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6.8: Exercises

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    98085

    • Henry Dauderis and David Annand
    • Athabasca University via Lyryx Learning
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    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 imgo.png $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:

    1. on January 9, the specific units sold were 72 units from opening inventory and 8 units from the January 7 purchase and
    2. 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:

    1. Record the journal entry for the January 5 sale. Show calculations for cost of goods sold.
    2. Record the journal entry for the January 16 sale. Show calculations for cost of goods sold.
    3. 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:

    1. Calculate the impact of the two errors listed below on the gross profit calculated for the three years:
      1. The 2021 ending inventory was understated by $2,000.
      2. The 2023 ending inventory was overstated by $5,000.
    2. 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

    1. A unit-by-unit basis
    2. 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:

    1. Calculate the estimated amount of inventory lost in the fire.
    2. 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:

    1. Calculate the Merchandise Inventory Turnover for each of the years 2022 to 2025.
    2. 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:

    1. Prepare inventory record cards for Products A and B for the year using the weighted average inventory cost flow assumption.
    2. Calculate total cost of ending inventory at December 31, 2023.
    3. Calculate the gross profit percentage earned on the sale of
      1. Product A in 2023 and
      2. 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:

    1. 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.
    2. Calculate the gross profit and the gross profit percentage.
    3. 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:

    1. 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.
    2. Calculate the gross profit and the gross profit percentage.
    3. 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:

    1. Calculate the LCNRV for each group.
    2. Calculate the LCNRV for each individual product.
    3. 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:

    1. Prepare a schedule of calculations to estimate the company's ending inventory at the end of the quarter using the gross profit method.
    2. 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:

    1. Prepare a schedule of calculations to estimate the company's ending inventory at the end of the quarter using the retail inventory method.
    2. 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:

    1. Calculate the impact of this error on the gross profit calculated for 2023 and 2024.
    2. 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.

    This page titled 6.8: Exercises is shared under a CC BY-NC-SA 3.0 license and was authored, remixed, and/or curated by Henry Dauderis and David Annand (Lyryx Learning) .

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