Chapter 9

Inventory: Measurement

Learning Objectives – Coverage by question

Multiple Choice Exercises & Problems

LO 9-1 – Determine the initial recognition

1-4 31, 45, 46
and measurement of inventory

LO 9-2 – Demonstrate accounting in a

5-8 32, 47-49, 51-53
periodic inventory system

LO 9-3 – Demonstrate specific

identification, average cost, FIFO, and 9-12 33-35, 54, 56-59, 67
LIFO in a periodic inventory system

LO 9-4 – Demonstrate accounting in a

13-16 36-38, 50-53
perpetual inventory system

LO 9-5 – Demonstrate moving average,

FIFO, and LIFO in a perpetual inventory 17-20 39, 40, 55-59, 67
system

LO 9-6 – Explain and compute a LIFO

21-22 41, 60
reserve

LO 9-7 – Describe and compute the

23-24 42, 61, 62
effect of LIFO liquidation

LO 9-8 – Apply the dollar-value LIFO

25-28 43, 63-67
method

LO 9-9 – Perform inventory ratio analysis

29-30 44
and interpretation

© Cambridge Business Publishers, 2020

9-1 Intermediate Accounting, 2nd Edition
Chapter 9: Inventory: Measurement

Multiple Choice

Topic: Determination of the initial measurement of inventory

LO: 1
1. Which of the following items should be included in determining unit cost for inventory purposes?

A) Abnormal shipping costs

B) Freight-in
C) Freight-out
D) Selling expenses
E) Both B and C

Answer: B
Rationale: Freight-in is included as part of inventory costs. The remaining costs listed are period costs
which are expensed in the period incurred.

Topic: Determination of the initial recognition and measurement of inventory

LO: 1
2. Kalen Co. had the following consignment transactions during March 2020.

Transaction Amount
Inventory on consignment to Rad Co. $18,000
Freight paid by Kalen Co. 900
Inventory held on consignment from Star Co. 12,000
Freight paid by Star Co. 500

No sales of consigned goods were made through March 2020. Kalen’s March 31, 2020, balance
sheet should include consigned inventory for the following amount.

A) $18,900
B) $18,000
C) $12,500
D) $12,000

Answer: A
Rationale: Answer A is calculated as $18,000 + $900 = $18,900.

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-2
Topic: Determination of the initial recognition and measurement of inventory
LO: 1
3. The records of Colatta Inc. at the end of the year included the following.

Item Amount
Merchandise sold, in transit, shipped f.o.b. destination $320,000
Merchandise sold, in transit, shipped f.o.b. shipping point 240,000
Merchandise purchased, in transit, shipped f.o.b. destination 190,000
Merchandise purchased, in transit, shipped f.o.b. shipping point 100,000

What amount would Colatta Inc. include on its year-end balance sheet for inventory?

A) $340,000
B) $510,000
C) $430,000
D) $420,000

Answer: D
Rationale: Answer D is calculated as $320,000 + $100,000.

Topic: Determination of the initial recognition and measurement of inventory

LO: 1
4. Which of the following items would not be included as part of the inventory balance of Clarinet Inc. on
December 31, 2020?

A) Clarinet sold goods to a customer for $5,000, but the contract obligates Clarinet to buy back the
inventory in 90 days.
B) Clarinet shipped $16,000 of goods to a customer; however, Clarinet retains legal title of the goods
until the goods are sold to the final customer. The customer may return the goods at any time.
C) Clarinet shipped $2,000 of goods to a customer, terms f.o.b. shipping point, that are still in transit.
D) Clarinet purchases $4,000 of goods from a vendor, terms f.o.b. shipping point, that are still in
transit.

Answer: C
Rationale: Answer A is incorrect because control of the goods have not passed to the customer;
therefore, Clarinet still owns the inventory. Answer B is incorrect because Clarinet is the consignor
and retains control of the inventory. Answer D is incorrect because the items are in control of Clarinet
at the point the goods were with the shipper. Answer C is correct because these items are not in
control of Clarinet—at the point that the goods were with the shipper, they were under the control of
the customer.

© Cambridge Business Publishers, 2020

9-3 Intermediate Accounting, 2nd Edition
 Use the following information to complete Questions 5 and 6.

Madison Corp. has the following information for 2020:

Item Amount
Sales $180,000
Beginning inventory 64,800
Freight-out 16,200
Purchases 77,400
Sales commissions 9,000
Purchase discount 8,000
Purchase returns 5,400
Freight-in 7,200
Cost of goods sold 108,000

Topic: Demonstration of the accounting in a periodic inventory system

LO: 2
5. What is Madison’s December 31, 2020, ending inventory balance under a periodic inventory system?

A) $28,000
B) $44,200
C) $54,800
D) $37,000
E) $20,800

Answer: A
Rationale: Ending inventory is equal to $64,800 + $77,400 + $7,200 - $8,000 - $5,400 - $108,000.

Topic: Demonstration of the accounting in a periodic inventory system

LO: 2
6. What is Madison’s gross margin for 2020 under a periodic inventory system?

A) $63,000
B) $46,800
C) $55,800
D) $72,000
E) $39,600

Answer: D
Rationale: The gross margin is equal to $180,000 - $108,000.

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-4
Topic: Demonstration of the accounting in a periodic inventory system
LO: 2
7. On June 30, 2020, Chesterton Inc. purchased merchandise for $2,500 on credit terms 2/10, n/30.
Chesterton accounts for purchase discounts using the gross method and follows a periodic inventory
system. If Chesterton paid the balance in full on July 8, 2020, Chesterton’s entry would include a:

A) Debit to Purchase Discount for $50.

B) Debit to Accounts Payable for $2,450.
C) Credit to Cash for $2,450.
D) Credit to Inventory for $50.
E) None of the above.

Answer: C
Rationale: The cash payment would be made net of the 2% discount which is equal to $2,500 x 98%.

Topic: Demonstration of the accounting in a periodic inventory system

LO: 2
8. On June 30, 2020, Chesterton Inc. purchased merchandise for $2,500 on credit terms 2/10, n/30.
Chesterton accounts for purchase discounts using the net method and follows a periodic inventory
system. If Chesterton paid the balance in full on July 25, 2020, Chesterton’s entry would include a

A) Debit to Purchases for $50.

B) Debit to Interest Expense for $50.
C) Credit to Inventory for $50.
D) Debit to Accounts Payable for 2,500.
E) None of the above.

Answer: B
Rationale: The lost discount is equal to $2,500 x 2% or $50.

Use the following information to complete Questions 9 through 12.

The following information is available for Garrett Inc.

Date Item Units Unit Cost

Oct. 1 Beg. Bal. 40 $5.00
Oct. 5 Purchase 60 5.20
Oct. 15 Purchase 100 5.40
Oct. 25 Purchase 50 5.50

A physical inventory count shows 80 units in stock on October 31. Garrett maintains a periodic
inventory system.

© Cambridge Business Publishers, 2020

9-5 Intermediate Accounting, 2nd Edition
Topic: Demonstration of specific identification inventory method in a periodic inventory system
LO: 3
9. Garrett Inc. uses the specific identification inventory method to value month-end inventory. Garrett
determines that the ending inventory units consist of 5 units from beginning inventory, 10 units from
the October 5th purchase, 30 units from the October 15th purchase, and 35 units from the October 25 th
purchase. What is Garrett’s cost of goods sold recognized for the month of October?

A) $695.50
B) $895.50
C) $905.00
D) $431.50
E) $422.00

Answer: B
Rationale: Answer B is calculated as follows. First, ending inventory is calculated as (5 x $5) + (10 x
$5.20) + (30 x $5.40) + (35 x $5.50) = $431.50. Next, cost of goods sold is equal to $1,327 (cost of
goods available for sale) minus $431.50 (ending inventory) = $895.50 (cost of goods sold).

Topic: Demonstration of the FIFO inventory method in a periodic inventory system

LO: 3
10. Garrett Inc. uses the FIFO inventory method to value month-end inventory and applies a periodic
inventory system. What is Garrett’s cost of goods sold recognized for the month of October?

A) $437
B) $408
C) $902
D) $919
E) $890

Answer: E
Rationale: Answer E is calculated as follows: $1,327 (cost of goods available for sale) minus $437 =
(50 x $5.50 + 30 x $5.40) (ending inventory) = $890 (cost of goods sold).

(Alternatively, COGS may be calculated directly: (40 x $5.00) + (60 x $5.20) + (70 x $5.40) = $890.)

Topic: Demonstration of the LIFO inventory method in a periodic inventory system

LO: 3
11. Garrett Inc. uses the LIFO inventory method to value month-end inventory and applies a periodic
inventory system. What is Garrett’s ending inventory recognized on October 31?

A) $437
B) $408
C) $902
D) $919
E) $890

Answer: B
Rationale: Answer B is calculated as follows: (40 x $5.00) + (40 x $5.20) = $408

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-6
Topic: Demonstration of the average cost inventory method in a periodic inventory system
LO: 3
12. Garrett Inc. uses the average cost method to value month-end inventory and applies a periodic
inventory system. What is Garrett’s ending inventory recognized on October 31?
A) $902.36
B) $905.00
C) $424.64
D) $422.00

Answer: C
Rationale: Answer C is calculated as follows: $1,327 ÷ 250 units x 80 units = $424.64.

Use the following information to complete Questions 13 and 14.

Madison Corp. begins the month with an inventory balance of $1,500 and completed the following
transactions for the month, listed in chronological order. Madison uses the gross method to record
purchase discounts.

Transaction Cost Amount

Purchased inventory from vendor, terms 2/10, n30 $1,200
Paid for shipping on the inventory purchase 60
Returned inventory to vendor 150
Paid an account balance within discount period 1,029
Sold inventory collecting $580 in cash 400
Paid for shipping on inventory sold 20

Topic: Demonstration of accounting in a perpetual inventory system

LO: 4
13. What is Madison’s month-end inventory balance under a perpetual inventory system?
A) $2,209
B) $2,039
C) $2,129
D) $2,189
E) $1,979

Answer: D
Rationale: Ending inventory is equal to $1,500 + $1,200 + $60 - $150 - $21 - $400 = $2,189, where
$21 = ($1,029/.98) - $1,029.

Topic: Demonstration of accounting in a perpetual inventory system

LO: 4
14. What is Madison’s gross margin for the month under a perpetual inventory system?
A) $180
B) $160
C) $420
D) $69
E) $400

Answer: A
Rationale: Gross margin is calculated as follows: $580 - $400 = $180.

© Cambridge Business Publishers, 2020

9-7 Intermediate Accounting, 2nd Edition
Topic: Demonstration of accounting in a perpetual inventory system
LO: 4
15. On June 30, 2020, Chesterton Inc. purchased merchandise for $3,500 on credit terms 1/10, n/30.
Chesterton accounts for purchase discounts using the gross method and follows a perpetual
inventory system. If Chesterton paid the balance in full on July 8, 2020, Chesterton’s entry would
include a:

A) Credit to Purchase Discount for $35.

B) Debit to Accounts Payable for $3,465.
C) Credit to Cash for $3,500.
D) Credit to Inventory for $35.
E) None of the above.

Answer: D
Rationale: Inventory would be reduced by the discount of 1% x $3,500 = $35.
The entry would be as follows:

Accounts Payable 3,500

Inventory 35
Cash 3,465

Topic: Demonstration of accounting in a perpetual inventory system

LO: 4
16. On June 30, 2020, Chesterton Inc. purchased merchandise for $3,500 on credit terms 1/10, n/30.
Chesterton accounts for purchase discounts using the net method and follows a perpetual inventory
system. If Chesterton paid the balance in full on July 25, 2020, Chesterton’s entry would include a

A) Debit to Inventory for $35.

B) Debit to Interest Expense for $50.
C) Credit to Cash for $3,465.
D) Debit to Accounts Payable for 3,465.
E) None of the above.

Answer: D
Rationale: Accounts payable is reduced by the net amount of $3,465, which is the amount that it was
originally credited. The entry would be as follows:

Accounts Payable 3,465

Interest Expense 35
Cash 3,500

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-8
 Use the following information to complete Questions 17 and 18.

Witt Hardware had an inventory of 1,500 hammers valued at $5.00 each to begin the month. Witt sold 800
hammers on the 15th of the month and purchased 2,800 hammers on the last day of the month at $5.80
each.

Topic: Demonstration of accounting in a moving average perpetual inventory system

LO: 5
17. The moving average cost per unit at the beginning of the next month is _______.

A) $5.40
B) $5.52
C) $5.62
D) $5.64

Answer: D
Rationale: Answer D of $5.64 is computed as follows: [(700 units x $5.00) + (2,800 units x $5.80)] ÷
3,500 units.

Topic: Demonstration of accounting in a FIFO perpetual inventory system

LO: 5
18. Witt's inventory on a FIFO basis as of the beginning of the next month is _________.

A) $19,100 under the periodic system only.

B) $19,740 under either inventory system.
C) $19,740 under the perpetual system only.
D) $19,740 under the periodic system only.

Answer: B
Rationale: Answer B is calculated as follows: (2,800 units x $5.80) + (700 units x $5.00) = $19,740.
This amount is the same whether the calculations are made at the end of the period (periodic system)
or continually (perpetual system).

Challenge: Also encompasses LO: 3

Topic: Demonstration of accounting in a LIFO perpetual inventory system

LO: 5
19. Witt's inventory on a LIFO basis as of the beginning of the next month is __________.

A) $19,100 under the perpetual system only.

B) $19,740 under the periodic system only.
C) $19,740 under the perpetual system only.
D) $19,100 under both inventory systems.

Answer: C
Rationale: Answer C is calculated as follows: (700 units x $5.00) + (2,800 units x $5.80) = $19,740.
Because the latest purchase is relative to the time that it is calculated, results differ under the periodic
and perpetual inventory methods. Under the periodic system only, ending inventory is calculated as
(1,500 units x $5.00) + (2,000 units x $5.80) = $19,100. Thus, Answers A, B, and D are incorrect.

Challenge: Also encompasses LO: 3

© Cambridge Business Publishers, 2020

9-9 Intermediate Accounting, 2nd Edition
Topic: Demonstration of accounting in a moving average, FIFO, and LIFO in a perpetual inventory
system
LO: 5
20. Which of the following statements regarding inventory valuation is correct?

A) The LIFO inventory method produces the same results whether a periodic system or a perpetual
system is used.
B) LIFO and moving average, but not FIFO method, apply assumed inventory flows that don’t
necessarily match the physical flow.
C) In periods of rising prices, LIFO produces a lower cost of goods sold amount than under FIFO.
D) Under the moving average inventory system, a new unit cost is calculated after each inventory
purchase but not after an inventory sale.

Answer: D
Rationale: Answer A is not correct because LIFO produces different results under periodic and
perpetual because the latest purchase is a relative value. Answer B is incorrect because all three
methods listed apply an assumed cost flow assumption. Answer C is incorrect because LIFO
produces a higher cost of goods sold than FIFO in periods of rising prices. Answer D is correct
because a new unit cost is determined under the moving average method after each purchase;
however, the most recent inventory cost is applied at the time of a sale.

Topic: Explanation and computation of a LIFO reserve

LO: 6
21. Which of the following statements describes a LIFO inventory reserve?

A) Identifies the difference between inventory valued under FIFO (or another method) for internal
purposes and under LIFO for external reporting.
B) Is always recorded using an inventory allowance account.
C) Is seldom used because a company would normally use LIFO for internal accounting and
reporting purposes.
D) Is adjusted continually throughout the accounting period.

Answer: A
Rationale: Answer A is correct because the LIFO reserve is only necessary when the inventory
methods differ between internal and external reporting. Answer B is not correct because the
allowance account is not used when the conversion to LIFO takes place outside of the accounts.
Answer C is not correct because companies would likely not use LIFO for internal reporting and
control purposes. Answer D is not correct because the LIFO reserve is calculated at reporting dates.

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-10
Topic: Explanation and computation of a LIFO reserve
LO: 6
22. SeaGull Inc. uses FIFO for internal purposes and LIFO for income tax and external reporting
purposes. At the end of the year, the inventory records of SeaGull Inc. include the following items.

2020 2021
Ending inventory at FIFO $120,000 $160,000
Ending inventory at LIFO $75,000 $100,000

The entry to adjust the inventory allowance to reduce FIFO inventory to LIFO inventory at the end of
2021 would include what amount?

A) A debit to cost of goods sold for $60,000.

B) A credit to cost of goods sold for $60,000.
C) A debit to cost of goods sold for $15,000.
D) A credit to cost of goods sold for $15,000.

Answer: C
Rationale: Answer C is correct, calculated as follows: Year one allowance balance is $45,000, equal
to $120,000 - $75,000. Year two allowance balance is $60,000, equal to $160,000 - $100,000. The
increase to the allowance and cost of goods sold is $15,000, equal to $60,000 (desired balance) less
$45,000 (prior balance).

Topic: Description and computation of the effect of LIFO liquidation

LO: 7
23. Oates Inc. has beginning inventory of 100,000 units (cost of $15 per unit) accounted for using the
LIFO inventory method. During the year, the company sold more items than purchased, causing the
ending inventory balance to drop to 65,000 units. Assuming a tax rate of 25%, and a current
replacement cost of inventory of $28 per unit, what is the LIFO liquidation effect on after-tax income?

A) $341,250
B) $113,750
C) $455,000
D) $633,750

Answer: A
Rationale: Answer A is correct, calculated as follows: (100,000 – 65,000) x ($28 - $15) x 75%
= $341,250.

© Cambridge Business Publishers, 2020

9-11 Intermediate Accounting, 2nd Edition
Topic: Description and computation of the effect of LIFO liquidation
LO: 7
24. What is (are) possible reason(s) for a liquidation of an old layer of inventory at year-end when
following the LIFO inventory method in a periodic inventory system?

A) Management voluntarily decides to reduce inventory due to a decline in customer demand for the
product.
B) Due to a strike, inventory is not being manufactured, thus inventory levels are depleted in order to
fill current customer orders.
C) Although inventory is up from the prior year, the first quarter showed a liquidation of inventory.
D) Both A and B.
E) A, B, and C.

Answer: D
Rationale: Answer D is correct—LIFO liquidation can take place due to voluntary or involuntary
reasons. Answer C is not correct because a company will typically replace inventory liquidations
before year-end if possible.

Topic: Application of the dollar-value LIFO method

LO: 8
25. Which of the following best illustrates the dollar-value LIFO method?

A) Companies use this method for both internal reporting and external reporting purposes.
B) This method pools inventory which decreases the chance of liquidation of LIFO layers.
C) Pools consist of inventory dollars rather than of separate inventory units.
D) Both A and B.
E) Both B and C.

Answer: E
Rationale: Answer A is incorrect because dollar-value LIFO is used for reporting purposes only. The
company would continue to use FIFO (or another method other than LIFO) for internal reporting
purposes.

Topic: Application of the dollar-value LIFO method

LO: 8
26. The following steps in the computation of dollar-value LIFO are listed below in no particular order.

a. Step__ Restate Layers of Inventory into Current Year Dollars

b. Step__ Arrange Restated Inventory Balance into Layers
c. Step__ Restate Ending Inventory at Base Year Dollars
d. Step__ Match Layers to the Appropriate Price Indices

Arrange the steps in the proper order.

A) a, b, c, d
B) a, b, d, c
C) c, b, d, a
D) a, c, b, d

Answer: C
Rationale: The four steps as included in LO: 8 are listed in the proper sequence.

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-12
Topic: Application of the dollar-value LIFO method
LO: 8
27.Wilderness Inc. accounts for inventory using the dollar-value LIFO method. The following information
is available for the years 2020 through 2022.

Year Ending Inventory at FIFO Price Index

2020 $10,000 1.00
2021 16,000 1.12
2022 22,000 1.15

What is ending inventory for year 2022 using the dollar-value LIFO method?

A) $18,039
B) $19,130
C) $20,371
D) $17,940

Answer: C
Rationale:
2021 $16,000/1.12 $14,286 $10,000 x 1.00
4,286 x 1.12

2022 $22,000/1.15 $19,130 $10,000 x 1.00 $10,000

4,286 x 1.12 4,800
4,844 x 1.15 5,571
$20,371

Topic: Application of the dollar-value LIFO method

LO: 8
28. Northwest Inc. accounts for inventory using the dollar-value LIFO method. The following information is
available for the years 2020 through 2022.

Year Ending Inventory at FIFO Price Index

2020 $10,000 1.00
2021 20,000 1.15
2022 14,000 1.20

What is ending inventory for year 2022 using the dollar-value LIFO method?

A) $11,917
B) $12,000
C) $13,417
D) $11,667

Answer: A
Rationale:
2021 $20,000/1.15 $17,391 $10,000 x 1.00
7,391 x 1.15

2022 $14,000/1.20 $11,667 $10,000 x 1.00 $10,000

1,667 x 1.15 1,917
$11,917

© Cambridge Business Publishers, 2020

9-13 Intermediate Accounting, 2nd Edition
Topic: Inventory ratio analysis
LO: 9
29. Luciano Inc. reported the following information.

Item Amount
Inventory, Dec. 31, 2019 $ 81,000
Inventory, Dec. 31, 2020 84,000
Cost of goods sold, 2019 480,000
Cost of goods sold, 2020 500,000
Sales, 2019 900,000
Sales, 2020 950,000

Compute the inventory turnover ratio and the average days in inventory for 2020.

Inventory Turnover Ratio Average Days in Inventory

A) 5.95 61.32
B) 6.06 60.23
C) 11.52 31.70
D) 5.45 66.92

Answer: B
Rationale: Inventory turnover ratio is equal to $500,000 ÷ ($81,000 + $84,000)/2) = 6.06. Average
days in inventory is equal to 365 days ÷ 6.06 = 60.23.

Topic: Inventory ratio analysis and interpretation

LO: 9
30. Which of the following statements regarding inventory ratio analysis is not true?

A) If inventory turnover is significantly lower than the industry average, a company may be holding
excess inventory.
B) If average days in inventory is greater than the industry average, a company may not have
sufficient inventory to support its operations.
C) In periods of rising prices, inventory turnover is generally higher under LIFO than under FIFO.
D) The inventory method applied in a company will impact the calculation of its inventory turnover
ratio.

Answer: B
Rationale: If average days in inventory is greater than the industry average, a company may be
holding excess inventory (not lacking inventory); hence, Answer B is not true.

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-14
Exercises & Problems

Topic: Identifying Goods in Transit as Inventory or Not

LO: 1
31. On December 31, 2020, Ruby Co. is determining whether goods in-transit should be included or
excluded from the physical inventory count. One shipment in-transit to Ruby Co. for $64,000 was
shipped f.o.b. destination from a vendor. The goods are expected to arrive on January 2, 2021. One
shipment in-transit from Ruby Co. for $25,600 was shipped f.o.b. shipping point to a customer. The
merchandise is expected to arrive on January 3, 2021.

What shipment amount(s) (if any) should be included in the physical inventory count on December
31, 2020?

Answer:
$0.00

Topic: Periodic System – Calculating Cost of Goods Sold from Component Accounts
LO: 2
32. Askew Inc. maintains a periodic inventory system. On January 1, 2020, the inventory balance was
$22,500. The physical inventory count on December 31, 2020, resulted in an ending inventory
balance of $27,000. The company reported purchases of $135,000, freight charges on purchases of
$7,200, and purchase returns of $900.

What should the company report as cost of goods sold for 2020?

Answer:
$136,800

Topic: Periodic System – Calculating Ending Inventory and Cost of Sales Using Average Cost
LO: 3
33. The following information is available for Waterson’s Inc.

Date Units Unit Cost

January 1, 2020 (beginning inventory) 240.00 $ 50.00
Purchases: January 10, 2020 180.00 52.00
January 15, 2020 360.00 52.50
January 30, 2020 240.00 55.00

The company maintains a periodic inventory system. A physical inventory count shows 300 units in
stock on January 31. What is (a) ending inventory on January 31, and (b) cost of goods sold for
January, using the average-cost method? (Round unit cost to two decimal places and final answers
to the nearest whole dollar.)

Answer:
(a) Ending inventory on January 31 $15,723
(b) Cost of goods sold for January $37,737

© Cambridge Business Publishers, 2020

9-15 Intermediate Accounting, 2nd Edition
Topic: Periodic System – Calculating Ending Inventory and Cost of Sales Using FIFO
LO: 3
34. The following information is available for Waterson’s Inc.

Date Units Unit Cost

January 1, 2020 (beginning inventory) 400.00 $ 50.00
Purchases: January 10, 2020 300.00 52.00
January 15, 2020 600.00 52.50
January 30, 2020 400.00 55.00

The company maintains a periodic inventory system. A physical inventory count shows 500 units in
stock on January 31. What is (a) ending inventory on January 31, and (b) cost of goods sold for
January, using the FIFO inventory method? (Round your final answers to the nearest whole dollar._

Answer:
(a) Ending inventory on January 31 $27,250
(b) Cost of goods sold for January $61,850

Topic: Periodic System – Calculating Ending Inventory and Cost of Sales Using LIFO
LO: 3
35. The following information is available for Waterson’s Inc.

Date Units Unit Cost

January 1, 2020 (beginning inventory) 500.00 $ 50.00
Purchases: January 10, 2020 375.00 52.00
January 15, 2020 750.00 52.50
January 30, 2020 500.00 55.00

The company maintains a periodic inventory system. A physical inventory count shows 625 units in
stock on January 31. What is (a) ending inventory on January 31, and (b) cost of goods sold for
January, using the LIFO inventory method? (Round your final answers to the nearest whole dollar.)

Answer:
(a) Ending inventory on January 31 $ 31,500
(b) Cost of goods sold for January 79,875

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-16
Topic: Perpetual Inventory System – Recording Purchases, Returns, and Sales
LO: 4
36. Tractor Bicycles Inc. maintains a perpetual inventory system and began 2020 with $144,000 of
merchandise inventory. During January 2020, the company purchased inventory of $360,000 on
account, returned $9,000 of defective goods, and sold inventory with a cost of $396,000 for $648,000
on account.

Prepare the journal entries for the month of January for Tractor Bicycles Inc. for the following
inventory transactions: (a) Inventory purchases, (b) Inventory returns, and (c) Inventory sales.

Answer:

a. Inventory 360,000
Accounts Payable 360,000

b. Accounts Payable 9,000

Inventory 9,000

c. Accounts Receivable 648,000

Sales Revenue 648,000
To record the sale of inventory

Cost of Goods Sold 396,000

Inventory 396,000
To record the cost of sale of inventory

Topic: Perpetual Inventory System – Recording Purchases and Payments with Discounts Using
Gross Method
LO: 4
37. Tractor Bicycles Inc. purchased merchandise inventory on February 1, 2020, for $246,500 on
account, terms 2/10, n/30. The company maintains a perpetual inventory system and accounts for
purchases using the gross method. The full balance of $246,500 was paid on February 9, 2020.

Record the purchases entry on February 1, 2020, and the payment entry on February 9, 2020.

Answer:

Feb. 1, 2020 Inventory 246,500

Accounts Payable 246,500

Feb. 9, 2020 Accounts Payable 246,500

Inventory 4,930
Cash 241,570

© Cambridge Business Publishers, 2020

9-17 Intermediate Accounting, 2nd Edition
Topic: Perpetual Inventory System – Recording Purchases and Payments with Discounts Using
Net Method
LO: 4
38. Tractor Bicycles Inc. purchased merchandise inventory on February 1, 2020, for $357,000 on
account, terms 2/10, n/30. The company maintains a perpetual inventory system and accounts for
purchases using the net method. The full balance of $357,000 was paid on February 9, 2020.

Record the purchases entry on February 1, 2020, and the payment entry on February 9, 2020.

Answer:

Feb. 1, 2020 Inventory 349,860

Accounts Payable 349,860

Feb. 9, 2020 Accounts Payable 349,860

Cash 349,860

Topic: Perpetual Inventory System – Calculating Ending Inventory and Cost of Sales Using
Moving Average
LO: 5
39. Valley Ridge Co.’s inventory records showed the following data accounted for in a perpetual inventory
system.

Date Units Unit Cost

June 1 Inventory 1,300 $ 8.00
June 3 Purchases 2,600 8.40
June 7 Sales (at $16 per unit) 1,820
June 20 Purchases 1,768 9.00
June 22 Sales (at $16 per unit) 2,860

What is (a) ending inventory on January 31, and (b) cost of goods sold for January, using the moving-
average method? (Round unit costs to two decimal places and final answers to the nearest whole
dollar.)

Answer:
Ending inventory on January 31 $ 8,507
Cost of goods sold for January $39,645

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-18
Topic: Perpetual Inventory System – Calculating Ending Inventory and Cost of Sales Using FIFO
LO: 5
40. Valley Ridge Co.’s inventory records showed the following data accounted for in a perpetual inventory
system.

Date Units Unit Cost

June 1 Inventory 2,200 $ 8.00
June 3 Purchases 4,400 8.40
June 7 Sales (at $16 per unit) 3,080
June 20 Purchases 2,992 9.00
June 22 Sales (at $16 per unit) 4,840

What is (a) ending inventory on January 31, and (b) cost of goods sold for January, using the FIFO
method? (Round your final answers to the nearest whole dollar.)

Answer:
Ending inventory on January 31 $15,048
Cost of goods sold for January $66,440

Topic: Recording Entry to Adjust LIFO Reserve

LO: 6
41. Santo Inc. reports inventory under the LIFO method but maintains inventory records internally using
the FIFO method. The difference between FIFO and LIFO at the end of 2019 was $50,000 (FIFO
inventory is higher). At the end of 2020, FIFO inventory exceeds LIFO inventory by $65,000.

Record the journal entry to adjust the LIFO reserve at December 31, 2020.

Answer:

Dec. 31, 2020 Cost of Goods Sold 15,000

Allowance to Reduce FIFO Inventory to LIFO Basis 15,000

Topic: Computing LIFO Liquidation

LO: 7
42. Gretel Inc. accounts for inventory using the LIFO inventory method. Beginning inventory on January 1
consists of 32,000 units at a cost of $5 per unit. During the year, the company sold more items than
purchased, causing the ending inventory balance on December 31, 2020, to drop to 24,000 units.

Assuming a tax rate of 40%, and a current replacement cost of inventory of $8 per unit, what is the
LIFO liquidation effect on pretax and after-tax income?

Answer:
LIFO liquidation effect on pretax income $24,000
LIFO liquidation effect on after-tax income $14,400

© Cambridge Business Publishers, 2020

9-19 Intermediate Accounting, 2nd Edition
Topic: Computing Ending Inventory Under Dollar-Value LIFO
LO: 8
43. Jakob Inc. accounts for inventory using the dollar-value LIFO method. The following information is
available for the years 2020 through 2022.

Ending Inventory
Year at FIFO Price Index
2020 $20,000 1.00
2021 32,000 1.10
2022 40,000 1.13

What is its ending inventory under the dollar-value LIFO method for the years 2020, 2021, and 2022?
(Round your answers to the nearest whole dollar.)

Answer:
Dollar-value LIFO ending inventory, 2020 $20,000
Dollar-value LIFO ending inventory, 2021 $30,000
Dollar-value LIFO ending inventory, 2022 $37,127

Topic: Computing Inventory Ratios

LO: 9
44. Beemer Corporation reported the following information in a recent Form 10-K.

Consolidated Statements of Operations

($ millions) FY 2016
Cost of sales $ 218,387

Consolidated Statement of Financial Position

($ millions) FY 2016 FY 2015
Inventory $ 36,984 $ 8,282

What is the (a) inventory turnover ratio, and (b) average days in inventory, for the fiscal year ended
January 30, 2016? (Round your answers to two decimal places.)

Answer:
(a) Inventory turnover ratio 9.65
(b) Average days in inventory 37.83

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-20
Topic: Determining Merchandise to be Included or Excluded from Ending Inventory
LO: 1
45. The unadjusted inventory balance of Matem Corp. is $190,000 on December 31, 2020, based on a
physical inventory count. The following items must be considered before the inventory valuation is
finalized.

a. On December 31, the physical inventory excluded $475 of merchandise inventory set aside for
shipment to a customer, which has not yet shipped.
b. On December 31, the physical inventory excluded $1,900 of merchandise inventory out on
consignment in the customers’ showrooms.
c. On December 31, the physical inventory excluded $1,520 of merchandise held on consignment.
d. $1,425 of in-transit merchandise was shipped f.o.b. shipping point to a customer and was
excluded from the physical inventory count. The merchandise was turned over to a common
carrier on December 28, 2020, and is expected to arrive at the customer on January 2, 2021.
e. Matem Corp. ordered merchandise on December 26, 2020. The merchandise ($1,520) was
shipped to Matem Corp. f.o.b. shipping point, and was expected to arrive January 2, 2021. The
merchandise was not included in the physical inventory count.
f. A return to a vendor of merchandise for $1,900 was in-transit on December 31, 2020, and was
excluded from the physical inventory count. The merchandise was shipped f.o.b. destination
on December 30, 2020.

Considering items a through f, determine the total adjustments required to the physical inventory
balance of $190,000 for Matem Corp.

Answer:
Adjusted inventory balance on December 31, 2020: $195,795

Topic: Determining Merchandise to be Included or Excluded from Ending Inventory

LO: 1
46. The unadjusted inventory balance of Freddy Corp. is $600,000 on December 31, 2020, based on a
physical inventory count. The following items must be considered before the inventory valuation is
finalized.

a. On December 31, the physical inventory excluded $600 of merchandise inventory shipped to
Freddy Corp. from a vendor f.o.b. destination that arrived on January 1, 2021.
b. On December 31, the physical inventory included $21,600 of merchandise inventory held on
consignment by a customer. Freddy Corp. is the consignor.
c. On December 31, the physical inventory included $960 of merchandise held on consignment. The
consignor is Freddy’s largest vendor.
d. $21,600 of in-transit merchandise was shipped f.o.b. shipping point to a customer and was
excluded from the physical inventory count. The merchandise was shipped on December 28,
2020, and is expected to arrive at the customer on December 31, 2020.

continued

© Cambridge Business Publishers, 2020

9-21 Intermediate Accounting, 2nd Edition
 e. Goods are in-transit from a vendor to Freddy on December 31, 2020. The invoice cost was
$14,400 and the goods were shipped f.o.b. shipping point on December 28, 2020. The
merchandise was excluded from the physical inventory count because they had not been
delivered.
f. Merchandise with a cost of $360 is held in the receiving department for return. The merchandise
was excluded from the physical inventory count.

Determine whether any adjustments are needed to Freddy’s physical inventory balance of $600,000
due to the transactions a through f outlined above.

Answer:
Adjusted inventory balance on December 31, 2020: $613,800

Topic: Periodic System – Recording Inventory-Related Entries Using the Gross Method
LO: 2
47. Mercury Inc. maintains a periodic inventory system and uses the gross method to record purchases.
The following transactions occurred during the month of March 2020 for its major inventory line.

a. Purchase of merchandise inventory on March 1, 2020, for $120,000 on account, terms 1/10, n/30.
b. Paid $1,200 cash for freight charges on March 1, 2020, related to the purchase.
c. Returned $900 of merchandise on March 5, 2020, and received a credit from the vendor.
d. Paid the balance due to the vendor on March 8, 2020.
e. Sold merchandise inventory on March 15, 2020, for $75,000.

Prepare journal entries for transactions a through e. (Round your answers to the nearest whole
dollar.)

Answer:

a. Mar. 1, 2020 Purchases 120,000

Accounts Payable 120,000

b. Mar. 1, 2020 Freight-in 1,200

Cash 1,200

c. Mar. 5, 2020 Accounts Payable 900

Purchase Returns and Allowances 900

d. Mar. 8, 2020 Accounts Payable 119,100

Purchase Discounts 1,191
Cash 117,909

e. Mar. 15, 2020 Accounts Receivable 75,000

Sales Revenue 75,000

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-22
Topic: Periodic System – Computing Income and Recording Period-End Adjusting Entry
LO: 2
48. The records of Claypool Inc. show the following data for 2020.

Sales revenue $1,200,000

Purchases $840,000
Net income as a percent of sales revenue 15%
Beginning inventory $150,000
Expenses including income taxes $270,000
Tax rate for 2020 25%

a. Reconstruct the income statement for this company. Assume a periodic inventory system.
b. Prepare the required journal entry at period end to record ending inventory. Assume a periodic
inventory system.

Answer:

a. Income Statement for 2020

Sales revenue $1,200,000
Cost of goods sold:
Beginning inventory $150,000
Plus: Purchases 840,000
Cost of goods available for sale 990,000
Less: Ending inventory 240,000
Cost of goods sold 750,000
Gross margin 450,000
Expenses 210,000
Gross income 240,000
Income taxes 60,000
Net income $180,000

b. Inventory, Ending 240,000

Cost of Goods Sold 750,000
Purchases 840,000
Inventory, Beginning 150,000

© Cambridge Business Publishers, 2020

9-23 Intermediate Accounting, 2nd Edition
Topic: Periodic System – Using Knowledge of Financial Statement Relations to Compute Missing
Amounts
LO: 2
49. The following information relates to Retro Vinyl Company. Assuming the company uses the periodic
inventory system, solve for the missing amounts a through m for years 2020 through 2022. (Round
gross profit percentage to the nearest whole percentage point.)

2020 2021 2022

Net sales $ 378,000 $ 462,000 $ 546,000
Beginning inventory 50,400 e. j.
Purchases (gross) 294,000 346,500 415,800
Purchase returns and allowances 25,200 21,000 36,960
Purchase discounts 16,800 10,500 7,980
Freight-in 12,600 f. 42,000
Cost of goods available for sale a. 392,700 k.
Ending inventory 63,000 g. 109,200
Cost of sales b. 317,100 l.
Gross profit c. h. 166,740
Gross profit as a percentage of sales d. i. m.

Answer:
a. $315,000 f. $14,700 k. $488,460
b. $252,000 g. $75,600 l. $379,260
c. $126,000 h. $144,900 m. 31%
d. 33% i. 31%
e. $63,000 j. $75,600

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-24
Topic: Perpetual System – Recording Inventory-Related Entries Using the Gross Method
LO: 4
50. Cleveland Promotions Inc. maintains a perpetual inventory system and uses the gross method to
record purchases. The following transactions occurred during the month of March 2020, for its major
inventory line.

a. Purchase of merchandise inventory on March 1, 2020, for $120,000 on account, terms 1/10, n/30.
b. Paid cash of $1,200 for freight charges on March 1, 2020, related to the purchase.
c. Returned $900 of merchandise on March 5, 2020, and received a credit from the vendor.
d. Paid the balance due to the vendor on March 8, 2020.
e. Sold merchandise inventory on March 15, 2020, for $75,000 with a cost of $50,000.

Prepare journal entries for transactions a through e. (Round your answers to the nearest whole
dollar.)

Answer:

a
. Mar. 1, 2020 Inventory 120,000
Accounts Payable 120,000

b
. Mar. 1, 2020 Inventory 1,200
Cash 1,200

c. Mar. 5, 2020 Accounts Payable 900

Inventory 900

d
. Mar. 8, 2020 Accounts Payable 119,100
Inventory 1,191
Cash 117,909

e
. Mar. 15, 2020 Accounts Receivable 75,000
Sales Revenue 75,000
To record sale of inventory

Mar. 15, 2020 Cost of Goods Sold 50,000

Inventory 50,000
To record cost of sale of inventory

© Cambridge Business Publishers, 2020

9-25 Intermediate Accounting, 2nd Edition
Topic: Perpetual and Periodic Systems – Recording Inventory-Related Entries Using the Gross
Method
LO: 2, 4
51. The following transactions are from Baez Optical Corporation.

1. Purchased inventory on December 10, 2020, with a list price of $8,250, a trade discount of
20%, and with terms 2/10, n/30.
2. Returned $1,100 of inventory to the supplier on December 15, 2020.
3. Paid $4,400 cash on account on December 19, 2020.
4. Paid the remaining balance on January 5, 2021.

a. Prepare journal entries for the transactions 1 through 4, assuming that the company uses the
perpetual inventory system and the gross method for recording purchase discounts.
b. Prepare journal entries for the transactions 1 through 4, assuming that the company uses the
periodic inventory system and the gross method for recording purchase discounts.

Answer:

a
. Dec. 10, 2020 Inventory 6,600
Accounts Payable 6,600

Dec. 15, 2020 Accounts Payable 1,100

Inventory 1,100

Dec. 19, 2020 Accounts Payable 4,490

Inventory 90
Cash 4,400

Jan. 5, 2021 Accounts Payable 1,010

Cash 1,010

b. Dec. 10, 2020 Purchases 6,600

Accounts Payable 6,600

Dec. 15, 2020 Accounts Payable 1,100

Purchase Returns and Allowances 1,100

Dec. 19, 2020 Accounts Payable 4,490

Purchase Discounts 90
Cash 4,400

Jan. 5, 2021 Accounts Payable 1,010

Cash 1,010

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-26
Topic: Perpetual and Periodic Systems – Recording Inventory-Related Entries Using the Net
Method
LO: 2, 4
52. The following transactions are from Baez Optical Corporation.

1. Purchased inventory on December 10, 2020, with a list price of $8,250, a trade discount of
20%, and with terms 2/10, n/30.
2. Returned $1,100 of inventory to the supplier on December 15, 2020.
3. Paid $4,400 cash on account on December 19, 2020.
4. Paid the remaining balance on January 5, 2021.

a. Prepare journal entries for the transactions 1 through 4, assuming that the company uses the
perpetual inventory system and the net method for recording purchase discounts.
b. Prepare journal entries for the transactions 1 through 4, assuming that the company uses the
periodic inventory system and the net method for recording purchase discounts.

Answer:

a
. Dec. 10, 2020 Inventory 6,468
Accounts Payable 6,468

Dec. 15, 2020 Accounts Payable 1,078

Inventory 1,078

Dec. 19, 2020 Accounts Payable 4,400

Cash 4,400

Dec. 31, 2020 Interest Expense 20

Accounts Payable 20
To record adjusting entry for interest

Jan. 5, 2021 Accounts Payable 1,010

Cash 1,010

b
. Dec. 10, 2020 Purchases 6,468
Accounts Payable 6,468

Dec. 15, 2020 Accounts Payable 1,078

Purchase Returns and Allowances 1,078

Dec. 19, 2020 Accounts Payable 4,400

Cash 4,400

Dec. 31, 2020 Interest Expense 20

Accounts Payable - 20
To record adjusting entry for interest

Jan. 5, 2021 Accounts Payable 1,010

© Cambridge Business Publishers, 2020
9-27 Intermediate Accounting, 2nd Edition
 Cash 1,010

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-28
Topic: Recording Entries Under the Periodic and Perpetual Inventory Systems
LO: 2, 4
53. The records for Landover Inc. at December 31, 2020, show the following.

Units Unit Price

Sales during period (for cash) 9,000 $20 (sales price)
Inventory at beginning of period 1,800 $12 (cost)
Merchandise purchased during period (for cash) 14,400 $12 (cost)
Purchase returns during period (cash refund) 90 $12 (cost)
Inventory at end of period (physically counted) 7,110 $12 (cost)

Total expenses (excluding cost of goods sold) were $54,000.

a. Prepare entries for the transactions reflected above assuming a periodic inventory system for:
1. Merchandise sales.
2. Merchandise purchases.
3. Merchandise returns.
4. Total expenses.
5. To record cost of sales and ending inventory balance.

b. Prepare entries for the transactions reflected above assuming a perpetual inventory system for:
1. Merchandise sales.
2. Merchandise purchases.
3. Merchandise returns.
4. Total expenses.
5. To record adjusting entry.

Indicate if a journal entry is not required.

Answer:

a. 1. Cash 180,000
Sales Revenue 180,000

2. Purchases 172,800
Cash 172,800

3. Cash 1,080
Purchases Returns and Allowances 1,080

4. Expenses 54,000
Cash and Payables 54,000

5. Inventory, Ending 85,320

Purchase Returns and Allowances 1,080
Cost of Goods Sold 108,000
Purchases 172,800
Inventory, Beginning 21,600

© Cambridge Business Publishers, 2020

9-29 Intermediate Accounting, 2nd Edition
 b. 1. Cash 180,000
Sales Revenue 180,000
To record sale of inventory

Cost of Goods Sold 108,000

Inventory 108,000
To record cost of sale of inventory

2. Inventory 172,800
Cash 172,800

3. Cash 1,080
Inventory 1,080

4. Expenses 54,000
Cash and Payables 54,000

5. No entry required

Topic: Periodic System – Calculating Ending Inventory and Cost of Sales Using Average Cost,
FIFO, and LIFO
LO: 3
54. Davina Company began operations on December 1, 2019. The following information is available for
the company’s merchandise inventory. A physical inventory taken on March 31, 2020, showed 1,350
units available. Davina uses a periodic inventory system.

Date Units Unit Cost

January 1, 2020 (beginning inventory) 720 $ 9.00
Purchases: January 5, 2020 1,350 10.00
January 25, 2020 1,080 10.50
February 16, 2020 540 12.00
March 26, 2020 810 13.00

a. Compute ending inventory and cost of goods sold for the quarter ended March 31, 2020, using:
1. Average cost method.
2. FIFO method.
3. LIFO method.

b. Which method results in the:

1. Highest gross profit?
2. Lowest gross profit?
3. Highest ending inventory balance?
4. Lowest ending inventory balance?

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-30
 Answer:

a. Ending Inventory COGS

1. Average cost method. $14,499 $33,831
2. FIFO method. 17,010 31,320
3. LIFO method. 12,780 35,550

b. 1. Highest gross profit FIFO

2. Lowest gross profit LIFO
3. Highest ending inventory balance FIFO
4. Lowest ending inventory balance LIFO

Topic: Perpetual System – Calculating Ending Inventory and Cost of Sales Using Average Cost,
FIFO, and LIFO
LO: 5
55. Sunday Inc. maintains a perpetual inventory system and recorded the following information for the
month of January.

Date Units Unit Cost

Inventory, January 1 570 $ 10.50
Purchase, January 10 240 12.00
Purchase, January 20 120 13.25
Purchase, January 28 360 14.00
Sale, January 5 300
Sale, January 13 120
Sale, January 31 192
Inventory, January 31 678

Compute ending inventory and cost of goods sold for the month ending January 31 using each of the
methods indicated below, rounding your final answers to the nearest dollar.

1. Average cost method.

2. FIFO method.
3. LIFO method.

Answer:

Ending Inventory COGS

1. Average cost method. 8,573 $6,922
2. FIFO method. 9,006 6,489
3. LIFO method. 8,217 7,278

© Cambridge Business Publishers, 2020

9-31 Intermediate Accounting, 2nd Edition
Topic: Periodic and Perpetual Systems – Calculating Ending Inventory and Cost of Sales Using
Average Cost (Moving Average), FIFO, and LIFO
LO: 3, 5
56. Mountbatton Inc.’s inventory records showed the following data for an item it sells regularly.

Date Units Unit Cost

Jan. 1 Inventory 4,400 $10.00
Jan. 3 Purchases 39,600 $10.40
Jan. 7 Sales (at $26 per unit) 15,400
Jan. 20 Purchases 13,200 $11.00
Jan. 22 Sales (at $27 per unit) 35,200
Jan. 30 Purchases 6,600 $12.00

a. Assuming that Mountbatton maintains a periodic inventory system, compute ending inventory and
cost of goods sold for the month ending January 31 using (1) average cost, (2) FIFO, and (3)
LIFO. (Round per unit cost to two decimal places and your final answers to the nearest dollar.)
b. Assuming that Mountbatton maintains a perpetual inventory system, compute ending inventory
and cost of goods sold for the month ending January 31 using (1) moving average, (2) FIFO, and
(3) LIFO. (Round your final answers to the nearest dollar.)

Answer:

a.
Periodic Inventory System Ending Inventory COGS
1. Average cost method. $140,712 $539,528
2. FIFO method. 151,800 528,440
3. LIFO method. 135,520 544,720

b.
Perpetual Inventory System Ending Inventory COGS
1. Moving average method. $148,910 $531,330
2. FIFO method. 151,800 528,440
3. LIFO method. 146,080 534,160

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-32
Topic: Periodic and Perpetual Systems – Calculating Ending Inventory and Cost of Sales Using
FIFO, and LIFO
LO: 3, 5
57. The inventory records of Cypress Inc. showed the following data for its merchandise inventory.

Date Units Unit Cost

Jan. 1 Inventory 144 $38.00
Jan. 3 Purchase 216 $40.00
Jan. 7 Sale 240
Jan. 10 Purchase 240 $41.60
Jan. 20 Sale 240
Jan. 30 Purchase 240 $43.20

Compute cost of goods sold and ending inventory for the month ending June 30 using:
a. FIFO (periodic inventory system).
b. LIFO (periodic inventory system).
c. FIFO (perpetual inventory system).
d. LIFO (perpetual inventory system).

Round your final answers to the nearest dollar.

Answer:

Periodic Inventory System:

Ending Inventory COGS
a. FIFO method. $ 15,360 $ 19,104
b. LIFO method. 14,112 20,352

Perpetual Inventory System:

Ending Inventory COGS
c. FIFO method. $ 15,360 $ 19,104
d. LIFO method. 14,928 19,536

© Cambridge Business Publishers, 2020

9-33 Intermediate Accounting, 2nd Edition
Topic: Periodic System – Computing Cost of Sales and Gross Profit Under FIFO, and LIFO
LO: 3, 5
58. The owner of Hill and Valley Cycle wants to maximize after-tax cash flows and is considering
switching from FIFO. The following data are available for its first quarter of 2020. In addition, sales for
the first quarter totaled 550 units, and a physical inventory taken on March 31, 2020, showed 250
units available in inventory. Hill and Valley uses the periodic inventory system.

Date Units Unit Cost

January 1, 2020 (beginning inventory) 150 $ 180
Purchases: January 15, 2020 200 205
February 12, 2020 250 215
March 19, 2020 200 230

a. Which of the following inventory flow methods would we recommend that Hill and Valley use to
produce the greatest after-tax cash flows: FIFO or LIFO?
b. Prepare a table showing the gross profit and gross profit percentage for each method in part a
assuming all units for the quarter were sold for $300 each. Round the gross profit percentage to
two decimal places.

Answer:
a. Collect more data to verify trends

b. FIFO LIFO
Sales $ 165,000 $ 165,000
Less: Cost of goods sold 111,000 120,250
Gross profit $ 54,000 $ 44,750
Gross profit percentage 32.73% 27.12%

Topic: Periodic and Perpetual Systems – Calculating Ending Inventory and Cost of Sales Using
Average Cost and Moving Average
LO: 3, 5
59. The inventory records of Meyer Inc. show the following data for its merchandise inventory.

Date Units Unit Cost

Jan. 1 Inventory 87 $38.00
Jan. 3 Purchase 131 $40.00
Jan. 7 Sales 145
Jan. 10 Purchase 145 $41.60
Jan. 20 Sale 145
Jan. 30 Purchase 145 $43.20

Compute cost of goods sold and ending inventory for the month ending June 30 using the following
methods. (Round unit costs to two decimals and final answers to the nearest dollar.)

a. Average cost (periodic inventory system).

b. Moving average (perpetual inventory system).

Answer:

Ending Inventory COGS

a. Average cost (periodic inventory system) $ 8,924 $ 11,898
b. Moving average (perpetual inventory system) 9,222 11,600

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-34
Topic: Recording and Reporting a LIFO Reserve
LO: 6
60. At the end of the annual accounting period, the inventory records of Hyannis Company show the
following. The company uses FIFO for internal purposes and LIFO for income tax and external
reporting purposes.

2020 2021
Ending inventory at FIFO $90,000 $162,000
Ending inventory at LIFO 36,000 63,000

a. Assume that the inventory difference is recognized in the accounts, and the balance in the
allowance account was zero at the beginning of 2020. Provide the necessary journal entry at
year-end 2020 and 2021.
b. Show how inventory should be shown on its 2020–2021 comparative balance sheets.
c. If the company reported cost of goods sold of $432,000 in 2021 using LIFO, what would cost of
goods sold be using FIFO?

Answer:

a. Dec. 31, 2020 Cost of Goods Sold 54,000

Allowance to Reduce FIFO Inventory to LIFO Basis 54,000

Dec. 31, 2021 Cost of Goods Sold 45,000

Allowance to Reduce FIFO Inventory to LIFO Basis 45,000

b
. Balance Sheet, Dec 31 2020 2021
Current Assets
Inventory $36,000 $63,000

c
. Cost of goods sold for 2021: $387,000

Topic: Computing and Analyzing a LIFO Liquidation

LO: 7
61. Sullivan’s storage facility was shut down due to a strike in December 2020, resulting in a drastic
reduction in inventory. The company had switched to LIFO effective January 1, 2020. The following
data are available. Sullivan’s is on a calendar-year reporting basis.

Units Unit Cost

Beginning inventory (Base layer of LIFO—January 1) 28,000 $1.00
Inventory purchases during 2020 630,000 $1.25
Total available for sale 658,000
Sales (valued on a LIFO basis) from:
Purchases 630,000 $1.25
Base inventory layer 14,000 $1.00
Total 644,000
Ending inventory (December 31, 2020) 14,000

What is the LIFO liquidation after-tax profit or loss assuming a 25% tax rate?

Answer:
LIFO liquidation after-tax profit = $2,625

© Cambridge Business Publishers, 2020

9-35 Intermediate Accounting, 2nd Edition
Topic: Computing and Disclosing a LIFO Liquidation
LO: 7
62. Left Coast Inc. has maintained a periodic inventory system and the LIFO inventory method for over
20 years. The earliest layer of LIFO inventory of 27,000 units dates back 15 years. The company had
beginning inventory (January 1, 2020) made up of the following three layers.

Units Unit Cost Total Cost

27,000 $20.00 $ 540,000
22,500 $25.00 562,500
4,500 $50.00 225,000
$1,327,500

At its December 31 year-end, an involuntary liquidation of beginning inventory occurred. Beginning

inventory dropped to 36,000 units. The current replacement value of inventory is $50.

What is the effect of the LIFO liquidation on after-tax profit or loss assuming a 25% tax rate?

Answer:
Effect of LIFO liquidation = $253,125

Topic: Computing Ending Inventory Using Dollar-Value LIFO

LO: 8
63. On January 1, 2020, Lennox Company changed from FIFO to LIFO for income tax and external
reporting purposes. At that date, the beginning FIFO inventory (the base inventory for LIFO purposes)
was $560,000. The following information is available from Lennox’s records for the years 2020
through 2023.

Year Ending Inventory on a FIFO Basis Price Index

2020 $660,000 1.1
2021 696,000 1.2
2022 806,000 1.3
2023 800,000 1.2

Compute the ending inventory on a dollar-value LIFO basis for each year, 2020 through 2023.
(Round your answers to the nearest whole dollar.)

Answer:
Dollar-value LIFO ending inventory, 2020 $604,000
Dollar-value LIFO ending inventory, 2021 $582,000
Dollar-value LIFO ending inventory, 2022 $634,000
Dollar-value LIFO ending inventory, 2023 $690,000

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-36
Topic: Computing Ending Inventory Using Dollar-Value LIFO
LO: 8
64. On January 1, 2020, Farrinaci Inc. adopted dollar-value LIFO, and its inventory priced at current costs
was $180,000. The following information is available on its inventories for 2020 through 2022.

Ending Inventory at Year-End

Year December 31 Conversion Factor*
2020 $204,000 1.10
2021 240,000 1.22
2022 216,000 1.15
*Computed as: Current (year-end) price index ÷ Base-year price index

Compute the ending inventory on a dollar-value LIFO basis for each year, 2020 through 2022. (Round
your final answers to the nearest whole dollar.)

Answer:
Dollar-value LIFO ending inventory, 2020 $186,000
Dollar-value LIFO ending inventory, 2021 $199,745
Dollar-value LIFO ending inventory, 2022 $188,893

Topic: Computing and Recording Ending Inventory Using Dollar-Value LIFO

LO: 8
65. On January 1, 2020, Shay Company changed from FIFO to LIFO for income tax and external
reporting purposes. On that same date, the beginning FIFO inventory (the base inventory for LIFO
purposes) was $95,000. The following information is available from Shay’s records for years 2020
through 2023.

Ending Inventory Ending Inventory

Year on a FIFO Basis at Base Year Costs
2020 $125,000 $113,600
2021 110,000 84,600
2022 115,000 85,200
2023 130,000 92,900

a. Compute the price indices used to calculate ending inventory at base year costs.
Hint: Divide ending inventory on a FIFO basis by ending inventory at base year for each year.
(Round indices to two decimal places.)
b. Compute the ending inventory on a dollar-value LIFO basis for each year, 2020 through 2023.
When restating layers of inventory into current year dollars use rounded indices from part a.
(Round final answers to the nearest whole dollar.)
c. Prepare the journal entry at each year-end, 2020 through 2023, to adjust inventory to LIFO.

Answer:

a. Year Price Index

2019 1.00
2020 1.10
2021 1.30
2022 1.35
2023 1.40

© Cambridge Business Publishers, 2020

9-37 Intermediate Accounting, 2nd Edition
 b. Dollar-value LIFO ending inventory, 2020 $ 115,460
Dollar-value LIFO ending inventory, 2021 $ 84,600
Dollar-value LIFO ending inventory, 2022 $ 85,410
Dollar-value LIFO ending inventory, 2023 $ 96,190

c. Dec. 31, 2020 Cost of Goods Sold 9,540

Allowance to Reduce FIFO Inventory to LIFO Basis 9,540

Dec. 31, 2021 Cost of Goods Sold 15,860

Allowance to Reduce FIFO Inventory to LIFO Basis 15,860

Dec. 31, 2022 Cost of Goods Sold 4,190

Allowance to Reduce FIFO Inventory to LIFO Basis 4,190

Dec. 31, 2023 Cost of Goods Sold 4,220

Allowance to Reduce FIFO Inventory to LIFO Basis 4,220

Topic: Computing Ending Inventory Using Dollar-Value LIFO

LO: 8
66. Coryell Bottlers uses LIFO for income tax and external reporting purposes. The LIFO base inventory
at the end of 2020 for the inventory pool amounted to $680,000. The physical inventory of the
inventory pool taken at the end of 2021, priced at 2021 costs on a FIFO basis, amounted to
$880,000. The price level for 2020 was 100 and for 2021 was 110.

Using the price indices provided, compute the 2021 ending dollar-value LIFO inventory.

Answer:
Dollar-value LIFO ending inventory, 2021: $812,000

© Cambridge Business Publishers, 2020

Test Bank, Chapter 9 9-38
Topic: Periodic and Perpetual Systems – Calculating Ending Inventory and Cost of Sales Using
Average Cost, Moving Average, FIFO, LIFO, and Dollar-Value LIFO
LO: 3, 5, 8
67. The inventory records of Lone Star Oil Company for January 2020 showed the following data for an
item of its merchandise for sale (assume that the six transactions occurred in the order shown).

Date Units Unit Cost Total

Beginning inventory (Jan. 1) 2,500 $6.00 $15,000
Jan. 3 Purchases 3,000 $6.10 18,300
Jan. 5 Sales (4,500 units)
Jan. 10 Purchases 3,000 $6.20 18,600
Jan. 20 Sales (2,500 units)
Jan. 25 Purchases 2,000 $6.30 12,600
Jan. 28 Sales (1,500 units)
Total available for sale 10,500 $64,500

Its ending inventory of 2,000 units can be specifically identified as follows:

 500 units from the January 3 purchase
 250 units from the January 10 purchase
 1,250 units from the January 25 purchase.

Compute ending inventory and cost of goods sold for the month ended January 31 using:
a. Specific identification (periodic inventory system).
b. Average cost (periodic inventory system).
c. FIFO (periodic inventory system).
d. LIFO (periodic inventory system).
e. Moving average (perpetual inventory system).
f. FIFO (perpetual inventory system).
g. LIFO (perpetual inventory system).
h. Dollar-value LIFO (periodic inventory system). Assume that the beginning inventory is the base
layer at a cost of $6.00 per unit. The price index for January 2020 is 1.05.

Answer:

Periodic Inventory System Ending Inventory COGS

a. Specific identification (periodic) $12,475 $52,025
b. Average cost (periodic) 12,280 52,220
c. FIFO (periodic) 12,600 51,900
d. LIFO (periodic) 12,000 52,500
e. Moving average (perpetual) 12,483 52,017
f. FIFO (perpetual) 12,600 51,900
g. LIFO (perpetual) 12,250 52,250
h. Dollar-value LIFO 12,000 52,500

© Cambridge Business Publishers, 2020

9-39 Intermediate Accounting, 2nd Edition