6.8: Exercises
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- 98085
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)EXERCISE 6–1 (LO1)
Laplante Inc. uses the perpetual inventory system. The following transactions took place during January 2023.
| Date | Units | Unit Cost | |
| Jan. 1 | Opening Inventory | 100 | $1 |
| 7 | Purchase #1 | 10 | 2 |
| 9 | Sale #1 | 80 | |
| 21 | Purchase #2 | 20 | 3 |
| 24 | Sale #2 | 40 |
Required: Using the table below, calculate cost of goods sold for the January 9 and 24 sales, and ending inventory using the FIFO cost flow assumption.
| Purchased (Sold) | Balance | ||||||||
| Date | Units | Unit Cost | COGS | Units | Unit Cost | Total Cost | |||
| Jan. 1 | Opening Inventory | 100 |  |
$1 | = | $100 | |||
| 7 | Purchase #1 | ||||||||
| 9 | Sale #1 | ||||||||
| 21 | Purchase #2 | ||||||||
| 24 | Sale #2 | ||||||||
EXERCISE 6–2 (LO1)
Using the information from EXERCISE 6–1, calculate the cost of goods sold for the January 9 and 24 sales, and ending inventory using the Specific Identification cost flow assumption. Assume that:
- on January 9, the specific units sold were 72 units from opening inventory and 8 units from the January 7 purchase and
- the specific units sold on January 24 were 23 units from opening inventory and 17 units from the January 21 purchase.
EXERCISE 6–3 (LO1)
ABBA uses the weighted average inventory cost flow assumption under the perpetual inventory system. The following transactions took place in January 2018.
| Date | Units | Unit Selling Price/Cost | |
| Jan. 1 | Opening Inventory | 2,000 | $0.50 |
| 5 | Sale #1 | 1,200 | 5.00 |
| 6 | Purchase #1 | 1,000 | 2.00 |
| 10 | Purchase #2 | 500 | 1.00 |
| 16 | Sale #2 | 2,000 | 6.00 |
| 21 | Purchase #3 | 1,000 | 2.50 |
All sales are made on account. Round all per unit costs to two decimal places.
Required:
- Record the journal entry for the January 5 sale. Show calculations for cost of goods sold.
- Record the journal entry for the January 16 sale. Show calculations for cost of goods sold.
- Calculate ending inventory in units, cost per unit, and total cost.
EXERCISE 6–4 (LO2)
Listed below are four common accounting errors.
| 2016 Statements | 2017 Statements | |||||||
| Errors | Opening Invent. | Ending Invent. | 2016 Total Assets | 2016 Net Income | Opening Invent. | Ending Invent. | 2017 Total Assets | 2017 Net Income |
| 1. Goods purchased in 2022 were included in the December 31, 2022 inventory, but the transaction was not recorded until early 2023. | N/E | |||||||
| 2. Goods purchased in 2023 were included in December 31, 2022 inventory, and the transaction was recorded in 2022. | N/E | |||||||
Required: Use N/E (No Effect), O (Overstated), or U (Understated) to indicate the effect of each error on the company's financial statements for the years ended December 31, 2022 and December 31, 2023. The opening inventory for the 2022 statements is done.
EXERCISE 6–5 (LO2)
Partial income statements of Lilydale Products Inc. are reproduced below:
| 2021 | 2022 | 2023 | |
| Sales | $30,000 | $40,000 | $50,000 |
| Cost of Goods Sold | 20,000 | 23,000 | 25,000 |
| Gross Profit | $10,000 | $17,000 | $25,000 |
Required:
- Calculate the impact of the two errors listed below on the gross profit calculated for the three years:
- The 2021 ending inventory was understated by $2,000.
- The 2023 ending inventory was overstated by $5,000.
- What is the impact of these errors on Total Assets?
EXERCISE 6–6 (LO3)
Erndale Products Ltd. has the following items in inventory at year-end:
| Item | Units | Cost/Unit | NRV/Unit |
| X | 2 | $50 | $60 |
| Y | 3 | 150 | 75 |
| Z | 4 | 25 | 20 |
Required: Calculate the cost of ending inventory using LCNRV on
- A unit-by-unit basis
- A group inventory basis.
EXERCISE 6–7 (LO4)
Windy City Insurance Ltd. has received a fire-loss claim of $45,000 from Balton Corp. A fire destroyed Balton's inventory on May 25, 2023. Balton has an average gross profit of 35%. You have obtained the following information:
| Inventory, May 1, 2023 | $ 80,000 |
| Purchases, May 1 - May 25 | 150,000 |
| Sales, May 1 - May 25 | 300,000 |
Required:
- Calculate the estimated amount of inventory lost in the fire.
- How reasonable is Balton's claim?
EXERCISE 6–8 (LO5)
The following account balances for Cost of Goods Sold and Merchandise Inventory were extracted from Able Corp.'s accounting records:
| 2025 | 2024 | 2023 | 2022 | 2021 | |
|---|---|---|---|---|---|
| Cost of Goods Sold | 370,000 | 400,000 | 420,000 | 440,000 | 450,000 |
| Merchandise Inventory | 120,000 | 111,250 | 88,750 | 111,250 | 88,750 |
Required:
- Calculate the Merchandise Inventory Turnover for each of the years 2022 to 2025.
- Is the change in Able Corp.'s Merchandise Inventory Turnover ratio favourable or unfavourable? Explain.
Problems
PROBLEM 6–1 (LO1)
Southern Cross Company Limited made the following purchases and sales of Products A and B during the year ended December 31, 2023:
| Product A | |||
| Units | Unit Cost/Selling Price | ||
| Jan. 07 | Purchase #1 | 8,000 | $12.00 |
| Mar. 30 | Sale #1 | 9,000 | 16.00 |
| May 10 | Purchase #2 | 12,000 | 12.10 |
| Jul. 04 | Sale #2 | 14,000 | 17.00 |
| Product B | |||
| Units | Unit Cost/Selling Price | ||
| Jan. 13 | Purchase #1 | 5,000 | $13.81 |
| Jul. 15 | Sale #1 | 1,000 | 20.00 |
| Oct. 23 | Purchase #2 | 7,000 | 14.21 |
| Dec. 14 | Sale #2 | 8,000 | 21.00 |
Opening inventory at January 1 amounted to 4,000 units at $11.90 per unit for Product A and 2,000 units at $13.26 per unit for Product B.
Required:
- Prepare inventory record cards for Products A and B for the year using the weighted average inventory cost flow assumption.
- Calculate total cost of ending inventory at December 31, 2023.
- Calculate the gross profit percentage earned on the sale of
- Product A in 2023 and
- Product B in 2023.
PROBLEM 6–2 (LO1) Challenge Question – Assigning Costs to Inventory
Below are various inventory related transactions:
| Jan 1 | Inventory, opening | 500 units | @ | $10 | = | $5,000 |
| 4 | Sale | 100 units | @ | $20 | = | 2,000 |
| 6 | Purchase | 200 units | @ | $11 | = | 2,200 |
| 8 | Purchase return (from Jan 6 purchase) | (10) units | @ | $11 | = | (110) |
| 9 | Sale | 200 units | @ | $22 | = | 4,400 |
| 10 | Sales return from customer from Jan 4 sale (returned to inventory) | (15) units | @ | $22 | = | (330) |
| 15 | Sale | 150 units | @ | $23 | = | 3,450 |
| 17 | Purchase | 300 units | @ | $9 | = | 2,700 |
| 19 | Sales return from customer from Jan 15 sale (beyond repair, disposed) | (2) units | $23 | = | (46) | |
| 20 | Sale | 400 units | @ | $21 | = | 2,100 |
Required:
- Complete an inventory record card (schedule) the same as the example shown in Figure 6.9 of the text and with totals at the bottom. Assume that the FIFO method was used.
- Calculate the gross profit and the gross profit percentage.
- What is the ending inventory balance at January 20, 2023?
PROBLEM 6–3 (LO1) Assigning Costs to Inventory
Below are various inventory related transactions:
Purchases:
| Feb 1 | Opening inventory | 75 units @ $12 |
| Feb 7 | Purchase | 300 units @ $11 |
| Feb 14 | Purchase return from Feb 7 | 10 units @ $11 |
| Feb 19 | Purchase | 400 units @ $9 |
Sales Price: $24.00
Units Sold:
| Feb 5 | 70 units |
| Feb 12 | 180 units |
| Feb 17 | 100 units |
| Feb 23 | 80 units |
Required:
- Complete an inventory record card (schedule) the same as the example shown in Figure 6.9 of the text and with totals at the bottom. Assume that a weighted average cost method was used. Round unit costs to the nearest two decimals.
- Calculate the gross profit and the gross profit percentage.
- What is the ending inventory balance at February 23, 2023?
PROBLEM 6–4 (LO2) Inventory Errors
The following table shows the following financial data for AAA Ltd. for the year ended December 31, 2023:
| Financial Data | ||
| For the year ended December 31, 2023 | ||
| 2022 | 2023 | |
| Cost of goods sold | $ 500,000 | $ 660,000 |
| Net income | 250,000 | 350,000 |
| Total assets | 1,500,000 | 1,400,000 |
| Equity | 1,400,000 | 1,300,000 |
The following errors were made:
The inventory count for 2022 was overstated by $45,000.
Required: Calculate the corrected cost of goods sold, net income, total assets and equity for 2022 and 2023.
PROBLEM 6–5 (LO2) Inventory Errors
Using the data from PROBLEM 6–4, the following table shows the following financial data for AAA Ltd. for the year ended December 31, 2023:
| Financial Data | ||
| For the year ended December 31, 2023 | ||
| 2022 | 2023 | |
| Cost of goods sold | $ 500,000 | $ 660,000 |
| Net income | 250,000 | 350,000 |
| Total assets | 1,500,000 | 1,400,000 |
| Equity | 1,400,000 | 1,300,000 |
The following errors were made:
The inventory count for 2022 was understated by $30,000.
Required: Calculate the corrected cost of goods sold, net income, total assets and equity for 2022 and 2023.
PROBLEM 6–6 (LO3) Lower of Cost and Net Realizable Value
Below are the inventory details for Almac Flooring Ltd.:
| Ceramic Wall Tiles: | # of Units | Cost/Unit | NRV/Unit |
|
White |
1,025 | 5.00 | 6.00 |
|
Black |
875 | 4.50 | 4.25 |
|
Slate |
645 | 7.00 | 7.11 |
|
Beige |
325 | 2.00 | 2.25 |
| Marble Flooring: | |||
|
Cordoba |
10,000 | 9.25 | 9.35 |
|
Carrerra |
12,000 | 10.50 | 10.50 |
|
Maricha |
8,000 | 11.50 | 11.45 |
| Shower Waterproofing: | |||
|
Novo |
10,035 | 9.85 | 9.50 |
|
Deetra |
9.86 | 6.75 | 7.15 |
Required:
- Calculate the LCNRV for each group.
- Calculate the LCNRV for each individual product.
- Prepare the adjusting entries if any for parts (1) and (2).
PROBLEM 6–7 (LO4) Estimating Inventory and Valuation – Gross Profit Method
Varane Ltd. is required to submit an interim financial statement to their bank as part of the line-of-credit monitoring process. Below is information regarding their first quarter business for 2024:
| Ending inventory from the previous year | $420,364 |
| Purchases | 1,323,280 |
| Purchase returns | 18,270 |
| Transportation-in | 9,660 |
| Freight-out | 2,300 |
| Sales | 1,667,610 |
| Sales returns | 13,230 |
| Operating expenses | 130,500 |
| 3-year rolling average gross profit | 34% |
| Income tax rate | 30% |
Required:
- Prepare a schedule of calculations to estimate the company's ending inventory at the end of the quarter using the gross profit method.
- Prepare a multiple-step income statement for the first quarter ending March 31, 2024.
PROBLEM 6–8 (LO4) Estimating Inventory and Valuation – Retail Inventory Method
Ceabane Ltd. is required to submit an interim financial statement to their creditors. Below is information regarding their first six months for 2024:
| At Cost | At Retail | |
|---|---|---|
| Ending inventory from the previous year | $659,890 | $1,298,010 |
| Purchases | 4,660,362 | 8,958,180 |
| Purchase returns | 73,920 | 167,090 |
| Sales | 7,693,980 | |
| Sales returns | 62,440 | |
| Additional information: | ||
| Operating expenses | $1,500,000 | |
| Income tax rate | 30% |
Required:
- Prepare a schedule of calculations to estimate the company's ending inventory at the end of the quarter using the retail inventory method.
- Prepare a multiple-step income statement for the first six months ending June 30, 2024.
PROBLEM 6–9 (LO2)
Partial income statements of Schneider Products Inc. are reproduced below:
| 2023 | 2024 | |
| Sales | $50,000 | $50,000 |
| Cost of Goods Sold | 20,000 | 23,000 |
| Gross Profit | $30,000 | $27,000 |
The 2023 ending inventory was overstated by $2,000 during the physical count. The 2024 physical inventory count was done properly.
Required:
- Calculate the impact of this error on the gross profit calculated for 2023 and 2024.
- What is the impact of this error on total assets at the end of 2023 and 2024? Net assets?
PROBLEM 6–10 (LO3)
Reflex Corporation sells three products. The inventory valuation of these products is shown below for years 2022 and 2023.
| 2022 | 2023 | |||||
| Cost | Market | Unit Basis (LCNRV) | Cost | Market | Unit Basis (LCNRV) | |
| Product X | $14,000 | $15,000 | ? | $15,000 | $16,000 | ? |
| Product Y | 12,500 | 12,000 | ? | 12,000 | 11,500 | ? |
| Product Z | 11,000 | 11,500 | ? | 10,500 | 10,000 | ? |
| Total | ? | ? | ? | ? | ? | ? |
Required: If Reflex values its inventory using LCNRV/unit basis, complete the 2022 and 2023 cost, net realizable value, and LCNRV calculations.