Problems

Problem 6-1
The completed table is shown below. Each deduction involves the basic inventory equation.

Ending inventory = Beginning Inventory + Purchase – Shipments (COGS)

as well as the basic relationships inherent in any income statement, that is:,

Income = Revenues – Expenses

Co. W Co. X Co. Y Co. Z

Sales.................................................................................................................................................................
$2,250 $1,800 $1,350 $2,100
Cost of goods sold:..........................................................................................................................................
Beginning inventory....................................................................................................................................
300 225 500 300
Plus: Purchases............................................................................................................................................
975 975 850 1,200
Less: Ending inventory................................................................................................................................
225 300 300 150
Cost of good sold....................................................................................................................................
1,050 900 1,050 1,350
Gross margin....................................................................................................................................................
1,200 900 300 750
Period expenses...............................................................................................................................................
300 400 150 800
Net income (Loss)...........................................................................................................................................
$ 900 $ 500 $ 150 $ (50)

Problem 6-2
The required income statement is reproduced below.

GARDNER PHARMACY
Income Statement for the Year ----.
Sales..........................................................................................................................................................
$325,000
Cost of goods sold:...................................................................................................................................
Beginning inventory............................................................................................................................
$ 50,000
Plus: Purchase, gross....................................................................................................................
$167,000
Freight-in.............................................................................................................................
4,000
171,000
Less: Purchase returns.................................................................................................................
8,000
Net purchases......................................................................................................................................
163,000
Goods available for sale......................................................................................................................
213,000
Less: Ending inventory................................................................................................................
77,500
Cost of goods sold......................................................................................................................
135,500
Gross margin.............................................................................................................................................
189,500
Other expenses..........................................................................................................................................
95,000
Income before taxes..................................................................................................................................
94,500
Income tax expense...................................................................................................................................
28,350
Net income................................................................................................................................................
66,150
Problem 6-3
b GOULD’S COMPANY
Income Statement
Gross sales..............................................................................................................................
$133,4
00
 Less: Sales returns.......................................................................................................................
1,8
40
Net sales..................................................................................................................................
$131,5
60

Cost of goods sold.......................................................................................................................

85,8
00
Gross margin...........................................................................................................................
$
45,760

c. The perpetual inventory records indicate ending inventory should have been 673 +
5,700 – 5,800 + 80 = 653 units. Inventory shrinkage has therefore been 653 – 610 =
43 units.

dr. Inventory Shrinkage..............................................................................................................................

645
cr. Inventory...........................................................................................................................................
645

The inventory shrinkage entry reduces gross margin by $645 (or shrinkage could be shown
below the gross margin line as a general expense).

Problem 6-4
Purchases:
50 units @ $14 = $ 700
75 units $12 = 900
@
Avg: 125 units $12.80 = $1,600
@
Sales: 100 units
Ending inventory: 25 units
Avg. Cost Fifo Lifo
July 31 inventory.................................................................................................................................................
$ 320 $ 300 $ 350
Cost of goods sold...............................................................................................................................................
1,280 1,300 1,250
Available for sale.................................................................................................................................................
1,600 1,600 1,600
Problem 6-5
Fifo Av. Cost Lifo
a. Sales...........................................................................................................................................................
$52,125 $52,125 $52,125
Cost of goods sold......................................................................................................................................
27,310 27,053 26,960
Gross margin..............................................................................................................................................
$24,815 $25,072 $25,165

Fifo Av. Cost Lifo

 b. Gross margin percentage............................................................................................................................
47.6% 48.1% 48.3%
c. Net cash flow = $21,465 ($52,125 - $30,660)

No change in pretax cash flow figure using different inventory methods.

d. Fifo Av. Cost Lifo

Pretax cash flow.........................................................................................................................................
$21,465 $21,465 $21,465
Tax payment...............................................................................................................................................
7,445 7,522 7,550
After-tax cash flow.....................................................................................................................................
$14,020 $13,943 $13,915

The tax payment in 30 percent of the gross margin dollars. The cash flow using Fifo for tax
purposes is the lowest of the three after tax cash flow amounts because the unit cost of
computers is falling, producing the highest taxable gross margin of the three methods.

Problem 6-6
a. Ending inventory balances are:

Materials Work in Finished

Inventory Process Goods
Beginning balance..............................................................................................................................
$ 100,000 $ 370,000 $ 60,000
(1) Purchases............................................................................................................................................
872,000
Delivery charge...................................................................................................................................
22,000
(2) Direct labor.........................................................................................................................................
565,000
(3) Materials transfer................................................................................................................................
(900,000) 900,000
(4) Indirect labor.......................................................................................................................................
27,000
Factory supplies..................................................................................................................................
46,000
Depreciation–factory..........................................................................................................................
54,000
Factory utilities...................................................................................................................................
147,000
Depreciation–Mfg...............................................................................................................................
46,000
Property taxes.....................................................................................................................................
14,000
(5) Finished goods–transfers....................................................................................................................
________ (2,035,000) 2,035,000
$ 94,000 134,000 2,095,000
Cost of goods sold..............................................................................................................................
-- -- (2,002,000)
Ending balance....................................................................................................................................
$ 94,000 $ 134,000 $ 93,000
b. Gross margin was 23 percent.
Sales....................................................................................................................................................
$2,600,000
Cost of goods sold..............................................................................................................................
2,002,000
Gross margin.......................................................................................................................................
$ 598,000

Problem 6-7
Valuation Historical Total
Item Units Basis/Unit Cost/Unit Adjustment
A 30 $145 $150 $150
B 40 173 183 400
C 20 131 134 60
 D 40 113 113 0
Total adjustment $610

Problem 7-1
With units-of-production depreciation, one finds the cost of one production unit, and then
multiplies this by the units used in a year to determine the year’s depreciation:

$300,000-$18,000
Cost of one unit= =$ . 08
3 , 525 ,000
Units of
Production SYD
Years Units x $.08 = Depreciation Charge
1 930,000 x $.08 = $ 74,400 $80,571 (6/21 x
$282,000)
2 800,000 x .08 = 64,000 67,143 (5/21 x 282,000)
3 580,000 x .08 = 46,400 53,714 (4/21 x 282,000)
4 500,000 x .08 = 40,000 40,286 (3/21 x 282,000)
5 415,000 x .08 = 33,200 26,857 (2/21 x 282,000)
6 300,000 x .08 = 24,000 13,429 (1/21 x 282,000)
3,525,000 $282,000 282,000

Problem 7-2
Equipment ID #103
Dr. Cash.........................................................................................................................................................
14,300
Accumulated Depreciation........................................................................................................................
59,755
*

Cr. Equipment.......................................................................................................................................
70,300
Gain on Sale of 3,755
Equipment........................................................................................................................................

*(70,300 / 10) x 8 ½ years = $59,755.

Equipment ID #415
Dr. Cash.........................................................................................................................................................
63,000
Accumulated Deprecation.........................................................................................................................
26,640
*
 Loss on Sale of Equipment.......................................................................................................................
6,360
Cr. Equipment.......................................................................................................................................
96,000

*Year 1, ($96,000 x 30%)(½ year) = $14,400.

*Year 2, ($81,600 x 30%)(½ year) = 12,240.
Equipment ID #573
Dr. Cash.........................................................................................................................................................
38,000
Accumulated Depreciation........................................................................................................................
49,500
*

Loss on Sale of Equipment.......................................................................................................................

7,000
Cr. Equipment.......................................................................................................................................
94,500

*$94,500 x 11/21 = $49,500.

Problem 7-3
Automobile (new)................................................................................................................................................
9,900
Accumulated Depreciation (old).........................................................................................................................
14,500
Automobile (old)...........................................................................................................................................
16,000
Cash...............................................................................................................................................................
8,400
(No gain or loss was involved, because the two assets were of like kind.)
Furniture..............................................................................................................................................................
8,850
Accumulated Depreciation..................................................................................................................................
13,610
Loss on Disposal of Truck...................................................................................................................................
750
Truck..............................................................................................................................................................
19,860
Cash...............................................................................................................................................................
3,350
Problem 7-4
(1) Land............................................................................................................................................................
80,600
Cash......................................................................................................................................................
80,600

(2) Building......................................................................................................................................................
138,00
0
Common Stock.....................................................................................................................................
90,000
Notes Payable.......................................................................................................................................
16,000
Cash......................................................................................................................................................
32,000

(3) Desks and Chairs (80% x $8,700)..............................................................................................................

6,960
Bookcases (80% x $2,200).........................................................................................................................
1,760
Filing Cabinets (80% x $1,100).................................................................................................................
880
Cash......................................................................................................................................................
9,600
The above does not treat the equipment purchase as a fortunate acquisition. An argument can
be made to record the equipment as a fortunate acquisition, giving rise to this entry instead:
Desks and Chairs........................................................................................................................................
8,700
Bookcases...................................................................................................................................................
2,200
Filing Cabinets...........................................................................................................................................
1,100
Cash......................................................................................................................................................
9,600
Retained Earnings.................................................................................................................................
2,400
Problem 7-5
Depletable Assets
Land.....................................................................................................................................................................
$ 21,700,000
Tests – successful ...............................................................................................................................................
35,250
 Tests – unsuccessful............................................................................................................................................
116,250
Permits.................................................................................................................................................................
41,000
$ 21,892,500
Salvage value.......................................................................................................................................................
(2,325,000)
Net Cost...............................................................................................................................................................
$19,567,500
Unit depletion = $19,567,500/800,000 tons = $24.46/ton.
Depreciation year 1 = $24.46 x 30,000 tons = $733,800
Depreciation year 2 = $24.46 x 70,000 tons = $1,712,200
Depreciation year 3 = $24.46 x 75,000 tons = $1,834,500
Land Improvements
$387,500/10 years = $38,750/year amortization.
Amortization year 1 = $38,750
Amortization year 2 = 38,750
Amortization year 3 = 38,750
Buildings
$271,250/10 years = $27,125/year depreciation
Deprecation year 1 = $27,125
Deprecation year 2 = 27,125
Deprecation year 3 = 27,125
Machinery
Depreciation year 1 = $1,162,500 x 10/55 = $211,364
Depreciation year 2 = $1,162,500 x 9/55 = $190,227
Depreciation year 3 = $1,162,500 x 8/55 = $169,091