CHAPTER 6

EXERCISES: SET B
E6-1B First Bank and Trust is considering giving Markhan Company a loan. Before doing Determine the correct
so, they decide that further discussions with Markhan’s accountant may be desirable. One inventory amount.
area of particular concern is the inventory account, which has a year-end balance of (LO 1)
$255,000. Discussions with the accountant reveal the following.
1. Markhan received goods costing $22,000 on January 2. The goods were shipped FOB
shipping point on December 26 by Cook Co. The goods were not included in the physi-
cal count.
2. The physical count of the inventory did not include goods costing $79,000 that were
shipped to Markhan FOB destination on December 27 and were still in transit at year-
end.
3. Markhan sold goods costing $47,000 to Lane Company, FOB shipping point, on Decem-
ber 28. The goods are not expected to arrive at Lane until January 12. The goods were
not included in the physical inventory because they were not in the warehouse.
4. Markhan sold goods costing $42,000 to Toby Co., FOB destination, on December 30.
The goods were received at Toby on January 8. They were not included in Markhan’s
physical inventory.
5. Markhan received goods costing $41,000 on January 2 that were shipped FOB destina-
tion on December 29. The shipment was a rush order that was supposed to arrive
December 31. This purchase was included in the ending inventory of $255,000.

Instructions
Determine the correct inventory amount on December 31.

E6-2B Jack Hoskins, an auditor with Lopez CPAs, is performing a review of Hobson Com- Determine the correct
pany’s inventory account. Hobson did not have a good year and top management is under inventory amount.
pressure to boost reported income. According to its records, the inventory balance at (LO 1)
year-end was $550,000. However, the following information was not considered when
determining that amount.
1. The physical count did not include goods purchased by Hobson with a cost of $30,000
that were shipped FOB destination on December 28 and did not arrive at Hobson’s
warehouse until January 3.
2. Included in the company’s count were goods with a cost of $170,000 that the company
is holding on consignment. The goods belong to Discland Corporation.
3. Included in the inventory account was $21,000 of office supplies that were stored in the
warehouse and were to be used by the company’s supervisors and managers during the
coming year.
4. The company received an order on December 29 that was boxed and was sitting on the
loading dock awaiting pick-up on December 31. The shipper picked up the goods on
January 1 and delivered them on January 6. The shipping terms were FOB shipping
point. The goods had a selling price of $29,000 and a cost of $19,000. The goods were
not included in the count because they were sitting on the dock.
5. On December 29 Hobson shipped goods with a selling price of $60,000 and a cost of
$36,000 to Gavin Corporation FOB shipping point. The goods arrived on January 3.
Gavin had only ordered goods with a selling price of $10,000 and a cost of $6,000. How-
ever, a sales manager at Hobson had authorized the shipment and said that if Gavin
wanted to ship the goods back next week, it could.
6. Included in the count was $27,000 of goods that were parts for a machine that the com-
pany no longer made. Given the high-tech nature of Hobson’s products, it was unlikely
that these obsolete parts had any other use. However, management would prefer to
keep them on the books at cost, “since that is what we paid for them, after all.”

Instructions
Prepare a schedule to determine the correct inventory amount. Provide explanations for
each item above, saying why you did or did not make an adjustment for each item.

E6-3B On December 1, Bargain Electronix Ltd. has three DVD players left in stock. All Calculate cost of goods sold
are identical, all are priced to sell at $125. One of the three DVD players left in stock, using specific identification
with serial #1012, was purchased on June 1 at a cost of $80. Another, with serial #1045, and FIFO.
was purchased on November 1 for $70. The last player, serial #1056, was purchased on (LO 2)
November 30 for $65.
2 6 Inventories

Instructions
(a) Calculate the cost of goods sold using the FIFO periodic inventory method assuming
that two of the three players were sold by the end of December, Bargain Electronix’s
year-end.
(b) If Bargain Electronix used the specific identification method instead of the FIFO
method, how might it alter its earnings by “selectively choosing” which particular
players to sell to the two customers? What would Bargain’s cost of goods sold be if the
company wished to minimize earnings? Maximize earnings?
(c) Which inventory method do you recommend that Bargain use? Explain why.

Compute inventory and cost

E6-4B Stanton sells a surfboard, Flash, that is popular with surfing enthusiasts. Below
of goods sold using FIFO and
LIFO.
is information relating to the company’s purchases of Flash surfboard during July. Dur-
ing the same month, 88 Flash surfboards were sold. Stanton uses a periodic inventory
(LO 2) system.

Date Explanation Units Unit Cost Total Cost

July 1 Inventory 20 $ 120 $ 2,400
July 12 Purchases 35 125 4,375
July 19 Purchases 15 128 1,920
July 26 Purchases 40 130 5,200
Totals 110 $13,895

Instructions
(a) Compute the ending inventory at September 30 and cost of goods sold using the FIFO
and LIFO methods. Prove the amount allocated to cost of goods sold under each
method.
(b) For both FIFO and LIFO, calculate the sum of ending inventory and cost of goods sold.
What do you notice about the answers you found for each method?

Compute inventory and cost

E6-5B Ivenson Co. uses a periodic inventory system. Its records show the following for the
of goods sold using FIFO and
LIFO.
month of May, in which 85 units were sold.

(LO 2) Units Unit Cost Total Cost

May 1 Inventory 40 $ 7 $ 280
15 Purchases 32 10 320
24 Purchases 45 11 495
Totals 117 $1,095

Instructions
Compute the ending inventory at May 31 and cost of goods sold using the FIFO and LIFO
methods. Prove the amount allocated to cost of goods sold under each method.

Compute inventory and cost

E6-6B Tevis Company reports the following for the month of June.
of goods sold using FIFO and
LIFO.
Units Unit Cost Total Cost
(LO 2)
June 1 Inventory 250 $7 $1,750
12 Purchase 325 8 2,600
23 Purchase 475 9 4,275
30 Inventory 110

Instructions
(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO
and (2) LIFO.
(b) Which costing method gives the higher ending inventory? Why?
(c) Which method results in the higher cost of goods sold? Why?

Compute inventory under

E6-7B Eaton Company had 100 units in beginning inventory at a total cost of $8,000. The
FIFO, LIFO, and average-cost.
company purchased 300 units at a total cost of $33,000. At the end of the year, Eaton had
(LO 2) 80 units in ending inventory.
 Exercises: Set B 3

Instructions
(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO,
(2) LIFO, and (3) average-cost.
(b) Which cost flow method would result in the highest net income?
(c) Which cost flow method would result in inventories approximating current cost in the
balance sheet?
(d) Which cost flow method would result in Eaton paying the least taxes in the first year?
Compute inventory and
E6-8B Inventory data for Tevis Company are presented in E6-6B. cost of goods sold using
average-cost.
Instructions
(LO 2)
(a) Compute the cost of the ending inventory and the cost of goods sold using the average-
cost method.
(b) Will the results in (a) be higher or lower than the results under (1) FIFO and (2) LIFO?
(c) Why is the average unit cost not $8?

E6-9B Gregory Camera Shop uses the lower-of-cost-or-market basis for its inventory. Determine ending inventory
The following data are available at December 31. under LCM.
(LO 2)
Item Units Unit Cost Market
Cameras:
Minolta 5 $180 $200
Canon 6 160 155
Light meters:
Vivitar 12 110 120
Kodak 14 130 115

Instructions
Determine the amount of the ending inventory by applying the lower-of-cost-or-market
basis.

E6-10B Ngvyen Company applied FIFO to its inventory and got the following results for Compute lower-of-cost-or-
its ending inventory. market.
(LO 2)
Cameras 200 units at a cost per unit of $55
DVD players 300 units at a cost per unit of $70
iPods 300 units at a cost per unit of $75
The cost of purchasing units at year-end was Cameras $50, DVD players $65, and iPods
$80.

Instructions
Determine the amount of ending inventory at lower-of-cost-or-market.

E6-11B Pesina Software reported cost of goods sold as follows. Determine effects of inventory
errors.
2016 2017 (LO 3)
Beginning inventory $ 27,000 $ 40,000
Cost of goods purchased 200,000 235,000
Cost of goods available for sale 227,000 275,000
Ending inventory 40,000 45,000
Cost of goods sold $187,000 $230,000

Pesina made two errors: (1) 2016 ending inventory was overstated $4,000, and (2) 2017
ending inventory was understated $9,000.

Instructions
Compute the correct cost of goods sold for each year.
Prepare correct income
E6-12B Benelli Watch Company reported the following income statement data for a statements.
2-year period. (LO 3)
4 6 Inventories

2016 2017
Sales revenue $300,000 $350,000
Cost of goods sold
Beginning inventory 40,000 55,000
Cost of goods purchased 186,000 217,000
Cost of goods available for sale 226,000 272,000
Ending inventory 55,000 53,000
Cost of goods sold 171,000 219,000
Gross profit $129,000 $131,000

Benelli uses a periodic inventory system. The inventories at January 1, 2016, and Dec-
ember 31, 2017, are correct. However, the ending inventory at December 31, 2016, was
overstated $7,000.

Instructions
(a) Prepare correct income statement data for the 2 years.
(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?
(c) Explain in a letter to the president of Benelli Watch Company what has
happened—i.e., the nature of the error and its effect on the financial statements.

Compute inventory turnover, E6-13B This information is available for Megan’s Photoshop for 2016, 2017, and 2018.
days in inventory, and gross
profit rate. 2016 2017 2018
(LO 4) Beginning inventory $ 120,000 $ 280,000 $ 200,000
Ending inventory 280,000 200,000 400,000
Cost of goods sold 1,400,000 1,440,000 1,740,000
Sales 2,000,000 2,400,000 3,000,000

Instructions
Calculate inventory turnover, days in inventory, and gross profit rate (from Chapter 5) for
Megan’s Photoshop for 2013, 2014, and 2015. Comment on any trends.

Compute inventory turnover E6-14B The cost of goods sold computations for Brady Company and Perez Company are
and days in inventory. shown below.
(LO 4)
Brady Company Perez Company
Beginning inventory $ 55,000 $ 82,000
Cost of goods purchased 300,000 400,000
Cost of goods available for sale 355,000 482,000
Ending inventory 75,000 88,000
Cost of goods sold $280,000 $394,000

Instructions
(a) Compute inventory turnover and days in inventory for each company.
(b) Which company moves its inventory more quickly?

Apply cost flow methods to *E6-15B Mary Appliances uses a perpetual inventory system. For its flat-screen television
perpetual records. sets, the January 1 inventory was 3 sets at $500 each. On January 10, Mary’s purchased
(LO 5) 6 units at $640 each. The company sold 2 units on January 8 and 4 units on January 15.

Instructions
Compute the ending inventory under (1) FIFO, (2) LIFO, and (3) moving-average cost.

Calculate inventory and cost *E6-16B Oakley Company reports the following for the month of June.
of goods sold using three cost
flow methods in a perpetual Date Explanation Units Unit Cost Total Cost
inventory system. June 1 Inventory 250 $7 $1,750
(LO 5) 12 Purchase 325 8 2,600
23 Purchase 475 9 4,275
30 Inventory 130
 Exercises: Set B 5

Instructions
(a) Calculate the cost of the ending inventory and the cost of goods sold for each cost flow
assumption, using a perpetual inventory system. Assume a sale of 425 units occurred
on June 15 for a selling price of $12 and a sale of 495 units on June 27 for $13. Round
to the nearest dollar for inventory totals.
(b) How do the results differ from E6-6B and E6-8B?
(c) Why is the average unit cost not $8 [($7 1 $8 1 $9) 4 3 5 $8]?

*E6-17B Information about Stanton is presented in E6-4B. Additional data regarding Apply cost flow methods to
Stanton’s sales of Flash surfboards are provided below. Assume that Stanton uses a perpet- perpetual records.
ual inventory system. (LO 5)
Date Units Unit Price Total Cost
July 5 Sale 10 $200 $ 2,000
July 16 Sale 40 200 8,000
July 29 Sale 38 210 8,820
Totals 88 $18,820

Instructions
(a) Compute ending inventory at July 30 using FIFO, LIFO, and moving-average cost.
(Round unit costs to 3 deceimal places and inventory totals to nearest dollar.)
(b) Compare ending inventory using a perpetual inventory system to ending inventory
using a periodic inventory system (from E6-4B).
(c) Which inventory cost flow method (FIFO, LIFO) gives the same ending inventory
value under both periodic and perpetual? Which method gives different ending inven-
tory values?

*E6-18B Waegelein Company reported the following information for November and Use the gross profit method to
December 2017. estimate inventory.
November December (LO 6)
Cost of goods purchased $ 600,000 $ 700,000
Inventory, beginning-of-month 140,000 100,000
Inventory, end-of-month 120,000 ????
Sales revenue 1,000,000 1,200,000
The company’s ending inventory at December 31 was destroyed in a fire.
Instructions
(a) Compute the gross profit rate for November.
(b) Using the gross profit rate for November, determine the estimated cost of inventory lost in
the fire.

*E6-19B The inventory of Peters Company was destroyed by fire on March 1. From an Determine merchandise lost
examination of the accounting records, the following data for the first 2 months of the year using the gross profit method
are obtained: Sales Revenue $105,000, Sales Returns and Allowances $5,000, Purchases of estimating inventory.
$62,000, Freight-In $2,000, and Purchase Returns and Allowances $1,000. (LO 6)
Instructions
Determine the merchandise lost by fire, assuming:
(a) A beginning inventory of $30,000 and a gross profit rate of 40% on net sales.
(b) A beginning inventory of $35,000 and a gross profit rate of 30% on net sales.

*E6-20 Jill’s Shoe Store uses the retail inventory method for its two departments, Adult’s Determine ending inventory
Shoes and Kid’s Shoes. The following information for each department is obtained. at cost using retail method.
Adult’s Kid’s (LO 6)
Item Department Department
Beginning inventory at cost $ 40,000 $ 50,000
Cost of goods purchased at cost 100,000 145,000
Net sales 160,000 230,000
Beginning inventory at retail 57,000 77,000
Cost of goods purchased at retail 143,000 223,000
Instructions
Compute the estimated cost of the ending inventory for each department under the retail
inventory method.