Lab 8 answers

A8 - 1

Corrected Explanation
inventory

a. Goods counted in the $280,000 $280,000 Goods counted

physical inventory and presumably
controlled by RL

b. Provincial sales tax on PST is not

the amount in a. refundable and is
an inventory cost
22,400 22,400

c. Federal GST on the 16,800 -- GST is a value

amount in a. added tax and is
not inventoriable

d. Goods that arrived from FOB shipping

a supplier on December point from a
2, shipped FOB supplier means
shipping point that RL
controlled the
43,000 goods while
43,000 shipped.

e. Goods that were FOB shipping

shipped to a customer point to a
on November 28, customer means
shipped FOB shipping that the customer
point controlled the
-- goods when
51,000 shipped.

A8 - 5

Case A Inventory cost should be recorded as net of early-payment discount

regardless of whether it was taken or not. Inventory should be reduced by
$56,000 × 2% = $1,120. The restated inventory will be $54,880.

Case B The policy of defining market value as replacement cost is not acceptable.
Market value should be defined as net realizable value.
 Case C Company policy is unacceptable. Goods on consignment belong to the
company, and cannot be regarded as sold until re-sold to a final
customer.

Case D Company policy is unacceptable. The company is recording goods at

cost, but has not recognized the onerous purchase commitment
agreement or recorded the purchases at fair value.

In 20x5, the company should have recognized a loss on the purchase agreement of
$160,000 (i.e., $2,000 per unit × 80 units remaining in the commitment).
In 20X6, the company should have recognized a recovery of $1,500 per unit, or
$120,000 total, which is calculated on the remaining units from year-end 20x5, not
20x6. The 45 units acquired at $16,000 in 20x6 should be written down by $500
per unit × 45 units = $22,500, to their current value at year-end. Earnings and
retained earnings are overstated in 20x5 and liabilities are understated.

A8 - 6

Average discount — 40% of sales at 10% discount; 60% of sales at 3% discount =

(0.40 × 0.10) + (0.60 × 0.03) = 0.04 + 0.018 = 5.8% average discount

NRV = [($140,000 – $10,000) × (1.0 – 0.058) discount] × (1 – .06) commission

= $130,000 × 0.942 × 94%

= $122,460 × 94%

= $115,112

Writedown = ($120,000 – $115,112) × 20 = $4,888 × 20 = $97,760

Requirement 2

Revenue = $126,000 × 94% × 5 = $592,200

Cost of goods sold = $115,112 × 5 = $575,560

Gross profit = $16,640

A8 - 23

Net Sales ($800,000 – $2,000)............................... $798,000

Opening Inventory.................................................. $ 45,000

Net purchases1........................................................ 464,300

509,300

Gross Margin ($798,000 × .51).............................. 406,980

Cost of Goods Sold ($798,000 – $406,980)........... $391,020

Ending Inventory ($509,300 – $391,020).............. $118,280

1$459,500 + $7,000 – $2,200 = $464,300

At cost At retail

Goods available for sale:

Beginning inventory...................................... $ 45,000 $ 80,000

Purchases....................................................... 459,500 850,000

Purchase returns............................................. (2,200)

(4,000)

Freight on purchases...................................... 7,000

Additional markups.......................................
9,000

Additional markup cancellations...................

(5,000)

930,000

Markdowns....................................................
(7,000)

Markdown cancellations................................ 3,000

Total goods available for sale.................... $509,300 926,000

Cost ratio = $509,300 ÷ $930,000 = 55%

Deduct:

Sales............................................................... $800,000

Less: Sales returns........................................

(2,000)

Net sales..................................................... (798,000)

Ending inventory (at retail).................................. $128,000

Ending inventory (at cost) $128,000 × .55..........

70,400

Cost of goods sold ($509,300 – $70,400)............ $438,900

Actual gross margin achieved,

($798,000 – $438,900) ÷ $798,000............... 45%