Intermediate Accounting Vol 1 Canadian 2Nd Edition Lo Solutions Manual Full Chapter PDF

Intermediate Accounting Vol 1
Canadian 2nd Edition Lo Solutions

Manual
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Chapter 6 Inventories
Chapter 6
Inventories
O. Problems
P6-1. Suggested solution:
Potential benefit True / False

A perpetual system is less costly than a periodic system. F
A perpetual system produces information that is more useful for inventory
T
management.
A perpetual system helps to estimate expected amounts of inventory at year-end. T
A perpetual system allows a company to avoid conducting costly inventory counts. F
A perpetual system is required by IFRS and ASPE. F
A perpetual system helps to determine the amount of shrinkage. T
Benefit of
Feasible to track continuous Costs of tracking
inventory inventory inventory
continuously tracking continuously Recommendation
Medium—with
High—helps to barcode scanning
determine the technology,
amount of continuous
a. Supermarket Yes Perpetual
spoilage and tracking is
theft, and when reasonably
to reorder. affordable.
No—each unit of
inventory cannot Low—low risk of
b. Ice cream
be tracked due to theft or overcon- n/a Periodic
store
the inconsistent sumption by staff
sizes of servings
High—helps to
identify models Low—items are
c. Car
Yes that sell better or high value and Perpetual
dealership
worse for future easy to track
purchases
High—helps to
Low—items are
determine the
d. Electronics medium to high
Yes amount of theft Perpetual
store value and easy to
or damage and to
track
identify products
Copyright © 2014 Pearson Canada Inc. 6-141

that sell better or

worse for future
purchases
a. A department store—Perpetual. A department store has a wide range of products that

need to be tracked to identify products that sell well versus others that do not. Theft is al-
so a significant concern, so information about the amount of shrinkage is valuable.
b. A furniture manufacturer—Periodic. Making furniture requires many different compo-
nents (wood, nails, screws, fabric) that have low value (although the finished product
may have high value). Trying to track how much of these raw materials are being used
for the manufacture of each item has little benefit but high cost in slowing down the pro-
duction process.
c. A restaurant—Periodic. It is not possible to track all the ingredients that go into the
preparation of meals served by the restaurant. Even if it were possible, there would be lit-
tle benefit to the information in terms of supply management.
d. A post office—Perpetual. Postage stamps are essentially pieces of paper that store value,
so they are similar to paper money. It is important for the post office to maintain tight
control over this inventory, so a perpetual system would be beneficial.
Item Product Period

a. Invoice cost of purchased inventory. √
b. Non-refundable tariffs on imported inventory. √
c. Cost of shelves and racks at retail store. √
d. Cost of shipping from distributor to warehouse. √
e. Transportation from warehouse to retail store. √
f. Cost to courier products to VIP customers. √
g. Rent for warehouse. √
h. Rent for retail store. √
i. Wages of staff at retail store. √
j Salary of purchasing manager. √
Include in
Item inventories Expensed
a. Raw materials. √
b. Salary for production line supervisor. √
c. Salary for sales manager. √
d. Pension benefits for assembly line workers. √
e. Electricity used in production plant. √
f. Production accountant (who tracks costs and variances). √
g. Cost of shipping to company’s warehouse prior to sale. √

h. Heating cost for production plant during operating hours. √

i. Heating cost for production plant during off-hours. √
j. Depreciation on production plant. √
a. To compute cost of goods sold and ending inventory, first compute the cost of goods
available for sale (COGAS). Since this is the first year of operations, COGAS equals the
current year’s production costs. (Later years would also need to include the cost of beginning
inventory.)
Product costs Amount
Raw materials purchases $123,500
Raw materials inventory, December 31, 2013 (14,600)
Raw materials used in production 108,900
Miscellaneous plant supplies 12,400
Direct labour 62,000
Supervisory salaries, production manager 65,000
Utilities expense (9/10 for plant) 18,000
Property taxes (4/5 of $5,000 for plant building) 4,000
Amortization, plant equipment 10,000
Total production cost = COGAS 280,300
Cost of goods sold (80% of COGAS) 224,240
Ending finished goods inventory (20% of COGAS) $ 56,060
b. Using the amounts for COGS and ending inventory from (a), and the other information
given, the income statement that results would be as follows:
Inventive Controls
Income Statement
For the year ended December 31, 2013
Sales $527,000
Cost of goods sold 224,240
Gross profit 302,760
Sales commissions 75,000
General administration expenses 38,800
Executive salaries 100,000
Utilities expense (1/10 related to the office) 2,000
Property taxes (1/5 for office building) 1,000
Amortization, office building 8,000
Income before tax $ 77,960

Potential reason for requirement to capitalize under IFRS and ASPE: Yes / No
The fixed overhead is relatively constant, which contributes to stable values of
N
earnings and inventories.
Fixed overhead contributes to the production of goods that have future benefits. Y
Capitalizing fixed overhead into inventories helps to match costs to revenues. Y
Capitalizing fixed overhead into inventories helps to smooth earnings. N
Fixed overhead costs are reliable and verifiable. N
Capitalizing fixed overhead is consistent with the going-concern assumption. Y
Fixed overhead costs are measurable and are usually material. N
The correct answer is (b). When actual production exceeds normal, the fixed overhead rate is
reduced so as not to overallocate fixed overhead to inventory. The total overhead cost of $10,000
is allocated over 1,250 units of actual production, resulting in $8/unit.
The correct answer is (a). When actual production is significantly below normal, the fixed
overhead rate is not increased, but remains at $20/unit. For 500 units produced, the amount of
fixed overhead capitalized in inventory is 500 units × $20/unit = $10,000. The remaining fixed
overhead ($10,000) would be directly expensed.
Amount Amount
Production capitalized into directly
level inventories expensed Explanation
120,000 units $500,000 $ 0 At or above normal production level.
110,000 units 500,000 0 Capitalize all fixed overhead. Per unit fixed
100,000 units 500,000 0 overhead rate would be adjusted.
98,000 units 500,000 0 Within range (+/–5%) of normal production.
90,000 units 450,000 50,000
Significantly below normal production.
80,000 units 400,000 100,000
Capitalize at $5/unit and expense remainder.
0 units 0 500,000

# units for
Fixed fixed
Production overhead Total fixed overhead
level allocation rate = overhead ÷ allocation Explanation
50,000 units $ 80.00 $4,000,000 50,000 units When production is at or
above normal level, fixed
46,000 units 86.96 $4,000,000 46,000 units overhead rate should be
42,000 units 95.24 $4,000,000 42,000 units adjusted downward using
actual production volume
40,000 units 100.00 $4,000,000 40,000 units so as not to over-
capitalize overhead.
Within normal range (+/–
39,000 units 102.56 $4,000,000 39,000 units 10%) of normal
production level.
Significantly below
30,000 units 100.00 $4,000,000 40,000 units normal production. Use
normal production level
to allocate costs so that
0 units 100.00 $4,000,000 40,000 units cost per unit is not
overstated.
a. This question indicates that the actual production volume approximated normal levels, so
all material production variances should be adjusted through inventories (rather than ex-
pensed).
Inventory
Item Standard cost Variance amount
Raw materials $ 210,000 $15,000 U $ 225,000
Production wages 670,000 20,000 F 650,000
Variable production overhead 180,000 3,000 F 177,000
Fixed production overhead 350,000 50,000 U 400,000
Total production cost $1,410,000 $42,000 U $1,452,000
b. If actual volume exceeded normal, the fixed cost per unit would need to be lowered so
that total fixed cost absorbed by production equals total fixed costs. If actual volume is
significantly lower than normal, the unallocated fixed cost would be expensed.

The standard rate for fixed overhead has been determined based on a normal production level of
750 batches. Since the actual production volume of 900 batches exceeded this level, the fixed
overhead rate needs to be recomputed (i.e., reduced) so as not to overallocate fixed overhead.
Total fixed overhead, which comprises depreciation on storage silos, is $300/batch × 750 batches
= $225,000.
Cost of goods sold is then computed as follows:

Cost per
batch # batches Amount
Variable costs $2,200 900 $1,980,000
Fixed production costs $ 250 900 225,000
Total production cost to include in inventories $2,450 900 $2,205,000
Add: Opening inventory (raw materials) 1,200,000
Cost of goods available for sale 3,405,000
Less: Ending inventory (raw materials) ( 900,000)
Cost of goods sold $2,505,000
Total fixed overhead equals 500 units × $20,000/unit = $10,000,000.

Cost per unit # units Amount
Variable costs $70,000 320 $22,400,000
Fixed production costs $20,000 320 6,400,000
Total production cost to include in inventories $90,000 $28,800,000
Fixed overhead $20,000 500 $10,000,000

Fixed overhead allocated (see above) 6,400,000
Unallocated fixed overhead to be expensed $ 3,600,000
Sales $42,000,000
Cost of sales
From opening inventory 40 ( 3,600,000)
From current year production $90,000 240 (21,600,000)
Unallocated fixed overhead
( 3,600,000)
($10,000,000 – $6,400,000)
Gross profit $13,200,000

a. Using normal production volume of 20,000 units of each production line, the total fixed
cost of $5 million equals $125/unit. If the two product lines were treated separately, the
following amounts would result:
Economy line Cost per unit # units Amount
Variable costs $300 16,000 $4,800,000
Fixed production costs $125 16,000 2,000,000
Total production costs $425 $6,800,000
Fixed overhead $125 20,000 $2,500,000

Fixed overhead allocated (see above) 2,000,000
Unallocated fixed overhead to be expensed $ 500,000
Cost of sales
From opening inventory $425 4,000 $1,700,000
From current-year production $425 11,000 4,675,000
Unallocated fixed overhead (see above) 500,000
Total cost of sales—Economy line $458.33 15,000 $6,875,000
Deluxe line Cost per unit # batches Amount
Variable costs $400 24,000 $9,600,000
Fixed production costs $104.17 24,000 2,500,000
Total production costs $504.17 24,000 $12,100,000
Cost of sales
From opening inventory $525.00 4,000 $ 2,100,000
From current-year production 504.17 21,000 10,587,500
Cost of goods sold—Deluxe line 507.50 25,000 $12,687,500
Thus, the cost of goods sold for Variety Appliances = $6,875,000 + 12, 687,500 =
$19,562,500.
b. If both production lines were considered together, the below-normal production of the
Economy line would be offset by the above-normal production of the Deluxe line. That
is, production of both lines taken as a whole approximated normal production levels. The
following amounts would result.
Economy line Cost per unit # units Amount
Variable costs $300 16,000 $4,800,000
Cost of sales
From opening inventory $425 4,000 $1,700,000
From current-year production $425 11,000 4,675,000
Total cost of sales—Economy line $425 15,000 $6,375,000

Deluxe line Cost per unit # batches Amount

Variable costs $400 24,000 $9,600,000
Cost of sales
From opening inventory $525.00 4,000 $ 2,100,000
From current-year production 525.00 21,000 11,025,000
Cost of goods sold—Deluxe line 525.00 25,000 $13,125,000
Total cost of goods sold for both lines combined = $6,375,000 + 13,125,000 = $19,500,000.
This amount is $62,500 lower than that obtained in part (a) because there was a cost reduc-
tion resulting from not having to expense $500,000 of unallocated overhead on the Economy
line, partially offset by a $20.83 higher fixed overhead rate on the Deluxe line that resulted in
$20.83/unit × 21,000 units = $437,500 of additional fixed overhead expensed through COGS.
c. Either approach (a) or (b) is acceptable, and professional judgment is necessary. One
could argue that the two product lines are distinct and therefore the overhead allocation
needs to be made separately. For Variety Appliances, the production process suggests
that the two product lines are manufactured through the same production process, so there
is an argument to treat them both together for the purpose of allocating fixed overhead.
Doing so has the advantage that a change in product mix will not result in unallocated
overhead in one product while there is a need to reduce overhead rates for another prod-
uct line to prevent overallocation.
a.
Inventory quantity 2012
Beginning balance 1,540 mbf Given
Production 3,230 mbf Solve
Units sold 2,820 mbf Given
Ending balance 1,950 mbf Given
Production cost = 90,000/mbf × 3,230 mbf + $120,000,000

= $410,700,000
Cost per mbf = $410,700,000 / 3,230 mbf
= $127,152/mbf

b.
Units × Unit cost = Total cost
Opening inventory 1,540 mbf $216,000,000
Current-period production 3,230 mbf $127.152/mbf 410,700,000
Goods available for sale 4,770 mbf $626,700,000
Weighted-average cost per unit 131.384/mbf
Cost of goods sold (2,820 mbf) 131.384/mbf ($370,501,887)
Ending inventory 1,950 mbf 131.384/mbf $256,198,113
c.
d. The inventory turnover ratio indicates how fast the inventory is being sold; that is, how
many times the inventory is sold in a period.
e. With a single product, there is sufficient information here to compute an inventory

turnover ratio based on physical quantities rather than dollar value. (When there are mul-
tiple products, this computation would not be possible.)
f. Cost of goods sold using variable costing is computed as follows:

Variable costing COGS = units sold × variable cost/unit
= 2,820 mbf × $90,000/mbf
= $253,800,000
Ending inventory = 2,500 units × $11/unit = $27,500.

COGS = COGAS – ending inventory = $132,000 – $27,500 = $104,500.

P6-17. Alternative solution:
Compute COGS first, then ending inventory.

COGS = $25,000 + $36,000 +$27,000 + (1,500 units × $11/unit)
= $25,000 + $36,000 + $27,000 + $16,500
= $104,500.
Ending inventory = COGAS – COGS = $132,000 – $104,500 = $27,500.
a. WAC = COGAS / # units available for sale = $132,000 / 11,000 = $12.00.

b. Number of units sold = 11,000 – 2,500 = 8,500.
COGS = 8,500 units × $12 / unit = $102,000.
Ending inventory = 2,500 units × $12 / unit = $30,000.
Compute ending inventory value first, then COGS.

Cost per
# units unit Total cost
Beginning inventory, January 1 300 $200 $ 60,000
Purchase, January 7 200 $210 42,000
Purchase, January 22 400 $205 82,000
Goods available for sale 900 184,000
Ending inventory, January 31 (200) $205 41,000
Goods sold 700 $143,000
P6-19. Alternative solution:
Compute COGS first, then ending inventory.

Units to
Cost per include in
# units unit Total cost COGS Total $
Beginning inventory, January 1 300 $200 $60,000 300 $60,000
Purchase, January 7 200 $210 42,000 200 42,000
Purchase, January 22 400 $205 82,000 200 41,000
Goods available for sale 900 184,000
Goods sold (700) 143,000 700 143,000
Ending inventory, January 31 200 $205 $41,000

Cost per
Beginning inventory, January 1 3,000 $5.00 $ 15,000
Purchase, January 4 5,000 5.10 25,500
Sales, month of January (12,000)
Purchase, February 14 8,000 5.00 40,000
Sales, month of February (7,000)
Purchases, March 7 4,000 4.95 19,800
Purchases, March 21 5,000 5.10 25,500
Sales, month of March (11,000) -
Cost of goods available for sale - $156,700
Ending inventory 1,000
Cost of ending inventory = 1,000 units × $5.10/unit (latest purchase) = $5,100.

COGS = COGAS – ending inventory = $156,700 – $5,100 = $151,600.
Cost per
Beginning inventory, January 1 3,000 $5.00 $15,000
Goods available for sale 14,000 $71,400
Weighted-average cost 5.10
Sales, month of January (12,000) 5.10 (61,200)
Ending inventory, January 31 2,000 5.10 $10,200

Sales, month of February (7,000) 5.02 (35,140)
Ending inventory, February 28 3,000 5.02 15,060
Purchases, March 7 4,000 4.95 19,800

Purchases, March 21 5,000 5.10 25,500
Goods available for sale 12,000 60,360
Sales, month of March (11,000) 5.03 (55,330)
Ending inventory, March 31 1,000 5.03 $ 5,030
COGS = $61,200 + $35,140 + $55,330 = $151,670.
Cost of ending inventory = 1,000 units × $5.03/unit = $5,030.

Cost per
Beginning inventory, January 1 3,000 $5.00 $15,000
Sales, month of January (12,000) 61,400*
Ending inventory, January 31 2,000 5.00 $10,000

Sales, month of February (7,000) $35,000
Ending inventory, February 28 3,000 5.00 $15,000
Purchases, March 7 4,000 4.95 19,800

Purchases, March 21 5,000 5.10 25,500
Sales, month of March (11,000) 55,300*
Ending inventory, March 31 1,000 5.00 $ 5,000
COGS, January $ 61,400

COGS, February 35,000
COGS, March 55,300
Total COGS, January – March $151,700
*Calculation of COGS:
COGS (January) = $30,900 + $25,500 + 1,000 units × $5.00/unit= $61,400.
Or = COGAS – Ending inventory = $71,400 – $10,000 = $61,400.
COGS (February) =7,000 units × $5.00/unit (from Feb. 14 purchase) = $35,000.
COGS (March) = $25,500 + $19,800 + 2,000 units × $5.00/unit= $61,400.

a. The lower of cost and market method does not apply matching. Rather, it is a method to
value the ending inventory and the amount of expense that would result does not neces-
sarily match the revenue recognized in the period.
b. The highest income corresponds to the lowest cost of goods sold. Since 2013 is the first
year of operations, the lowest cost of goods sold occurs when the ending inventory is the
highest. Thus, the answer is the FIFO method. Although not required, numerical proof is
as follows:
Spec. ID FIFO Avg. cost LOCM
Opening inventory $ 0 $ 0 $ 0 $ 0
+ Purchases 600,000 600,000 600,000 600,000
− Ending inventory (212,000) (220,000) (216,000) (196,000)
= Cost of goods sold $388,000 $380,000 $384,000 $404,000
c. The cost of goods sold for the second year under FIFO would be $732,000, calculated as
follows:
FIFO
Opening inventory $220,000
+ Purchases 700,000
− Ending inventory (188,000)
= Cost of goods sold $732,000
The best answer is (d): the last-in, first-out (LIFO) periodic system will tend to have the lowest
year-end inventory value. When the purchase price is rising, the oldest inventory costs tend to be
the lowest (on a per unit basis). The LIFO system expenses the newest costs to cost of goods sold
(COGS) and retains the oldest costs as inventory, which would be the lowest costs.
The first-in, first-out (FIFO) method has the opposite effect, expensing the oldest costs to COGS
and retaining in inventory the newest costs, which tend to be the highest. The perpetual system
for FIFO produces the same result as the periodic system.
The specific identification method would produce results similar to FIFO if the flow of goods is
similar to the flow of costs (i.e., oldest units are sold first). It is unlikely for a firm that uses the
specific identification method to retains the oldest products in inventory.
The weighted average cost method produces results in-between LIFO and FIFO so this method
will not produce the lowest inventory values.

a. The periodic FIFO ending inventory would be $120,000, calculated as follows:

Ending inventory from purchase #2 3,000 $28 $ 84,000
Ending inventory from purchase #1 1,000 $36 36,000
Total (# units given) 4,000 $120,000
b. The periodic weighted-average cost of goods sold would be $174,667, calculated as

follows:
Opening inventory 3,600 $40 $144,000
Purchase #1 2,400 $36 86,400
Purchase #2 3,000 $28 84,000
Total 9,000 $314,400
Weighted-average cost per unit
$34.9333
($314,400 / 9,000)
Cost of goods sold 5,000 $34.9333 $174,667
c. The perpetual weighted-average ending inventory would be $136,960, calculated as

follows:
Opening inventory 3,600 $40 $144,000
Purchase #1 2,400 $36 86,400
Sub-total 6,000 230,400
Weighted-average cost per unit $38.40
Cost of sale #1 (1,500) $38.40 (57,600)
Purchase #2 3,000 $28 84,000
Subtotal 7,500 $256,800
Cost of sale #2 3,500 $34.24 (119,840)
Ending inventory 4,000 $34.24 $136,960

First, calculate cost of goods available for sale (COGAS), which is the same for all three cost
flow assumptions.
Opening inventory 3,000 $8.00 $24,000
Purchase #1 2,000 $7.65 15,300
Purchase #2 4,000 $7.50 30,000
Total available for sale 9,000 $69,300
a. Weighted average, periodic

Units × Unit cost Total cost
Total available for sale 9,000 $69,300
Weighted-average cost per unit
$7.70
(COGAS / # units available for sale)
b. FIFO, perpetual [Note: perpetual and periodic systems yield the same results under
FIFO.]
Units × Unit cost Total cost
Ending inventory from purchase #2 4,000 $7.50 $ 30,000
Ending inventory from purchase #1 1,000 $7.65 7,650
Total ending inventory 5,000 $37,650
Cost of goods sold (COGAS—end inv.) $31,650
c. Weighted average, perpetual

Opening inventory 3,000 $8.00 $24,000
Purchase #1 2,000 $7.65 15,300
Subtotal 5,000 39,300
Sale #1 (1,500) $7.86 (11,790)
Purchase #2 4,000 $7.50 30,000
Subtotal 7,500 57,510
Sale #2 (2,500) $7.668 (19,170)
Cost of goods sold (COGAS—end inv.) $30,960

Regular products: retail price = cost × 200%  cost = 50% of retail price.
Discounted products: retail price = cost × 200% × (1 – 30%)  cost = retail price / (200% ×
70%) = 71.4% of retail price.
Mark-up = 50% on cost  retail price = 150% of cost  cost = 2/3 of retail price.
Cost of goods sold = $330,000 × 2/3 = $220,000.
Ending inventory = BI + P – COGS = $160,000 + $200,000 – $220,000 = $140,000.
Mark-down Estimated
(% of Retail price Cost as % cost
Product Mark-up regular per dollar of retail Retail value (cost % ×
category (% on cost) price) of cost price of inventory retail value)
Regular 100% — 2.00 50% $2,860,000 $1,430,000
Discounted 100% 35% 1.30 76.92% 520,000 400,000
Total $3,380,000 $1,830,000
COGS = Beginning inventory + Purchases – Ending inventory

= $1,790,000 + $13,700,000 – $1,830,000
= $13,660,000
Write-
Net down per
realizable unit
Selling value required Total
costs (price – (cost – write-
Cost per Selling (10% of selling NRV) or down for
Product # Units unit price price) cost) 0 product
A 200 $ 40 $ 80 $8 $ 72 $ 0 $ 0
B 100 150 120 $12 108 42 4,200
C 300 60 100 $10 90 0 0
D 200 100 100 $10 90 10 2,000
E 300 65 70 $7 63 2 600
Total $6,800

Net Write-
Cost per Replace- realizable down?
Inventory item unit ment cost value (Yes / No)
Finished good A $100 — $200 No
Raw material A $50 $50 — No
Finished good B $100 — $220 No

Raw material B $50 $45 — No
Finished good C $100 — $80 Yes

Raw material C $50 $50 — No
Finished good D $100 — $80 Yes

Raw material D $50 $45 — Yes
For B, even though the raw materials replacement cost is below cost in the books, the finished
product has NRV exceeding cost, so neither the finished product nor the raw material needs to be
written down.
a. The finished product’s NRV < cost. Therefore, it needs to be written down by $20 per
unit on 300 units, for a total of $6,000.
The raw materials need to be evaluated together, not individually, because they are both
required to produce the finished product.
Total
Cost per Replace- replace- Write-
Inventory item # Units unit ment cost Total cost ment cost down
Raw material A 200 $ 20 $ 25 $4,000 $5,000
Raw material B 100 50 45 5,000 4,500
Total $9,000 $9,500 nil
b. If the replacement cost of raw material A were to be $21 per unit, the answer would
change even though $21 is higher than cost. This is because the raw materials need to be
evaluated together as they are jointly used in production. The amount of write-down is
determined as follows:
Total
Raw material A 200 $ 20 $ 21 $4,000 $4,200
Raw material B 100 50 45 5,000 4,500
Total $9,000 $8,700 $300

Grimmets
Finished goods: NRV ($425) < cost ($450), so Grimmets need to be written down.
Raw materials need to be evaluated for impairment.
Hokeys
Finished goods: NRV ($600) > cost ($520), so Hokeys are not impaired.
Raw materials do not need to be evaluated for impairment because the final product is not
impaired.
The inventory write-down computations for Grimmets and its raw materials are as follows. Note
that the three types of raw materials need to be considered together because they are all required
to produce Grimmets.
Total
Raw material A 50 $ 30 $ 20 $1,500 $1,000
Raw material B 100 10 11 1,000 1,100
Raw material C 80 50 40 4,000 3,200
Total $6,500 $5,300 $1,200
a. The costs related to production should be included in the inventory account (work-in-
process). Non-product (period) costs should be expensed. Storage and interest costs are
period costs; all other costs are product costs. The journal entry to correct the error is as
follows:
Debit Credit
Dr. Inventory (WIP) 175,000
Dr. Storage expense 4,000
Dr. Interest expense 3,000
Cr. Production expense 182,000
b. Assuming the periodic FIFO method, the cost of goods sold and ending inventory are
computed as follows:
# pairs Cost per pair Total
Opening inventory 5,000 $2.40 $ 12,000
Production during year 70,000 $2.50 175,000
Cost of goods available for sale 75,000 $187,000
Cost of goods sold—from opening inv. 5,000 $2.40 $ 12,000

Cost of goods sold—from production 64,000 $2.50 160,000
Cost of goods sold—total 69,000 $172,000
Ending inventory 6,000 $2.50 $ 15,000

c. Assuming the periodic weighted average cost method, the cost of goods sold and ending
inventory are computed as follows:
# pairs Cost per pair Total
Cost of goods available for sale (see (b)) 75,000 $187,000
Weighted average cost
$2.4933
(COGAS/units available for sale)
Ending inventory 6,000 $2.4933 $ 14,960
a. The puppy inventory needs to be written down to the lower of cost and market. “Market”
should be net realizable value, or $100 each. The replacement cost of $40 each is not rel-
evant. Since the purchases had been recorded at $150 each, the inventory value needs to
be written down by $50 per puppy.
Dr. Loss on write-down of inventory (or cost of sales) 4,500
Cr. Inventories (90 puppies × $50 / puppy) 4,500
b. Inventory, December 31, 2013: overstated by $4,500

Cost of goods sold, year 2013: understated by $4,500
Cost of goods sold, year 2014: overstated by $4,500
2012 income 2013 income 2013 end R/E

a. Inventory count error overstated $15,000 understated $15,000 correct
b. Invoice recorded too
overstated $24,000 understated $24,000 correct
late
c. Incorrect inclusion of
consignment goods in correct overstated $37,000 overstated $37,000
inventory
a. Dr. Retained earnings (re: cost of goods sold for 2012) 15,000
Cr. Cost of goods sold 15,000
b. Dr. Retained earnings (re: cost of goods sold for 2012) 24,000
Cr. Cost of goods sold* 24,000
c. Dr. Cost of goods sold 37,000

Cr. Inventory 37,000
* This amount may be recorded in purchases if the purchases account has not yet been closed for
the year.

Year 1 Year 2
Scenario Inventory Income Inventory Income
a. $25,000 overstated $25,000 overstated correct $25,000 understated
b. 8,000 overstated 8,000 overstated correct 8,000 understated
c. correct 15,000 overstated correct 15,000 understated
d. correct correct correct correct
a. Use the cost of goods sold equation: COGS = BI + P – EI. Ending inventory in Year 1 is
overstated by $25,000, so COGS is understated and income overstated. Beginning inventory
in Year 2 is overstated, so COGS is overstated and income understated in Year 2.
b. Reasoning similar to (a).
c. Ending inventory is correct according to year-end count. Since purchase was not recorded,
COGS = BI + P – EI is understated, so income is overstated in Year 1. Recording the pur-
chase incorrectly in Year 2 overstated COGS and understated income in Year 2.
d. This scenario is difficult for most students to understand. While there is an error in not
including fixed overhead in inventory costs, the error affects neither the year-end inventory
balance nor income. The key here is to recognize that the company uses LIFO and the quanti-
ty of inventory. Since the inventory of finished goods declined from 20,000 units to 15,000
units in Year 1 and WIP remained constant, that means all manufacturing costs recorded into
inventory in Year 1 will flow into cost of goods sold under LIFO. Thus, whether a particular
expenditure is capitalized into inventory or expensed affects neither inventory nor net income
(although there is an effect on the classification on the income statement).
a. The inventory account included $800,000 too much cost. The $300,000 salary of the
company president and the $500,000 cost of advertising and promotion are not part of the
production process, so they cannot be included in inventories. The corrected amount
should be $13,580,000 – $800,000 = $12,780,000.
b. To determine the ending value of inventory and cost of goods sold, first determine the
per-unit cost of the bikes manufactured in the year. Correcting for the error in part (a), to-
tal cost is $12,780,000. Production was 50,000 bikes, so cost per bike is $12,780,000 /
50,000 = $255.60
Beginning inventory 6,000 bikes × $250 / bike $ 1,500,000
Cost of goods manufactured 12,780,000
Cost of goods available for sale $14,280,000
Ending inventory 4,000 bikes × $255.60 / bike – 1,022,400
Cost of goods sold $13,257,600

c. If the error in inventory costing has not been corrected as per part (a), the inventory
would be overstated by $64,000, computed as follows:
Uncorrected cost per unit produced $13,580,000 / 50,000 bikes $271.60 / bike
Uncorrected ending inventory 4,000 bikes × $271,60 $1,086,400
Corrected inventory From part (b) 1,022,400
$ 64,000
In this particular scenario, this amount can also be computed more directly using the $800,000 of
overstatement:
$800,000 / 50,000 units of production = $16 / unit
$16 / unit × 4,000 units of ending inventory = $64,000
Note that this computation works in this case because the company uses FIFO and the ending
inventory costs all derive from production during the year. If the number of units in ending
inventory exceeds the number of units in beginning inventory, then this computation would be
incorrect.
d. The correcting journal entry is as follows. Note that the effect of the error needs to be
allocated between units sold and units remaining in inventory.
Dr. Salary and wages expense 300,000
Dr. Advertising and promotion expense 500,000
Cr. Inventory (from part c, $16 / bike × 4,000 units) 64,000
Cr. Cost of goods sold ($16 / bike × 46,000 units) 736,000
e. If the company had used the weighted-average cost method, the ending inventory and COGS
would be as follows:
Cost of goods available for sale (from part a) $14,280,000
Units available for sale 56,000 bikes
Weighted-average cost per unit $255 / bike
Ending inventory 4,000 bikes × $255 / bike $1,020,000
Cost of goods sold $14,280,000 – $1,020,000 $13,260,000

It is important to note that a change from FIFO to weighted-average cost would be a change in
accounting policy. Such changes must be reflected retrospectively, the same as would be for an
accounting error. Recognizing this fact, we begin with re-computing figures for 2013 and
carrying through the changes to the current year 2014. (Note that the information indicates that
prices were stable prior to 2013, so FIFO and WA cost numbers would not be materially
different.)
Begin-
gin- Purchas- Units Units COGS or Units
ning es or avail. sold or cost of in
inven- transfers for pro- goods inven- Ending
tory in* COGAS sale WA cost cessed processed tory inventory
Column A B C D E F G H I
Calculation A+B C/D E×F E×H
2013 $ $ $ # $ # $ # $
Glass 2,500 53,500 56,000 1,377 40.67 1,302 52,950 75 3,050
Aluminum 1,600 33,500 35,100 1,377 25.49 1,302 33,188 75 1,912
WIP 4,600 312,338 316,938 1,325 239.20 1,300 310,958 25 5,980
Fin. goods 24,200 310,958 335,158 1,421 235.86 1,301 306,855 120 28,303
2014 $ $ $ # $ # $ # $
Glass 3,050 74,700 77,750 1,310 59.35 1,250 74,189 60 3,561
Aluminum 1,912 50,700 52,612 1,310 40.16 1,250 50,202 60 2,410
WIP 5,980 340,491 346,471 1,275 271.74 1,260 342,395 15 4,076
Fin. goods 28,303 342,395 370,698 1,380 268.62 1,230 330,405 150 40,293
* Note that transfers into WIP and finished goods need to be adjusted for changes in cost in
earlier stages of inventory:
WIP transfer in (@WA cost) = WIP transfer in (@ FIFO)
+ change in cost of raw materials processed
2013 WIP transfer in (@WA cost) = $311,800 + (52,950 – 52,600) + (33,188 – 33,000)
= $312,338
2014 WIP transfer in (@WA cost) = $339,100 + (74,189 – 73,200) + (50,202 – 49,800)
= $340,491

With this information in hand, we can restate the financial statements.

2014 2013
Original Revised Original Revised
FIFO WA Cost Change FIFO WA Cost Change
Cash $ 8,900 $ 8,900 $ 0 $ 7,600 $ 7,600 $ 0
Accounts receivable 42,600 42,600 0 40,900 40,900 0
Inventories: raw materials 7,900 5,971 -1,929 5,500 4,962 -538
Inventories: work-in-process 5,100 4,076 -1,024 6,200 5,980 -220
Inventories: finished goods 48,400 40,293 -8,107 29,400 28,303 -1,097
Other assets 320,000 320,000 0 310,000 310,000 0
Total assets $432,900 $421,888 -11,060 $399,600 $397,745 -1,855
Total liabilities $113,800 $113,800 0 $137,900 $137,900 0
Contributed capital 5,000 5,000 0 5,000 5,000 0
Retained earnings 314,100 302,288 -11,060 256,700 254,845 -1,855
Total liabilities and equity $432,900 $421,888 -11,060 $399,600 $397,745 -1,855
Sales $561,000 $561,000 $ 0 $529,000 $529,000 $ 0

Cost of goods sold 321,200 330,405 +9,205 305,000 306,855 +1,855
Gross margin $239,800 $230,596 -9,205 $224,000 $222,145 -1,855
Operating expenses 182,600 182,600 0 178,300 178,300 0
Net income $ 57,200 $ 47,996 -9,205 $ 45,700 $ 43,845 -1,855
The cumulative effect on income over the two years is -$1,855 – $9,205 = -$11,060, which is the
amount by which retained earnings decreases. As the owner of Oculus speculated, using the
weighted-average cost method would reduce income by just over 10% of the income over the
two years ($11,060 / ($45,700 +$ 57,200)).
a. The company only has finished goods, which makes sense for a retailer.
b. Inventory cost includes purchase cost plus inbound shipping costs.
c. The company uses the weighted-average cost flow assumption.
d. Net realizable value is the estimated normal selling price less estimated selling expenses.
Note 3 on Significant Accounting Policies contains the above information.
e. Days of inventory = merchandise inventory / cost of sales = $1,448.6 m / $6,916.7 × 365

days = 76.4 days. Merchandise inventory is obtained from the balance sheet while cost of
sales is from Note 33. In 2010, this figure is $901.0 m / $6016.2m × 365 days = 54.7 days.
The increase in days of inventory is mostly a result of the acquisition of Forzani Group
Ltd. (FGL): the purchase was completed on August 18, 2011 (Note 1 and Note 8 of the fi-
nancial statements on pages 88 and 110), so the 2011 financial statements include only
about 4.5 months of FGL sales and cost of sales, but all of the FGL inventories at Decem-
ber 31, 2011. Note 8 also shows that FGL had $455.9 million of inventories on the date of

purchase. While the company does not disclose the cost of sales for FGL, it does indicate
that FGL contributed $645.6 million of revenue From August 19 to December 31, 2011. To
make the ratio comparable between the two years, one of two adjustments can be made: (i)
remove an estimated amount of inventory and cost of sales related to FGL, or (ii) increase
the cost of sales by extrapolating FGL sales and cost of sales to a full year.
a. The balance sheet shows inventories at $7,398 million. Note 15 on page 167 shows three
components comprising this amount, being: Aerospace programs ($3,845m), work-in-
process on long-term contracts ($1,737m), and finished products ($1,481m).
b. Work-in-progress on long-term contracts reflects the contracted price and the percentage
completed, in accordance with the percentage-of-completion method (see Chapter 4). That
is, the inventory amount includes not only costs, but also the profit margin on the contract.
See excerpt of accounting policy disclosure from page 149 shown below.
c. To determine the cost of inventories and cost of sales for aircraft, the company uses the
“unit cost method” (see excerpt below). This term is not standard terminology and is not
defined / explained elsewhere in the annual report. In context of aircraft (high value item),
it is likely to mean the specific identification method (i.e., the cost specifically identified
with each unit). This method is in contrast to the moving average method used for spare
parts.

P. Mini-Cases
Case 1: Rocky Dilemma. Suggested solution:
a. First note that this is the first year of operations, so the cost of goods available for sale
(COGAS) is equal to purchases (19,000 units with cost of $249,600).
There are 4,000 units in ending inventory. We can either first calculate the cost of ending
inventory, or the cost of goods sold. The following shows the former method.
FIFO ending inventory = 3,200 units × $16/unit + 800 units × $13/unit = $51,200 +
$10,400 = $61,600.
Weighted-average cost per unit = $249,600 / 19,000 units = $13.13684/unit.

Weighted-average ending inventory = 4,000 units × $13.13684/unit = $52,547.
Specific ID ending inventory = 3,500 units × $11/unit + 500 units × $13/unit = 38,500 + 6,500 =
$45,000.
Weighted
FIFO average Specific ID
Cost of goods available for sale $249,600 $249,600 $249,600
Ending inventory 61,600 52,547 45,000
Cost of goods sold $188,000 $197,053 $204,600

b. Using the given information and the results from part (a), we can calculate the relevant
ratios.
Weighted
FIFO average Specific ID
Current assets, excluding inventory $ 10,000 $ 10,000 $ 10,000
Ending inventory 61,600 52,547 45,000
Current assets 71,600 62,547 55,000
Non-current assets 107,000 107,000 107,000
Total assets $178,600 $169,547 $162,000
Current liabilities $ 32,600 $ 32,600 $ 32,600

Long-term bank loan 50,000 50,000 50,000
Total liabilities $ 82,600 $ 82,600 $ 82,600
Sales $284,000 $284,000 $284,000

Cost of goods sold (188,000) (197,053) (204,600)
Expenses, other than cost of goods sold (40,000) (40,000) (40,000)
Net income before bonuses $ 56,000 $ 46,947 $ 39,400
Ratio calculations:
Current assets 71,600 62,547 55,000
Current liabilities 32,600 32,600 32,600
Current ratio (2 to 1 preferred) 2.196 1.919 1.687
Total liabilities 82,600 82,600 82,600

Total assets 178,600 169,547 162,000
Total debt to total assets (<50% required) 46.2% 48.7% 51.0%
Net income before bonuses 56,000 46,947 39,400

Ending total assets 178,600 169,547 162,000
Return on ending total assets 31.4% 27.7% 24.3%
(prefer <25%)
RDL’s choice of cost flow assumption has economic (cash flow) consequences because the
choice affects ratios that determine (implicit and explicit) contractual outcomes. The FIFO
method results in the highest current ratio and lowest debt-to-assets ratio, which are prefera-
ble. However, this method would result in a bonus payment of $6,000 since ROA is 6.4%
above the threshold of 25%.
The weighted average method meets the debt-to-assets ratio requirement of <50%. It also
reduces the bonus payment (relative to FIFO) to $2,000. However, the current ratio falls
below 2, so future purchases will cost more. In the past year, purchases were almost
$250,000. If this amount is representative of purchases this coming year, a 10% increase in
cost would amount to $25,000.

The specific identification method results in no bonus payment because ROA is below 25%.
However, the current ratio is below 2, and the debt-to-assets ratio is above 50%. The latter is
particularly problematic since the bank could put the company into bankruptcy.
My recommendation is to use the FIFO method because it minimizes the cost of the different
contracts. Bankruptcy is of course a very undesirable outcome and the 10% increase in cost
of purchases would be substantial; these two costs greatly outweigh the additional $6,000 of
bonuses for the general manager.
Case 2: Eastern Pacific Lumber. Suggested solution:
The controller indicated that cost of goods sold per unit declined by 2.4%, which, on the surface,
is a good sign. This 2.4% is obtained as follows:
2015 cost of goods sold $ 176,642,000

Less: export tariffs $ (17,700,000)
2012 COGS excluding tariffs 600,000 $ 158,942,000 264.90
2014 cost of goods sold $ 164,203,000

Less: export tariffs $ (28,500,000)
2011 COGS excluding tariffs 500,000 $ 135,703,000 271.41
Decrease in COGS per unit -2.40%
While COGS per unit has decreased, it is not conclusive evidence that production costs have
decreased, because cost of goods sold is based on absorption costing and this method of costing
can have anomalous results due to the inclusion of fixed costs.
In fact, we can show that variable costs have actually increased from 2014 to 2015. To show this,
we need to determine the production volume for the two years. The following inventory
continuity schedule reconciles inventory on the balance sheet with production and sales
information. Calculated figures are in bold, while unbolded figures have been given.
# Units Total cost Cost/unit

Dec. 31, 2013 Inventory 170,404 $ 46,053,000 $ 270.26
+ 2014 production 502,574 136,700,000 272.00
- 2014 sales (500,000) (135,703,000) 271.41
Dec. 31, 2014 inventory 172,978 47,050,000 272.00
+ 2015 production 705,580 184,862,000 262.00
- 2015 sales (600,000) (158,942,000) 264.90
= Dec. 31, 2015 inventory 278,511 72,970,000 262.00

Using the production figures of 502,574 Mbf and 705,580 Mbf, we can determine the variable
costs per unit. While fixed costs per unit are not meaningful, they are also shown in the
following table to demonstrate the source of the decline in total cost per unit.
Costs # Units Cost/unit

2014 Production costs $ 136,700,000 502,574 $ 272.00
- Fixed costs (34,000,000) 502,574 (67.65)
Variable costs 102,700,000 502,574 204.35
2015 Production costs $ 184,862,000 705,580 $ 262.00

- Fixed costs (34,000,000) 705,580 (48.19)
Variable costs 150,862,000 705,580 213.81
Thus, variable costs per unit actually increased by $9.46. The decline in per unit production costs
is entirely due to the decrease in fixed costs per unit, which is due to the higher production
volume. By definition, fixed costs do not increase with production volume; by increasing
production, a fixed amount of cost is being spread over more units.
The production volume of more than 700,000 Mbf appears to be excessive given that sales in
2015 was only 600,000 Mbf. This has contributed to the inventory balance ballooning from $47
million to almost $73 million. This ties up valuable capital and increases storage costs.
The excessive production could be due to the incentive plan the company has in place. The
production manager receives $20,000 for each dollar that production costs fall below $280/Mbf.
By increasing production volume (without regard to the amount being sold), the production
manager maximizes his bonus. Furthermore, the chief operating officer receives a bonus based
on net income; lower cost per unit will benefit him as well, although he may become concerned
with the high level of inventory and the cost that entails.
There may be good reason for stockpiling the inventory that I am not aware of, such as in
anticipation of a big order to be filled soon after year-end. In any case, the board of directors
should consider revising the incentive plan for the production manager so that he is rewarded
based on variable costs, which he controls and is not subject to manipulation using production
volume. The board might also consider revising the incentive plan for the chief operating officer,
but that change is not as compelling. The COO’s responsibilities are more global and net income
is arguably a good enough measure.

Case 3: Mountain Mines Lubrication. Suggested solution:
To: Partner
From: CA
Re: Mountain Mine Lubrication Engagement
Overview
This engagement poses a number of risks for our firm. MML is a new review client, and the bank
will be relying on the financial statements in deciding whether to extend a new line of credit to
MML. These facts, combined with the fact that MML has liquidity problems that call into
question whether it is a going concern, make the risk of the engagement quite high.
MML has implemented a new method of revenue and expense recognition this year for some of
its clients. The change appears to have been implemented incorrectly, with the result that the
2014 financial statements are misstated. The new method has implications for the amounts
reported on the financial statements for inventory, cost of goods sold, and net income. Inventory
is of particular concern because it is a material item.
Misstatement of financial statements

For three of its customers MML recognizes revenue on the basis of hours of machine use. The
mining machines of these customers have been equipped with meters that measure that number
of hours that a machine operates. Each week the customers advise MML of the meter readings,
and MML bills the customer based on the number of hours of use. Revenue is recognized based
on the meter readings. However, the cost of the lubricant is fully expensed when MML is
notified that a new tub of lubricant has been poured into the machine. As a result, it could be
argued that a portion of the cost of the lubricant is being recognized before the revenue is
recognized. The result is that cost of goods sold is overstated and inventory understated because
too much lubricant is expensed at the time a machine is filled. MML should expense only that
portion of the cost of the lubricant that has been used since that is the basis of revenue recogni-
tion. If 20% of a tub of lubricant has been billed to the customer, only 20% of the cost should be
expensed.
Given the new billing arrangement that MML now uses for three of its customers, recognizing
revenue when lubricant is used is reasonable, although it is also possible to make an argument
for recognizing the revenue when the lubricant is poured into the machine. The critical event for
revenue recognition is actual usage of the machine. Alternatively, the new method can be viewed
simply as a billing arrangement. Once lubricant is put into a machine, it probably cannot be
returned to MML and the customer will ultimately have to pay for it. Under this approach
revenue recognition can be advanced to the point when the lubricant is put into a machine. In my
opinion, both approaches are acceptable. Deferring revenue and expense recognition to when the
lubricant is actually used is a more conservative approach. Either method would correct the error.
The effect on the revenue and expenses can be seen from the effect on the gross margins:

Slip Coat Maximum Guard

Gross Gross
Calculation Margin Calculation Margin
Gross margin per unit (16.00 – 13.50) / 16.00 15.6% (22.50 – 18.25) / 22.50 18.9%
Gross margin per the
$18,067 / $136,000 13.3% $31,892 / $200,250 15.9%
income statement
As the table shows, the gross margin per unit is greater than the gross margin per the income
statement. They should be the same. The error occurs because the method MML uses expenses
the cost of lubricant before all the related revenue is recognized, thereby increasing the cost of
sales and decreasing the gross margin. Because this billing method is new this year, last year’s
financial statements will not have any errors as a result of this method.
To calculate the amount of the error, we must determine the amount of lubricant that was most
recently put into machines that has been used up. This calculation is done using the number of
hours a machine has been used since the last top-up. The calculation is:
Amount of lubricant proportion of tub

× cost per kilogram ×
put in machine used1
1
Proportion of tub used is calculated on the basis of 28 days.
The cost of the remaining amount of lubricant is the amount by which inventory is understated
and cost of sales is overstated. The exact amounts are:
Cost of
lubricant put Remaining
into machine % used Amount used amount
Scorched Earth
Slip Coat $675.00 21.4% $145.00 $ 530
Maximum Guard 912.50 21.4% 195.50 717
Moon Crater
Slip Coat 675.00 64.2% 433.00 242
Maximum Guard 912.50 64.2% 585.50 327
Big Scar
Slip Coat 2,700.00 10.7% 289.00 2,411
5,475.00 4,889
Maximum Guard 10.7% 586.00
The cost of the amount remaining in the machines, $9,116, is the amount by which inventory is
understated and cost of sales is overstated. These errors are large, and they result in the financial
statements being materially misstated. The gross margin per the income statement and per unit
can be made the same by adjusting inventory and cost of sales.

The adjustment will increase net income and, as a result, the amount of tax that must be paid.
The amount of extra tax that MML will have to pay using the effective tax rate on the income
statement of 27.7% is $2,525. Given MML’s liquidity problem, this extra demand on cash flows
exacerbates the situation. It is likely that MML will want to do whatever it can to conserve cash
by minimizing taxes, and this may be the motivation behind the “error.”
Adjustment of the error is straightforward since MML already has estimates of the hourly usage
rates of lubricant. However, we must review the method used for determining the usage rate to
ensure it is reasonable. If MML has used very crude rules of thumb to estimate usage, the above
calculations may be significantly in error. Constant usage rates have been used across all
customers, and usage rates may vary depending on the equipment and conditions.
It must be made clear to MML that if the error is not corrected we will not be able to give
negative assurance on the financial statements.
There are a number of minor questions that need to be addressed so that we can have confidence
in the amount of revenue and expense that is recognized. First, is it possible for a customer to
buy lubricant from another supplier? If lubricant is purchased from another supplier, how does
this affect MML? Second, can the meters be tampered with or incorrect information conveyed to
MML? If they can be tampered with, does MML have policies in place to detect whether the
meters have been tampered with or if usage is otherwise under reported.
Potential theft of lubricant

There are inconsistencies in the information provided about the consumption of lubricant at
Scorched Earth Mine that may be the result of problems ranging from equipment breakdown to
the theft of MML’s product. The mine seems to be using large amounts of lubricant, as evi-
denced by the fact it is running low on lubricant even though it received a large shipment in the
spring. Yet Ms. Verhan has advised us that Scorched Earth’s meter reading was low, indicating
that the equipment is operating well below capacity. On the other hand, Mr. Mulholland told us
that the mine was working at capacity recently. We do not have enough information to explain
the inconsistency, but there are many possible explanations that need to be investigated so that
we can rule out explanations that have an impact on reporting. Mr. Mulholland’s information
may simply be incorrect, which would explain the low meter readings but not the high usage of
lubricant, unless the machines at the mine are very inefficient.
Scorched Earth may be using lubricant from other suppliers and only reporting usage of MML’s
lubricant. Another possibility is that the meter is broken and Scorched Earth has not noticed.
However, given that Scorched Earth is in financial trouble, we cannot easily rule out the
possibility of theft. We need to notify Mr. Mulholland immediately of our concerns so that he
can take his own steps to investigate. We should advise MML to consider not making further
shipments to Scorched Earth until payment is assured.
Cash crunch
Despite having higher net income in 2014 than in 2013, MML has a serious liquidity problem.
Inventory, plant, property and equipment, and accounts receivable have each increased signifi-
cantly over last year—inventory by almost 50%, plant, property and equipment by 29% and

receivables by almost 18%. These increases have been financed by suppliers through accounts
payable and by a sizable bank overdraft. MML’s current ratio has fallen from 2.66 in 1998 to
1.25 in 2014 and it has no cash reserves on hand.
Unless MML is able to generate a significant amount of cash, it may be unable to pay its short-
term obligations. Mr. Mulholland appears to be aware of the problem because he is attempting to
obtain a new line of credit from the bank. However, MML’s financial position is not strong, and
there is some doubt as to whether it can continue as a going concern. MML may be able to
increase the amount of bank financing it obtains by correcting the inventory misstatement
because the correction will increase inventory and thereby increase the amount of collateral
available to the bank.
Most of MML’s current assets are inventory. It is not clear why there has been such a large build
up of inventory. However, MML must be concerned about how long it will take for the inventory
to be converted to cash and whether it can be sold quickly to raise cash if needed. Compounding
any problems with selling inventory quickly is the fact that most of it is at mine sites that are far
from any major commercial centre. The implication is that it will be time consuming and costly
to recover and sell the inventory at these distant mine sites. However, despite the fact that the
inventory is at customer locations, it does belong to MML so if a customer does not pay, MML is
entitled to get its inventory back. Since the inventory belongs to MML, it should be insured even
if held at distant mine sites to protect MML’s investment in the inventory. The inventory at the
mine sites also poses an environmental risk: any damage caused by leakage or spillage may be
MML’s responsibility. While this is not an engagement issue at this time based on the infor-
mation available to us, we should advise the client to take steps to ensure that these potential
environmental problems do not occur.
One final point on the inventory: Two of the mines have very large quantities of inventory on
site. Assuming that lubricant in a machine lasts about four weeks, there is a 40-month supply at
Moon Crater and 17.5-month supply at Big Scar. While there is nothing inherently wrong with
having that much inventory at the mine sites, it does seem an inefficient use of resources,
especially when cash is so tight. However, transportation costs may justify this approach.
It is also not clear how collectable MML’s receivables are, given that one of its customers is in
financial trouble and another may have troubles (given the possibility that it may be stealing
lubricant from MML). I do not know at this point whether MML has made an allowance for
uncollectible accounts in its 2014 income statement. If no allowance has been made, the amount
of receivables may be overstated.
There are some steps that MML can take to improve its liquidity position in addition to obtaining
additional bank financing. It should try to refinance the $60,000 current portion of its long-term
debt. That alone would relieve a lot of the pressure on MML. It might also seek out new long-
term financing, either debt or equity, to finance its growth. In 2014 it financed its acquisitions of
plant, property and equipment through current liabilities. It is usually appropriate to finance
long-lived assets with long-term liabilities.

Case 4: James Television Inc. Suggested Solution:
a. Under ASPE, absorption costing has to be used for manufactured goods for external
financial reporting. The difference between absorption costing and variable costing is that
absorption costing includes the cost of fixed inventory overhead as product costs while
variable costing expenses fixed overhead costs in the period they are incurred. If all units
are sold in the current period, absorption and variable costing methods should result in
the same level of expenses. However, given that this is a new product and the company is
unlikely to sell all of its 20 units, absorption costing would result in lower inventory ex-
penses. In this case, one should note it is also debatable whether the company is manufac-
turing these products through Global Manufacturing Inc., or it is simply buying these
products from the other company. If it is the latter, then the goods should be accounted
for as purchased goods.
b. A perpetual inventory system is one that constantly keeps track of additions to and sales
of inventory while a periodic inventory system does not keep track of inventory and
COGS. In this case, considering the high price of each unit of inventory and its low sales
volume, it is beneficial for the company to account for its inventory using the perpetual
inventory system. FIFO is a cost flow assumption that uses the oldest costs in the compu-
tation of cost of sales. Considering the price of inventory is rising due to currency appre-
ciation of the Yen, FIFO would result in higher ending inventory on the balance sheet,
and COGS is relatively lower when older inventory items are assumed to be sold first. If
the company has an objective to increase net income, then FIFO is the preferred costing
method.
c. As price of buying the televisions from the Japanese manufacturers is increasing, it might
be a good idea to consider a new line of products. Provided that retail prices of televi-
sions remain rigid in Canada, currency appreciation of the Yen would reduce the profit
margin of the company. The downside of ordering the lower-cost televisions, however,
would be the uncertainty associated with selling these lower-cost products with little
brand recognition, and the possibility of this new line of products undercutting the sales
of the higher-end televisions. From a financial standpoint, if the company manages to sell
all its products, it would have sold more televisions than before and would be able to rec-
ord higher revenue. But it is hard to determine if retailers are willing to buy the lower-
cost televisions from the company, so the risk of inventory obsolescence and the chance
of inventory write-down are higher.

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“We must be near land,” said Mark. “Dust couldn’t come from
anywhere else. But I can’t see any land.” And he took another look
around—this time with difficulty, for the dust appeared to grow
thicker.
When the sun went down it was in a curious haze, which the
Norwegian sailor said was new to him. “Nefer see da sun lak dat,” he
said. “He look lak behine big smok.” And the boys agreed with him.
“It seems to me it is growing warmer,” came from Mark, as the
darkness settled around them. “I feel—what was that, a gun?”
A deep booming had reached their ears, coming from a great
distance. They listened and presently the sound was repeated,
rolling away like distant thunder.
“Is that a thunder storm?” questioned Frank of the sailor.
“I t’ink no sturm. I t’ink dat be da breakers. But no can see him.”
They looked around for the breakers, or for some sign of reefs, but
darkness was now settled upon every side. The booming continued
at long intervals, but they concluded that it must be miles away.
“I never heard of anything like it,” came from Mark. “First the dust
and now this noise. It’s certainly strange.”
“The raft is moving swifter, too,” returned Frank. “I’ve noticed it for
some time. There must be some sort of a current here.”
Their attention was now directed to this new discovery, and soon
they noticed that the raft was certainly moving in a direction south-
east by south, to use the nautical term. And it was going at the rate
of twenty or thirty miles an hour!
“The whole ocean looks different here,” said Mark, “What do you
make of it?” he asked of Sven Orlaff.
The Norwegian could not explain. He said the water had an
appearance which he had never seen. On the surface was a sort of
scum which, on being examined, proved to be, in part, of the dust
they had previously noticed.
“Put your hand into the water,” cried Frank. “It is surely warmer!”
They did so. Frank was right, the water was at least ten degrees
hotter than it had been. Not only this, it was growing hotter each
minute, until it got so they could scarcely put their hands into it.
“We are in for it now,” muttered Mark. “I don’t know what can be the
matter, but something is surely wrong.”
As if to add to the peril of the situation the raft now began to spin
around and sank several feet, as if about to go down. All clutched
each other, but soon the spinning ceased and the lumber moved
onward as before, sending the flying spray in all directions. They had
to cling fast with all their strength, for fear of being hurled off.
“If we were on a river I should say we were rushing for some
cataract,” said Mark. And then he added: “Don’t you remember,
Frank, how we went over that falls on the Orinoco?”
“I’ll never forget it,” answered Frank, with a shudder. “But, unless I
am mistaken, this is going to prove a ten times worse adventure.
That came to an end in short order—there is no telling where this will
wind up.”
Night had now settled down fully. There was no moon, and if the
stars were shining they were obscured by the strange dust, which
now came down as thickly as ever. They had to keep their eyes
closed for the greater part and breathed only with difficulty.
“If only we would strike land of some sort,” sighed Frank. “Even a
few rocks with trees would be better than this boundless deep.”
“I suppose the professor and Sam and Darry have given us up for
lost,” observed Mark.
“Perhaps the steamer went down, Mark. She must have been
rammed fearfully by that heavy lumber vessel. A single stick of
timber is a big battering-ram in itself.”
They questioned the Norwegian sailor, but he could not tell how
seriously the steamer had been injured. “Da water come ofer me,” he
said. “I mak big fight—no t’ink of da ships. I catch da lumber and hol’
fast. Den da ships go away and no can see dem t’rough da sturm.”
It was a night long to be remembered. The hours wore away slowly.
Each took a nap in turn, while the other two remained on guard.
Sound sleeping was out of the question, for there was no telling what
would happen next. If the truth be told, the anxiety of the two boys
was heartrending. They would have given all they possessed, or
ever hoped to possess, to have been upon terra firma once more.
But all times must have an end, and gradually a light in the East
proclaimed the coming of another day. The sky was still murky, but
not with the dust of the day before. Heavy clouds, not unlike thick
smoke, hung over the southern horizon, and these gradually
mounted higher and higher until the light of the rising sun was again
obscured. The raft was moving on still, but more slowly. The water
was just as hot as ever.
“Do you see anything?” questioned Frank, as Mark got up on the
highest point of the lumber to look around.
“I think I do,” was the slow answer. “Orlaff, look here.”
The Norwegian sailor readily complied, and Frank joined the pair.
“Dare is somet’ing,” said the sailor, slowly, pointing with his arm. “I
t’ink he is a boat—yes, t’ree, four boats. And back in da cloud is a
mountain.”
“It must be land!” cried Mark. “Oh, I hope it is!”
“But what is that big cloud?” questioned Frank.
“Some sort of fire, I guess,” returned Mark. “See! see! the boats are
coming this way! Oh, Frank! we are saved!”
“I see more boats, Mark! Five, six, eight, ten,—there must be at least
twenty of them. The natives must be going out to fish.”
Wild with delight at the approach of the boats, they yelled at the top
of their lungs and waved coats and the shirt frantically. Even Sven
Orlaff joined in the demonstration, yelling in a voice that sounded as
if it was coming through a megaphone.
“They see us!” cried Mark, after another painful pause. “See, they
are heading this way!”
“Look! look!” screamed Mark, pointing beyond the boats. “What a
fearfully black cloud! And it is rolling this way! And listen to the
thunder? Frank, that cloud is rolling from the mountain, and I think I
can see the flashes of lightning.”
It was all very strange to them, and they stared in open-mouthed
wonder at the phenomenon. What it could mean they could not
surmise. Then the raft began to whirl around and around, throwing
them down in a heap, while the air became so murky and full of gas
they could scarcely breathe. They clutched the lumber and the
chains and held fast, and for the time being the boats in the distance
were forgotten.
CHAPTER XXVIII
THE ERUPTION OF MONT PELEE
To those on board of the Vendee the hours dragged along dismally.

Neither Sam nor Darry knew what to do, and Professor Strong was
equally perplexed. The only person who was not deeply affected was
Hockley.
“It’s too bad,” he said to Sam. “But it couldn’t be helped, and we’ve
got to make the best of it.”
“You have never known what it is to have a real chum, Glummy,”
retorted Sam. “If you had one, and he was taken off as Frank and
Mark have been, you wouldn’t talk in this fashion. It’s dreadful to
think they have been drowned.”
“Well, crying about it won’t bring ’em back,” answered the tall youth,
unfeelingly.
“No, it won’t, but—but I can’t get over it yet—and perhaps I’ll never
get over it,” came from Sam, and then he turned away, unwilling to
continue the conversation with one so thoroughly unsympathetic.
Professor Strong walked the deck constantly. His mind was on the
missing boys and on their fathers, whom he expected to meet at St
Pierre. What should he tell those parents when they met? He could
well imagine their deep grief. And perhaps they would think it had
been his fault that they had been washed overboard.
“I should have compelled them to remain in the cabin,” he groaned to
himself. “Yes, that was my duty, in such a storm as that! I wish they
were back—I’d give all I possess to bring them back!” And he
continued his unsatisfactory walk back and forth, until even kind
hearted Captain Danvier grew tired of seeing the movements.
“You must calm yourself, my dear professor,” he said, in French. “It is
very sad, my heart goes out to you. I know what it is. And why not?
My own brother was washed from the deck in a storm and never
seen afterward. And I had to be captain just the same and bring my
vessel to the end of her trip. It was awful! Yes, I know how to feel for
you,” and he clapped a friendly hand on Professor Strong’s shoulder.
The air was murky and hot, so much so that even Sam and Darry
noticed it. They saw the cloud of smoke at a great distance, looking
at it through a marine glass the captain loaned them.
“The cloud is hanging over the northern end of the island of
Martinique,” said the professor. “There must be some sort of a forest
fire raging there.”
Soon somebody on deck reported that his eyes were filled with dust.
Half a dozen passengers and sailors were affected, and the dust
became so thick that it covered everything and made it look gray.
This was a most unusual occurrence and the professor was
appealed to for an explanation.
“This appears to be pumice,” he said, after an examination with a
microscope. “And if it is, it is most likely of volcanic origin. Pumice is
very light—so light that it will float on the water—which this is doing.
It is formed, so scientists say, by the gas coming out of lava while the
latter is in a melted state.”
“But where does it come from?” questioned Darry, who could not
help but be interested. “Is there any active volcano around here?”
“This pumice is so light that a fair wind will carry it for many miles,
Dartworth.”
“The wind is blowing up from the south-east,” put in Sam. “Do you
suppose it came from Martinique? That big black cloud looks
suspicious to me.”
“Perhaps Mont Pelee has become active again!” cried Darry. “It
certainly looks so.” And he pointed to the cloud, which looked
blacker than ever.
“That is not impossible,” said the professor. “You remember I told you
that that volcano had been active many times in the past. But I doubt
if the eruption will amount to anything. The volcano is considered to
be about burnt out.”
“Yes, it is no longer dangerous,” put in Captain Danvier, speaking in
French. “I myself was to the top with an excursion party but two
months ago. There was a beautiful lake there and no sign of fire. An
outbreak there would amount to but little.” And then he told how he
had often discussed the volcano with his friends at St. Pierre and
Fort de France and how all had agreed that the volcano’s activity
was of the past,—that is, so far as its capabilities for doing much
damage was concerned.
The dust proved so disagreeable that the professor and the boys
remained in the cabin the greater part of the time. It was now noticed
by the sailors that the sea was running in a strange manner and that
the flying spray was unusually warm. A bucket of water was hauled
up for examination and all were astonished to learn how hot it was.
“Perhaps there has been an under-water eruption,” said Professor
Strong. “But that would not account for this thick dust. It is a most
remarkable occurrence.” He was so interested that for the moment
his grief was forgotten.
They had been approaching the island from the north, and now they
turned due southward, to run down the coast to the harbor of St.
Pierre. Land was still but a speck in the distance when the darkness
of night closed in on the steamer.
“When shall we get to St. Pierre?” asked Sam.
“We be dare by daylight,” answered Captain Danvier. “Dat ees, if ze
dust don’t hold us back,” and he smiled, as if he was not very much
afraid.
Hardly had darkness settled down when the Vendee came to a
sudden stop and began to drift. Inquiries brought forth the
information that the engine had broken down, a portion of it having
been badly jarred when the steamer collided with the Dutch lumber
craft. There was no danger, and the chief engineer said he would be
able to repair the damage long before daybreak.
“This will make little difference to us,” said Professor Strong to the
boys. “We will get into St. Pierre harbor early in the morning and that
will do just as well as at night.” He spoke thus, little dreaming of how
much that delay meant to all on board.
When the sun arose the Vendee was still at rest on the bosom of the
sea. But repairs were going forward rapidly, and by half-past seven
the engine was once more in good running order and the steamer
resumed her course toward Martinique, which was now plainly
visible in the distance.
The volcanic dust had cleared away to a great degree and over
toward Mont Pelee, which arose majestically before them, only a
small black cloud hovered.
“There is the smoking mountain,” said the professor. “It doesn’t look
very alarming.”
The Vendee was not making over six knots an hour, the engineer
deeming it best not to strain the engine too greatly, so as they
passed along the coast they could see the shipping of the island and
the various industries. At one point they beheld a large smoking ruin
close to the water’s edge.
“That was a sugar factory—the Guerin,” said the captain, in French.
“It has been burnt down. And see, the houses around it have been
burnt down too.”
“The whole district is burnt down!” cried Professor Strong. “There
has been a serious calamity of some sort here. It looks to me as if
the volcano had become active. See the wreckage drifting along the
beach.”
“We shall soon know,” answered the commander of the steamer.
He turned to give some orders to his mate, leaving the boys and the
professor standing at the rail. Scarcely had he disappeared when a
fearful explosion in the distance burst upon the ears of all on board.
The noise was so great that it almost stunned them.
“Oh, what’s that?” cried Sam.
“Look! look!” yelled Darry. “The volcano!”
“The volcano! The volcano!” came the cry from all over the steamer.
No one could say more than that, for there was not time, nor was
there need. One look in the direction of Mont Pelee was enough to
stagger the stoutest heart.
The whole top of the mountain seemed to have gone up like a
discharge from a gigantic cannon. There was a vast cloud of
blackness sweeping and rolling in every direction, a blackness lit up
by patches of fire of various colors. The cloud came on and on,
growing larger and larger, until it hid the sun and made all as dark as
night. The fire was everywhere, filling the air like rain.
The captain of the Vendee was calling to the wheelman to turn the
steamer about when a mighty wave struck the craft, sending her
staggering to starboard. The boys held on like grim death, Hockley
shrieking in his terror. Then the vessel righted herself, only to be
heeled over again, worse than before.
And now that cloud, or the extreme edge of it, reached them and a
noxious gas made them gasp for breath. There was dust, mud and
red-hot stones in that cloud, and they fell everywhere on the deck of
the steamer as she turned to escape what looked like certain
destruction. Some of the fire landed on the boys and the professor,
and in a twinkling their clothes were aflame.
“Help! help!” roared Hockley. “I am burning up!” And then he made a
dash for the cabin, slapping out the fire as he ran. The others came
after him, putting out the flames as best they could.
All was confusion on board, the passengers running hither and
thither, not knowing what to do. “The volcano is bursting!” was the
cry. “We are doomed! The sea will open and swallow us!” Some fell
upon their knees praying, others ran to the captain imploring him to
run away from the land, while one nervous and highly excited old
man leaped into the sea, to be seen no more.
The sea was now foaming and boiling on all sides of the ship. The
hot stones as they fell sent up a loud hissing and some of them
cracked open with pistol-like reports. The superheated mud was of a
sticky nature and where it fell it dried fast like so much plaster.
In a few minutes the black cloud lifted somewhat, but the patches of
fire came down as thickly as ever. The Vendee was set on fire in a
score of places, the masts and tarry ropes flaming up like so many
torches. She had now been turned about and was running for the
open sea at the top speed of her engine.
“The ship is on fire! The ship is on fire!” Such was the cry taken up a
minute later, when it was seen that the craft had righted and was
running steadily on her new course. “We must put out the flames!
Form a bucket brigade!” And this was done, while the captain
ordered the hose brought into use.
His first surprise over, Professor Strong grew calm, and at once set
to work to do all in his power to assist in saving the Vendee. He
found a bucket, filled it with water and started to put out the fire that
had taken hold of a corner of the rear deck house. Without delay
Sam and Darry joined him. Hockley remained in the cabin, wringing
his hands in despair, afraid to remain alone and equally afraid to go
outside, where the patches of fire still filled the air.
“Boys, you had better keep under shelter,” panted Professor Strong,
as he worked away vigorously, not only with the water bucket but
also with a wet swab he had discovered. “This is highly dangerous,
and——”
“No more so for us than for you,” interrupted Sam. “It’s our duty to do
all we can.”
“Creation! but this is awful!” panted Darry, as he too began to fight
the flames with another bucket.
“Wet your jackets—I have wet my coat,” said the professor. “And be
careful of your eyes. I think we are getting out of the zone of fire,” he
added, as he cast an anxious eye shoreward, where Mont Pelee was
still belching forth death and destruction.
The two boys did as advised, and soon the three were working like
Trojans, along with some other passengers and a number of the
steamer’s crew. The Vendee was now quivering from stem to stern
under her full head of steam, for the engineer had been told of what
had occurred and given to understand that they must either get away
or go down in that awful holocaust behind them.
Darry and Sam had just procured fresh buckets of water and were
doing their best to put out a patch of fire in a coil of ropes when they
heard a groan from Professor Strong, who, bucket in hand, was
staggering around clutching the air. Some hot volcanic dust had
taken the professor full in the face, cutting off his breath.
“The professor is overcome!” cried Darry and threw down his bucket
on the instant. Sam did the same, and both leaped forward just in
time to save the man from falling. The next moment Professor
Strong hung limply in their arms, his eyes closed. Not a sound came
from him, nor did he appear to be breathing.
“He’s dead!” muttered Sam, hoarsely. “Oh, Darry, this is the worst
yet!”
CHAPTER XXIX
THE DESTRUCTION OF ST. PIERRE
And now, while Mont Pelee is in full eruption, let us go ashore and
learn what was happening in the city of St. Pierre, with its twenty-five
thousand inhabitants and its five thousand refugees.
There had been more than one warning that this terrible catastrophe
was at hand. For a number of days outbreaks of more or less
importance had occurred, which had occasioned the lava dust and
the strange condition of the water encountered so far out at sea.
The first intimation that the inhabitants of northern Martinique had
that something was wrong was on Friday, April 25, 1902. On that day
curious vapors were seen to be rising above Morne Lacroix, the
highest summit of Pelee. A number of inhabitants went to investigate
and found the water in the lake on the mountain top boiling and
throwing off gases.
“We are going to have an eruption,” said some, but the majority
laughed and said it would amount to little or nothing.
The water in the lake continued to boil for several days, and then the
volcano began to throw up mud and cinders, which fell on all sides of
the crater. Still there was but little alarm, until on May 2d, when there
came a shower of cinders which completely covered some of the
villages near the mountain and even extended to certain portions of
St. Pierre.
The alarm was now greater, but still it was argued that St. Pierre was
safe. The leading newspaper of St. Pierre, Les Colonies, gave some
interesting information about the outbreaks, and spoke about the fine
dust which had entered every house and every store. This dust was
so obnoxious that some of the places of business had felt compelled
to close their doors. The inhabitants of the villages near to the angry
mountain were now coming into St. Pierre for protection, and
churches and many public buildings had to be opened for their
benefit. It was reported that all vegetation around the mountain itself
had disappeared and that even the roads and trails could no longer
be found, owing to the cinders and mud.
For two days cinders and mud continued to come from the mountain
and frequent explosions were heard accompanied by slight
earthquakes. The streets of St. Pierre and other towns close to the
mountain were covered with several inches of volcanic dust, and
business came to a standstill. Many began to leave the northern end
of the island, taking passage for Fort de France and other places
further southward. But still the majority of the citizens of St. Pierre
believed that the eruption would soon cease, and even the governor
of the island advised them to remain by their property until the
excitement was over.
The River Blanche flows down from Mont Pelee to the sea, midway
between St. Pierre and the village of Precheur on the north. Near
this stream stood the great Guerin sugar factory, with many valuable
plantations around it. On May 5th it was noticed that the river was
swelling and that its waters were of a black and gray color. Then the
river rose with remarkable rapidity and began to boil, and the terror-
stricken people near at hand saw that it was nothing more than a
torrent of lava and mud from the mountain sweeping down to engulf
them. On and on it came, leaping bridges and low-lying fields, and in
a few minutes not only the buildings of the factory, but also the
beautiful villas of the owners, the houses of the workmen, and trees
and all living things were swallowed up. The ocean went down a
distance of thirty or forty feet, leaving parts of the harbor bottom dry
at Precheur and at St. Pierre, and then arose with tremendous force,
sweeping the shipping about, smashing small craft of all kinds, and
causing a rush of people to the hills.
The alarm was now universal, and several meetings were held at St.
Pierre and other places, to decide what was best to be done. The
French war cruiser Suchet was called into service, to make an
examination and give all the relief possible. To add to the horror St.
Pierre was plunged into darkness that night, the electric light plant
failing to work.
For two days the terror of the people continued, and now they were
leaving, or trying to leave, as fast as they could make the necessary
arrangements. Those who owned valuable property hated, of course,
to give it up, and some said they would remain to the end, no matter
what occurred. There were constant showers of dust, and muddy
rains, and frequent rumblings as of thunder. Some parties that went
out to explore in the vicinity of the mountain reported that all was
chaos within three miles of Pelee, and that at some points the lava
and mud lay to a depth of ten feet.
The next day was Thursday, May 8th. It was Ascension Day, and
early in the morning the cathedral in St. Pierre and the churches
were open for divine service. A heavy cloud hung over Mont Pelee,
that same cloud which those on board of the Vendee saw and which
caused poor Frank and Mark on their raft so much uneasiness.
And then the great eruption.
What the people of St. Pierre thought of that fearful outburst no one
can tell, for out of that vast number, estimated at between twenty-five
thousand to thirty-one thousand people, not a single person
remained alive to tell the tale! Surely such an awful record is enough
to sadden the hardest heart.
Having already viewed this scene from the deck of the Vendee we
know that there was scant warning of this mighty outburst. From out
of the depths of Pelee issued mud, lava, stones, and a gigantic
volume of gas that rolled and fell directly down upon the doomed
city, cutting off every particle of life-giving air and suffocating and
burning wherever it landed. Men, women, and children were struck
down where they stood, without being able to do anything to save
themselves. The explosions of the gases, and the shock of an
earthquake, made hundreds of buildings totter and fall, and the rain
of fire, a thousand times thicker here than out on the ocean, soon
completed the work of annihilation. St. Pierre, but a short time before
so prosperous and so happy, was no longer a city of the living but
had become a cemetery of the dead.
It was something of this last outburst that reached Mark and Frank
and the Norwegian sailor, as they clung fast to the lumber raft as it
whirled and rocked in the boiling sea that raged on all sides of them.
Then a cloud as black as night swept over them, so that they could
scarcely see each other.
“What can it be?” murmured Mark. “Is it the end of the world?”
“The world is on fire!” shrieked Sven Orlaff, in his native tongue. “The
Lord God have mercy on us!” And he began to pray earnestly. The
boys did not understand him, but in the mind of each was likewise a
prayer, that God would bring them through that terrible experience in
safety.
At last the cloud lifted a bit and the sea became somewhat calmer.
Part of the lumber had become loosened and drifted off, so that the
raft was scarcely half as big as before. In the excitement Mark had
had his leg severely bruised and Frank’s left hand was much
scratched and was bleeding, but neither paid attention to the hurts.
“The boats—where are they?” questioned Mark, trying to clear his
eyes that he might see. All had drifted out of sight but one, a craft
with a single sail, which the strange current had sent close beside
them. This boat was filled to overflowing with people, Frenchmen
and negroes, all as terror-stricken as themselves.
“Help! Help us!” called the boys, and Sven Orlaff added a similar
appeal. But no help could be given—the boat was already
overloaded—and soon wind and current carried her out of sight
through the smoke and dust and the rolling sea.
Slowly the hours passed and gradually the sky cleared, although
over Mont Pelee still hung that threatening cloud of death. The sea
remained hot, and as the lumber raft drifted southward it
encountered numerous heaps of wreckage. Far off could be seen
the ruins of buildings which still smoked and occasionally blazed up.
“It’s a tremendous volcanic explosion,” said Mark, at last. “I believe
Mont Pelee has blown its head off.”
“Look! Look!” cried Sven Orlaff. “Da boat! We git da boat!”
He pointed but a short distance away. A boat was drifting toward
them, a craft probably twenty-five feet in length and correspondingly
broad of beam. The boat had had a mast but this was broken off
short and hung, with the sail, over the side.
Soon the boat bumped up against the lumber raft and they caught
hold of the wreckage and held fast. The body of the craft was in
good condition and they immediately leaped into the boat and began
to clear away the fallen mast and the sail with its ropes. There were
some signs of fire both at the bow and the stern but this had done
little but char the seats and gunwale. In the bottom of the boat rested
a keg and several boxes.
“This is much better than the lumber,” observed Frank, when they
were safely on board and had saved part of the mast and the sail. “I
suppose this boat either went adrift or the persons in her were
drowned. What do you suppose is in the keg and in the boxes?”
“Water in da keg,” announced the sailor, after an examination. He
took a long drink and the boys did the same. The water was very
warm but to their parched throats it was like nectar.
On breaking open the boxes they were found to contain eatables of
various kinds, evidently packed for a trip of several days. At once all
fell to, eating the first “square” meal they had had since drifting
around.
“There, that puts new life into a fellow,” exclaimed Mark, when he
had finished. “Now let us hoist that mast and sail and steer for St.
Pierre.”
“Do you believe this eruption reached that city?” questioned Frank,
with a look of new alarm suddenly showing itself on his worn face.
Mark gazed back blankly for an instant. “Great Cæsar, Frank! If it
did, and your father and mine were there——” Mark could not finish.
With sober faces the two boys assisted Sven Orlaff to hoist the
broken mast and fix it in place with ropes, of which, fortunately there
were plenty, they having been dragging in the water, thus escaping
the fire. Then the sail was hoisted, and they began a slow journey
southward, in the direction of St. Pierre harbor.
As the boat advanced more wreckage was encountered, and once
they passed a small raft filled with household goods. On top of the
goods lay the half burnt bodies of several people. Then they passed
the bodies of several cows and of a horse, and the wreckage
became thicker and thicker. The sights made them shudder and
grow sick at heart.
Night found them still on the sea, some distance west of St. Pierre,
for they had missed their reckoning by over a mile, Sven Orlaff being
but a common sailor and understanding little more of steering than
themselves. A horrible smell reached them, coming from the distant
shore.
When day dawned, it found them somewhat rested and eager to get
closer to land, although they determined not to go ashore until they
felt it would be safe to do so. Each of the boys was thinking of his
father. Was it possible that St. Pierre had been overcome and were
their parents dead?
As last they made out the distant city, and the harbor dotted here
and there with the burnt shipping. Directly in the roadstead rested
the wrecked and burnt hulk of a big steamship, the Roraima, of the
Quebec line. The Roraima had been caught with twenty-one
passengers and a crew of forty-seven on board, and of that number
less than a third were saved and many of these were horribly
crippled for life.
“Another ship! A man-of-war!” cried Frank, and he was right. Close at
hand was the big warship, the Suchet, sent north once more from
Fort de France to investigate the happenings of St. Pierre. The
captain of the warship had just taken on board the survivors from the
Roraima, and now a hail was sent to our friends and they too were
assisted to the deck.
CHAPTER XXX
LOOKING FOR THE MISSING ONES
“Oh, Mark, the city is laid in ashes! Nobody escaped!”

It was Frank who uttered the words, after a French naval officer, who
could speak English, had explained the situation.
“But some people must have gotten away,” insisted Mark, unwilling
to believe the awful facts. “Remember how we found our boat, and
how we saw those other boats further up the coast. They must have
had warning enough.”
“But the fiery blast came so quickly,” went on the younger youth.
“Those from the Roraima say it came in one gigantic swoop that
swept everything before it. If that is so, and our fathers were in the
city——”
“We must go ashore and make a search, Frank—that is, as soon as
it is safe to do so. I wonder where the Vendee is?”
“There is no telling. If she was in the harbor perhaps she was burnt
up like the Roraima and those other craft lying about,” answered
Frank, dismally.
It was truly a trying time on board of the warship, where the cries of
those suffering from burns could be plainly heard. The boys wanted
to help, but were told there were plenty of doctors for that purpose.
In the meantime Sven Orlaff had made himself at home among the
sailors.
Two hours later found the lads on shore, in company with a
searching party sent to bring in any persons who might be found
alive. The landing was made in a small boat some distance south of
the fallen city. There were two priests and several naval officers, and
also half a dozen Frenchmen, and two Americans who had business
interests in that locality.
It was with extreme difficulty that the boys picked their way along,
over the trunks of fallen trees and over rocks which were still hot to
the touch. Everything was blasted as if by a lightning stroke and
covered with mud, lava and ashes. Nothing could be seen of the
roadway, which was buried beneath stones, brick and other debris.
The boys had been told in their letters that their parents would stop
at the Hotel Rosa, on the Rue de Victor Hugo, one of the principal
streets of St. Pierre. One of the Americans in the party, John
Waterbury by name, was bound for this street, and the boys plodded
along beside him.
It took them two hours to gain the neighborhood, so great were the
ruins on all sides. Dead bodies were everywhere in evidence, some
buried under tons and tons of fallen stones and bricks. Even the
great cathedral and the massive bank buildings had not escaped. At
last John Waterbury came to a halt and heaved a deep sigh.
“As I thought,” he said. “Do you see yonder pile of smoking ruins?
That was where our three-storied business building stood, with a
stock of goods worth thirty thousand dollars. It is gone—every dollar
of it—and my two partners and our four clerks have probably lost
their lives also.”
“It is awful!” murmured Mark. He could scarcely speak. “Simply
awful! And where was the—the Hotel Rosa?” he faltered.
“That building over yonder. I can tell it only by that twisted iron railing
of the balcony. I have sat on that balcony many a time with my feet
on the railing. It doesn’t seem to be destroyed as utterly as our
building, but it is pretty well riddled.”
And riddled it was, from top to bottom, with the back and one side
wall completely demolished. In the street the wreckage lay five or six
feet deep, and over all was the mud and lava dust, still hot. The
boys’ feet were uncomfortably warm and looking at their shoes they
found that the soles were seared as by a hot iron.
There was no sign of life about the hotel. In one of the windows hung
the half doubled up body of a man, burnt beyond all possible
recognition. As the lads gazed at it a shiver passed over them
impossible to suppress. Could that be—but no, it was too horrible—
they would not believe it.
“Let us go!” whispered Frank, hoarsely. “I—I can’t stand it!” And he
swayed as if about to faint.
Mark caught his chum by the arm, and both picked their way to
where they had left John Waterbury. Nothing could be accomplished
while the ruins were so hot, and the American business men
accompanied them back to the shore below St. Pierre. Here they
learned that the warship had sailed to another quarter of the island,
but a relief boat named the Ridalla was at hand, and they were taken
on board this craft and made to feel at home.
From those on board of the Ridalla, Mark and Frank learned that the
Vendee had been spoken several hours before, and that the steamer
was now heading back to Martinique. She had suffered, as we
already know, but nothing had been lost but a number of ropes and a
corner of the cabin, which were burnt away.
“I’m glad they are safe,” said Mark. “The Vendee might have suffered
like the Roraima and those other ships.”
An hour later a lookout announced the appearance of the Vendee,
and not long after this the steamer came into the harbor and dropped
anchor. At once Mark and Frank begged to be taken on board and
their wish was speedily granted.
“Mark! Frank!” The cry came from Darry, who chanced to be on
deck, and the next moment the lad was fairly hugging the pair. “Well
of all that is wonderful! We had given you both up as lost!”
“We’ve had a hard time of it,” answered Mark. “How did you make
out?”
“Oh, we caught our share too, I can tell you that. The fire rained all
over the ship and we had to fight it like mad for over an hour. The
professor was overcome and Sam and I were afraid he was dead.
But he got over it after a while, and now he is as well as ever. I
suppose St. Pierre is a sight. But tell me how you escaped being
drowned. But no, come into the cabin first and see the others.”
Darry led the way, and soon they ran into all the others of the party.
There was another joyous greeting, in which even Hockley had the
good sense to join. Then each party had to tell its story, to which the
other listened with breathless attention.
“You were more than fortunate,” said Professor Strong, after Mark
and Frank had finished. “Getting aboard that lumber raft, and later on
the small boat, was certainly providential. And we were equally
fortunate in being delayed by the breaking down of the engine. Had it
not been for that the Vendee would surely be lying a wreck in St.
Pierre harbor.”
Captain Danvier was glad to see the boys, and from them learned
the particulars concerning the lumber vessel that had been struck.
“They will not prosecute me at law,” he said to Professor Strong, in
French. “They knew the collision was as much their fault as mine.”
And so it proved. Later on the Dutch owners of the lumber boat sent
several threatening communications, and Captain Danvier answered
in an equally threatening manner; and there the matter rested. It may
be as well to add that Sven Orlaff never went back to the lumber
boat, but enlisted instead in the service of a packet line running from
the West Indies to Brazil.
Word soon came for Captain Danvier to take his vessel to Fort de
France, and he sailed to that port with our friends on board. Sam and
Darry had wanted to go ashore to inspect the ruins but Hockley had
objected strongly.
“I don’t want to run any more risks,” said the tall youth. “I want to get
just as far away from that volcano as possible.”
They found Fort de France a busy place. It was fast filling up with
refugees from all parts of Martinique, and many public buildings had
been thrown open for the accommodation of the newcomers. More
than this, relief was already pouring in from many places, including
the United States, where the news of the terrible catastrophe had
shocked the whole nation.
Professor Strong would have been willing to leave the West Indies
without delay, but Frank and Mark stoutly objected to going before
they had learned something concerning their fathers, and he did not
care to sail without them.
“I’m going to make a systematic search,” said Mark to Frank, after
several days had been spent in Fort de France. “It is possible that
your father and mine came down here from St. Pierre.” And he and
Frank did make a search which lasted forty-eight hours.
It was then that they ran across a Frenchman who was in the
business of exporting dyewoods. The Frenchman had met Mr.
Robertson and Mr. Newton twice, and transacted some business
with both.
“They were up at St. Pierre three days before the great eruption,”
said the dyewoods exporter, who could speak good English. “They
told me that they were going to make a journey overland to Basse
Pointe, on the north coast. Whether they started before St. Pierre
fell, or whether they were caught on the way, I cannot tell.”
This conversation filled Mark and Frank with renewed hope that their
parents might have escaped, and they talked the matter over with
Professor Strong and Sam and Darry.
“Basse Pointe is a small town lying almost directly north of Mont
Pelee,” said the professor. “It is just as close to the volcano as St.
Pierre and has suffered a good deal, so they say, although not as
much as the city.”
“But couldn’t we go up there in some kind of a boat, or overland?”
questioned Mark, eagerly. “Perhaps my father and Frank’s are up
there?”
The professor said he would make inquiries, and set about doing so
without delay. He could find no boat running to Basse Pointe, but
there was a native craft about to sail for St. Marie, a village about ten
miles below the point they wished to gain.
“Then I’m going to St. Marie and travel overland to Basse Pointe,”
said Mark, and Frank said the same.
“And I’ll go with you,” put in Sam.
“Ditto myself,” chimed in Darry. “I want to see something of this
volcanic eruption before I leave Martinique.”
“Well, you fellows can go,” came from Hockley. “But you won’t budge
me. If there comes another downpour of lava, rocks and mud you’ll
all be killed.”
Darry was about to say something about a coward, when Mark
stopped him. “We don’t want Hockley anyway,” he whispered. “And it
is just as dangerous as he says.”
Another talk followed, and it was hard work for the boys to get
Professor Strong to consent to the plan. But the professor was
secretly as eager as any of them, for he knew that the scientific
magazines would welcome an article from his pen describing the
condition of this territory immediately after the great eruption.
“I cannot blame Mark and Frank for wanting to go,” he said. “But as
to you, Samuel, and Dartworth——”
“Oh, you must consent!” interrupted Darry. “What are we journeying
around for if not to see the sights? And this is such a sight as comes
only once in a lifetime.” So it was settled; and that evening found the
five on the ship bound for St. Marie. Hockley was left at a hotel in
Fort de France to await their return.
CHAPTER XXXI
DANGEROUS VOLCANO EXPLORING
The journey to St. Marie was made without special incident, and
thirty-six hours later the party landed in the little village, to find it all
but deserted. Many of the inhabitants had fled in boats and others
had journeyed overland to Fort de France.
On landing, the boys and the professor lost no time in making
inquiries concerning the road to Basse Pointe. They were told that it
ran along the shore, past Grand Anse, another village, also
deserted. There were a number of bridges to cross, and whether
these were in good condition nobody could tell.
“This is getting more risky,” observed the professor, but at that
moment a black man came up who could speak English, and he
offered to guide them to any point they wished to go providing they
would pay him a sum equal to five dollars per day,—this amount
being a small fortune to the fellow.
“We’ll take you up, Gambo,” said the professor. “Let us start at
once.” And they set off, each carrying some food with him, for there
was no telling what desolation lay in store for them.
Gambo was a bright, intelligent fellow, and under his guidance they
made rapid progress. By nightfall they reached Grand Anse, to find it
covered with volcanic dust and stones. Only four natives had
remained there, and they said they were going to depart as soon as
a certain boat came back for them. They asked Gambo about the
Americans, and then said they had seen some other Americans up
in the mountains, the day before the awful eruption.
“They must have been Mark’s father and mine!” cried Frank,
excitedly. “Ask them where they went to?”
Gambo did so. The reply was uncertain. The Americans had been at
a small settlement called Frodamalos but where they had gone after
that was not known.
“Where is Frodamalos?” questioned Professor Strong.
“Up the mountainside,” answered Gambo. “It is close to Pelee.”
“I don’t care—I’m going anyway,” said Frank. “I don’t believe we are
going to have any more eruptions—at least, not right away.”
Again there was a conference, but in the end the professor yielded,
and they went forward towards the interior of Martinique. The lofty
height of Mont Pelee was before them, still crowned with black
smoke and many-colored vapor. The mighty giant was resting,
preparatory to a greater exhibition of strength.
The evidences of the fearful eruption were more and more
pronounced as they advanced. Down near the shore the vegetation
had been only dust covered, here it was literally burnt up. The trees
were stripped bare, leaving only the black trunks standing. The
ground was cracked in a thousand places, while here and there were
large deposits of mud and lava, twisted and turned into all sorts of
curious shapes. Occasionally they passed the bones of some
animal, and in one spot they came upon the partly consumed bodies
of two natives who had died locked in each other’s arms. At the sight
of the dead natives Gambo fell upon his knees in horror. Then of a
sudden he leaped up, turned, and fled in the direction from whence
he had come, running as if a legion of demons were at his heels.
“He has deserted us,” said the professor, after calling for the negro to
come back. “Even the offer of five dollars per day in gold couldn’t
hold him after such a sight.”
“But I am not going to turn back,” said Mark, with set teeth, and he
strode on, with Frank beside him; and the others followed.
It was hard walking and climbing, and frequently they had to pause
to get their breath. The air seemed to grow more suffocating as they
drew nearer to the volcano.
“It is the gas,” said Professor Strong. “I think we had better go back.”
And he shook his head doubtfully.
“There are the ruins of a village!” exclaimed Sam, pointing to a hill on
their left. “That must be Frodamalos.”
Without replying Mark led the way toward the spot pointed out. They
had to cross a bed of lava and mud that was still warm, and then
leap a wide ravine before they could get close to the wreckage of
huts and houses.
“Not a person in sight, nor a dead body,” remarked Frank, as they
gazed about them. “That looks encouraging. Everybody here
evidently got out before the big explosion.”
“Let us go a little closer to the volcano, now we are here,” suggested
Sam. “I don’t believe there is any immediate danger of another
outburst.”
The sight of the lofty mountain, with its smoke and vapor, was a
fascinating one, and cautiously they moved forward once more until
they could see the openings and the streams of lava quite plainly.
The top of the mountain appeared to be split into several sections,
and at one point they could see a ruddy glow that betokened a vast
fire beneath.
“Come, let us go back,” said Professor Strong, decidedly. “This is far
too dangerous. We have seen enough.” And he caught Mark and
Frank by the arm.
“Look! look!” cried Darry, pointing with his hand. “The fire is growing
brighter!”
“And the lava is beginning to flow again!” ejaculated Sam. “You are
right, professor, we had best get away from here!”
All looked back and saw that Sam was right. The lava was beginning
to flow from two of the vents in the mountain top. It was a steaming,
hissing and dangerous looking mass, and began to move down on
both sides of them.
“We must run for it!” exclaimed Professor Strong. “If we do not that
lava may cut off our retreat. Come!” And he set off, with all of the
boys around him.
It was no easier to descend the mountainside than it had been to
come up. Rocks and loose stones were numerous, and it appeared
to them that some of the cracks in the surface were wider than
before. Once Darry stumbled and fell, and the wind was knocked out
of him so completely that the others had to help him up and hold him
for a moment. Then they turned in the wrong direction and
encountered a bed of half-dried mud into which they sunk up to their
shoe tops.
“Hi! this won’t do!” called out Sam, who was in the lead. “We’ll all be
stuck like flies on flypaper. We’ll have to go to the right.” And this
they did.
Looking back they saw that the lava was now flowing at a greater
rate than ever. It hissed and steamed viciously, as if anxious to
overtake them. The main flow on their right had divided into two
streams and one of these was coming straight for them!
“We must get to the other side of yonder split in the rocks!” cried
Professor Strong. “It’s our only hope. Come, boys!” And he urged
them before him.
The crevasse he mentioned was a good fifty yards away, and now
the lava was approaching with incredible swiftness, like some fiery
serpent bent upon their destruction. On and on they sped, until their
breath came thick and fast and poor Frank felt on the point of fainting
away. The professor caught him by the shoulder and almost dragged
him to the edge of the opening.
With the lava at their very heels the boys and Professor Strong made
the leap over the wide crevasse. The professor had Frank by the
hand and went over in safety with his charge, and the leaps of Mark
and Darry were equally successful. But poor Sam, as he started to
jump, slipped and fell.
“Help!” cried Sam, and then half fell across the opening, to clutch at
the edge of the crevasse with his hands. There was next to nothing
to hold to, and he was on the point of dropping out of sight when
Mark made a dive for him, followed by Darry. Each caught a wrist in
his grasp and pulled with all of his strength, and in a moment more
Sam was safe. But the escape had been a narrow one, and the
youth was as pale as a sheet.
As the whole party collected on the opposite side of the opening the
lava poured into it with an increased hissing and a rapid rising of
steam. Then, as the lava struck some water far below, there was a
loud report, followed by others.
“Come, we have no time to waste!” went on the professor. “That
opening will soon fill up and then the lava will be after us again. We
must get down to the ocean without delay.”
Again they went on, this time in an irregular line, each holding on to
the others. Frank had a stitch in the side, and so had Darry, but
neither dared to complain. They knew it was a run for life.
At last they came in sight of the sea, far below them, for they had
come out on something of a cliff. There was a rough path leading
downward, and over this they stumbled, they could scarcely tell how,
afterward. Then they ran out along a broad beach. They saw a boat
not far away and called loudly to those on board.
At first the craft refused to come in for them. It was a small affair,
manned by two Frenchmen. But Professor Strong promised the
sailors a big reward for their assistance, and presently our friends
were taken aboard.
“That ends volcano exploring for me,” gasped Sam, when they were
safe on board. “That was a close shave.”
“It certainly was,” came from Darry. “It was only that split in the earth
that saved us from that stream of lava.”
Neither Mark nor Frank said anything. The exploration, so far as
finding out anything about their parents was concerned, had been a
failure.
The French sailors were bound for St. Pierre by way of the north
passage around the island, and there was nothing to do but to
remain on board until the capital city was reached. It was now seen
that Mont Pelee was getting ready for another eruption.
This outburst, four-fold greater than those already described,
occurred the next day, while the small craft was well away from the
shore. The thunder and lightning from the volcano were something
stupefying, and tremendous masses of rocks and lava were hurled
forth, to lay the whole northern end of Martinique in complete
desolation. The ruins of St. Pierre were all but buried from sight, and
the force of the eruption was felt even as far south as Fort de
France, where much dust and not a few stones fell, to add to the
terror of a population already on the verge of despair.
It may be as well to add here that Martinique was at these trying
times not the only island in that vicinity to suffer from volcanic action.
On St. Vincent, a British possession one hundred miles further
south, the volcano called La Soufriere went into equal activity, and
an eruption at Mont Pelee was usually attended by a similar
happening at the other volcano, showing that the two were most
likely in some way connected. The activity of La Soufriere threw the
natives of St. Vincent into a panic, and although but few people,
comparatively, were killed, yet they flocked to Kingstown, the capital,
and many begged the government to aid them in getting away. It was
a time of great anxiety in all the Lesser Antilles and many predicted
that all these islands, which as already mentioned, are in reality
nothing but the tops of a long range of mountains, would either blow
up or sink into the sea.
CHAPTER XXXII
THE FATE OF CAPTAIN SUDLIP
By the time the small native craft reached the vicinity of St. Pierre
the great eruption was at an end, and Pelee had once more resumed
its normal condition, saving for the cloud of black smoke and the
strange vapor still clinging to its lofty top. Even from a great distance,
however, it could be noticed that the top of the grand old mountain
was split into several parts.
In the harbor of St. Pierre were collected a dozen or more steamers
sent from various ports to give aid to the sufferers who were flocking
in from many of the outlying districts. Provisions were to be had in
plenty, and also clothing, while a score or more of surgeons and
physicians stood ready to care for the sick, the wounded and the
dying.
“What an awful scene of desolation!” remarked Sam, as they gazed
at the distant ruin of the once prosperous city. “Everything seems to
be buried under the fall of lava and mud.”
“Yes, and the lava has turned to stone,” added Mark. “I don’t believe
they will ever rebuild this place.”
“It is not likely,” said Professor Strong. “Or, if they do, it will not be for
many years. In my opinion the whole north end of Martinique will be
abandoned, for there is no telling how soon Mont Pelee will belch
forth again.”
It was not long after this that they passed the wreckage of a French
sailing vessel which had been burnt near to the north shore of St.
Pierre. Another boat was at hand, transferring such of the cargo as
remained undamaged.
“I wonder what craft that is?” said Frank. “It looks something like a
boat we saw in the harbor of Havana.”

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Canadian 2nd Edition Lo Solutions

P6-1. Suggested solution:

Potential benefit True / False

P6-2. Suggested solution:

Copyright © 2014 Pearson Canada Inc. 6-141

that sell better or

P6-3. Suggested solution:

a. A department store—Perpetual. A department store has a wide range of products that

P6-4. Suggested solution:

Item Product Period

P6-5. Suggested solution:

Copyright © 2014 Pearson Canada Inc. 6-142

h. Heating cost for production plant during operating hours. √

P6-6. Suggested solution:

Copyright © 2014 Pearson Canada Inc. 6-143

P6-7. Suggested solution:

P6-8. Suggested solution:

P6-9. Suggested solution:

P6-10. Suggested solution:

Copyright © 2014 Pearson Canada Inc. 6-144

P6-11. Suggested solution:

P6-12. Suggested solution:

Copyright © 2014 Pearson Canada Inc. 6-145

P6-13. Suggested solution:

Cost of goods sold is then computed as follows:

P6-14. Suggested solution:

Total fixed overhead equals 500 units × $20,000/unit = $10,000,000.

Fixed overhead $20,000 500 $10,000,000

Copyright © 2014 Pearson Canada Inc. 6-146

P6-15. Suggested solution:

Fixed overhead $125 20,000 $2,500,000

Copyright © 2014 Pearson Canada Inc. 6-147

Deluxe line Cost per unit # batches Amount

P6-16. Suggested solution:

Production cost = 90,000/mbf × 3,230 mbf + $120,000,000

Copyright © 2014 Pearson Canada Inc. 6-148

e. With a single product, there is sufficient information here to compute an inventory

f. Cost of goods sold using variable costing is computed as follows:

P6-17. Suggested solution:

Ending inventory = 2,500 units × $11/unit = $27,500.

Copyright © 2014 Pearson Canada Inc. 6-149

P6-17. Alternative solution:

Compute COGS first, then ending inventory.

P6-18. Suggested solution:

a. WAC = COGAS / # units available for sale = $132,000 / 11,000 = $12.00.

P6-19. Suggested solution:

Compute ending inventory value first, then COGS.

P6-19. Alternative solution:

Compute COGS first, then ending inventory.

Copyright © 2014 Pearson Canada Inc. 6-150

P6-20. Suggested solution:

Cost of ending inventory = 1,000 units × $5.10/unit (latest purchase) = $5,100.

P6-21. Suggested solution:

Purchase, February 14 8,000 5.00 40,000

Purchases, March 7 4,000 4.95 19,800

Copyright © 2014 Pearson Canada Inc. 6-151

P6-22. Suggested solution:

Purchase, February 14 8,000 5.00 40,000

Purchases, March 7 4,000 4.95 19,800

COGS, January $ 61,400

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