RC = $18, NRV = $35 - $5 = $30 NRV - PM = $30 - ($35 x.3) = $19.50, cost = $15. Product 2: RC = $27, NRV = $60 - $13 = $47. NRV - PM = $47 - ($60 x.3) = $29, cost = $ COGS = $3,500,000 x.75 = $2,625,000 $1,400,000 + $2,800,000 - $2,625,000 = $1,575, $720,000 + ($840,000 - $480,000) = $1,080, , ,000+15,000=465,000