Chapter Six

Challenge Exercise 1 Expands on: E6-1 LO: 1 Premier Bank and Trust is considering giving Bean Company a loan Be!ore doing so" t#ey decide t#at !urt#er discussions $it# Bean%s accountant may &e desira&le One area o! particular concern is t#e inventory account" $#ic# #as a year-end &alance o! '()6"*** +iscussions $it# t#e accountant reveal t#e !ollo$ing 1 Bean received goods costing ',-"*** on .anuary ) t#at $ere s#ipped /OB destination on +ecem&er )T#e s#ipment $as a rus# order t#at $as supposed to arrive +ecem&er (1 T#is purc#ase $as included in t#e ending inventory o! '()6"*** ) Bean sold goods costing ',1"*** to Cusa Company" /OB s#ipping point" on +ecem&er )0 !or '61"*** T#e goods are not expected to arrive at Cusa until .anuary 1) T#e goods $ere not included in t#e p#ysical inventory &ecause t#ey $ere not in t#e $are#ouse ( T#e p#ysical count o! t#e inventory did not include goods costing '0-"*** t#at $ere s#ipped to Bean /OB destination on +ecem&er )2 and $ere still in transit at year-end , Bean received goods costing ')2"*** on .anuary ) T#e goods $ere s#ipped /OB s#ipping point on +ecem&er )6 &y 3o&le Co T#e goods $ere not included in t#e p#ysical count 1 Bean sold" !or '11"*** goods costing '(0"*** to Limerick Co " /OB destination" on +ecem&er (* T#e goods $ere received at Limerick on .anuary 0 T#ey $ere not included in Bean%s p#ysical inventory 4nstructions: 5a6 +etermine t#e correct inventory amount on +ecem&er (1 5&6 7#at correcting entry $ould #ave to &e made !or item ,8

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Weygandt, Financial and Managerial Acco nting, Challenge !"ercises

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Challenge Exercise 2 Expands on: E6-, LO: ) /lying Tomato sells a sno$&oard" 7#iteOut" t#at is popular $it# sno$&oard ent#usiasts Presented &elo$ is in!ormation relating to /lying Tomato%s purc#ases o! 7#iteOut sno$&oards during 9eptem&er +uring t#e same mont#" 1)1 7#iteOut sno$&oards $ere sold at '12* eac# /lying Tomato uses a periodic inventory system +ate 9ept 9ept 9ept 9ept Explanation 4nventory Purc#ases Purc#ases Purc#ases :nits )1 ,1 ), 1* 1,, :nit Cost ' 1** 1*6 11* 11) Total Cost ' )"1** ,"22* )"6,* 1"6** ' 11"11*

1 1) 1)6 Totals

4nstructions: 5a6 Compute t#e ending inventory at 9eptem&er (* and cost o! goods sold using t#e /4/O and L4/O met#ods Prove t#e amount allocated to cost o! goods sold under eac# met#od 5&6 /or &ot# /4/O and L4/O" calculate t#e sum o! ending inventory and cost o! goods sold 7#at do you notice a&out t#e ans$ers you !ound !or eac# met#od8 5c6 7#at is gross pro!it under eac# met#od8 5d6 7#ic# met#od results in a larger amount reported !or assets on t#e &alance s#eet8 7#ic# results in a larger amount reported !or stock#olders% e;uity on t#e &alance s#eet8

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Weygandt, Financial and Managerial Acco nting, Challenge !"ercises

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Challenge Exercise 3 Expands on: E6-2 LO: )" ( <oot Beer Company #ad )** units in &eginning inventory at a total cost o! '16"*** T#e company purc#ased 1** units at a total cost o! '11"*** =t t#e end o! t#e year" <oot Beer #ad 2* units in ending inventory 4nstructions: 5a6 Compute t#e cost o! t#e ending inventory and t#e cost o! goods sold under 516 /4/O" 5)6 L4/O" and 5(6 average-cost 5&6 7#ic# cost !lo$ met#od $ould result in t#e #ig#est net income8 5c6 7#ic# cost !lo$ met#od $ould result in inventories approximating current cost in t#e &alance s#eet8 5d6 7#ic# cost !lo$ met#od $ould result in <oot Beer paying t#e least taxes in t#e !irst year8 5e6 9uppose <oot Beer decides at yearend t#at t#ey $ant to report a lo$er net income 7ould t#ey &e a&le to manipulate net income $#en using /4/O or L4/O8

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Weygandt, Financial and Managerial Acco nting, Challenge !"ercises

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Challenge Exercise 4 Expands on: E6-LO: , 3aug#ty +og +isc >ol! 9#op uses t#e lo$er-o!-cost-or-market &asis !or its inventory T#e !ollo$ing data are availa&le at +ecem&er (1

4tem Baskets: 4nnova +iscra!t +isc &ags: Lig#tning 7#am-O

:nits 1* )*

:nit Cost '1-* 121

?arket ')** 16*

11 1,

)* (*

16 )0

4nstructions: 5a6 +etermine t#e amount o! t#e ending inventory &y applying t#e lo$er-o!-cost-or-market &asis 5&6 7#en determining @lo$er o! cost or marketA" $#at is @market8 7#y is market de!ined in t#is $ay8

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Weygandt, Financial and Managerial Acco nting, Challenge !"ercises

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Challenge Exercise 5 Expands on: E6-11 LO: 1 9caggs Bard$are reported cost o! goods sold as !ollo$s )*1( )*1, Beginning inventory ' (*"*** ' ,*"*** Cost o! goods purc#ased 12*"*** 1-1"*** Cost o! goods availa&le !or sale )**"*** )(1"*** Ending inventory ,*"*** ,1"*** Cost o! goods sold '16*"*** '1-*"*** 9caggs made t$o errors: 516 )*1( ending inventory $as overstated ',"***" and 5)6 )*1, ending inventory $as understated '2"*** 4nstructions: a6 Compute t#e correct cost o! goods sold !or eac# year &6 7#at correcting entry $ould 9caggs make !or error 5)68

Challenge Exercise 6
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Weygandt, Financial and Managerial Acco nting, Challenge !"ercises

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Expands on: E6-1, LO: 6 T#e cost o! goods sold computations !or Letterman Company and 9c#ae!!er Company are s#o$n &elo$ Letterman Company 9c#ae!!er Company ' 11"*** ' 01"*** ))*"*** (1*"*** )21"*** (-1"*** 61"*** 2-"*** ')1*"*** '(1)"***

Beginning inventory Cost o! goods purc#ased Cost o! goods availa&le !or sale Ending inventory Cost o! goods sold

4nstructions: 5a6 Compute inventory turnover and days in inventory !or eac# company 5&6 7#ic# company moves its inventory more ;uickly8 5c6 7#y is it generally considered to &e &etter !or a company to move its inventory more ;uickly8 5d6 7#at are possi&le concerns you mig#t #ave a&out a company $it# a very #ig# inventory turnover8

Challenge Exercise 7 Expands on: E6-10 LO: 0

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Weygandt, Financial and Managerial Acco nting, Challenge !"ercises

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+oc >i&&s Company reported t#e !ollo$ing in!ormation !or 3ovem&er and +ecem&er )*1, 3ovem&er +ecem&er ' 2**"*** ' -11"*** 1,*"*** 160"*** 160"*** 8888 1"1)*"*** 1"1**"***

Cost o! goods purc#ased 4nventory" &eginning-o!-mont# 4nventory" end-o!-mont# 9ales

+oc >i&&s%s ending inventory at +ecem&er (1 $as damaged in a !ire =!ter t#e !ire" inventory $#ic# originally cost '6*"*** is salvagea&le 4t can &e sold at approximately 2*C o! cost 4nstructions: 5a6 Compute t#e gross pro!it rate !or 3ovem&er 5&6 :sing t#e gross pro!it rate !or 3ovem&er" determine t#e estimated loss on inventory lost due to t#e !ire

Challenge Exercise 8 Expands on: E6-)* LO: 0 +an%s T#reads uses t#e retail inventory met#od !or its t$o departments" ?enDs Clot#es and 7omenDs Clot#es T#e !ollo$ing in!ormation !or eac# department is o&tained

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Weygandt, Financial and Managerial Acco nting, Challenge !"ercises

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4tem Beginning inventory at cost Cost o! goods purc#ased at cost 3et sales Beginning inventory at retail Cost o! goods purc#ased at retail

?en%s +ept ' ,*"*** 16*"16* 1-)"*** 10"*** ))*"***

7omen%s +ept ' 1*"*** 121"2** ),1"*** 61"*** ),*"***

4nstructions: a6 Compute t#e estimated cost o! t#e ending inventory !or eac# department under t#e retail inventory met#od

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Weygandt, Financial and Managerial Acco nting, Challenge !"ercises

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