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Chapter 8: Q4CA. (page 436)

Shawnee Corp., a household appliances dealer, purchases its inventories from various suppliers. Shawnee has consistently stated its inventories at FIFO cost.

Instructions

Shawnee is considering alternate methods of accounting for the cash discounts it takes when paying its suppliers promptly.From a theoretical standpoint, discuss the acceptability of each of the following methods.

(a) Financial income when payments are made.

(b) Reduction of cost of goods sold for the period when payments are made.

(c) Direct reduction of the purchase cost.

Short Answer

Expert verified

a) Acceptable

b) Not acceptable

c) Note acceptable

Step by step solution

01

Step1: Financial income when payments are made

A cash discount is like an income for the business. It is earned when obligations are paid off. So this is an acceptable way of recording the cash discount received.

02

Step 2: Reduction of cost of goods sold for the period when payments are made.

This is not an acceptable way of recognizing the cash discount. A cash discount is received on the selling price and is earned when the obligation is paid. On the other hand cost of goods sold is based on inventory acquisition costs. So this is not a GAAP-acceptable practice.

03

Step 3: Direct reduction of the purchase cost.

This is also not an acceptable method. Cash discounts are received on the selling price. In contrast, the purchase cost is incurred at the time of purchasing goods. So the income earned is not matched with the expense incurred.

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Most popular questions from this chapter

The following independent situations relate to inventory accounting.

1. Kim Co. purchased goods with a list price of \(175,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. How much should Kim Co. record as the cost of these goods?

2. Keillor Company鈥檚 inventory of \)1,100,000 at December 31, 2017, was based on a physical count of goods priced at cost and before any year-end adjustments relating to the following items.

(a) Goods shipped from a vendor f.o.b. shipping point on December 24, 2017, at an invoice cost of \(69,000 to Keillor Company were received on January 4, 2018.

(b) The physical count included \)29,000 of goods billed to Sakic Corp. f.o.b. shipping point on December 31, 2017. The carrier picked up these goods on January 3, 2018.

What amount should Keillor report as inventory on its balance sheet?

3. Zimmerman Corp. had 1,500 units of part M.O. on hand May 1, 2017, costing \(21 each. Purchases of part M.O. during May were as follows.

Units Unit Cost

May 9 2,000 \)22.00

17 3,500 23.00

26 1,000 24.00

A physical count on May 31, 2017, shows 2,000 units of part M.O. on hand. Using the FIFO method, what is the cost of part M.O. inventory at May 31, 2017? Using the LIFO method, what is the inventory cost? Using the average-cost method, what is the inventory cost?

4. Ashbrook Company adopted the dollar-value LIFO method on January 1, 2017 (using internal price indexes and multiple pools). The following data are available for inventory pool A for the 2 years following adoption of LIFO.

At Base- At Current-

Inventory Year Cost Year Cost

1/1/17 \(200,000 \)200,000

12/31/17 240,000 264,000

12/31/18 256,000 286,720

Computing an internal price index and using the dollar-value LIFO method, at what amount should the inventory be reported at December 31, 2018?

5. Donovan Inc., a retail store chain, had the following information in its general ledger for the year 2018.

Merchandise purchased for resale $909,400

Interest on notes payable to vendors 8,700

Purchase returns 16,500

Freight-in 22,000

Freight-out (delivery expense) 17,100

Cash discounts on purchases 6,800

What is Donovan鈥檚 inventoriable cost for 2018?

Instructions

Answer each of the preceding questions about inventories, and explain your answers.

Question:Two or more items are omitted in each of the following tabulations of income statement data. Fill in the amounts that are missing.

2016 2017 2018

Sales revenue \(290,000 \) ?$410,000

Sales returns and allowances 11,000 13,000 ?

Net sales ? 347,000 ?

Beginning inventory 20,000 32,000 ?

Ending inventory ? ? ?

Purchases ? 260,000 298,000

Purchase returns and allowances 5,000 8,000 10,000

Freight-in 8,000 9,000 12,000

Cost of goods sold 233,000 ? 293,000

Gross profi t on sales 46,000 91,000 97,000

Oasis Company has used the dollar-value LIFO method for inventory cost determination for many years. The following data were extracted from Oasis鈥� records.

Price Ending Inventory Ending Inventory

Date Index at Base Prices at Dollar-Value LIFO

December 31, 2017 105 \(92,000 \)92,600

December 31, 2018 ? 97,000 98,350

Instructions

Calculate the index used for 2018 that yielded the above results.

The following is a record of Pervis Ellison Company鈥檚 transactions for Boston Teapots for the month of May 2017.

May 1 Balance 400 units @ \(20 May 10 Sale 300 units @ \)38

12 Purchase 600 units @ \(25 20 Sale 540 units @ \)38

28 Purchase 400 units @ $30

Instructions

(a) Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 560units on hand, what is the cost of the ending inventory using (1) FIFO and (2) LIFO?

(b) Assuming that perpetual records are maintained and they tie into the general ledger, calculate the ending inventory using (1) FIFO and (2) LIFO.

Describe the LIFO double-extension method. Using the following information, compute the index at December 31, 2017, applying the double-extension method to a LIFO pool consisting of 25,500 units of product A and 10,350 units of product B. The base-year cost of product A is \(10.20 and of product B is \)37.00. The price at December 31, 2017, for product A is \(21.00 and for product B is \)45.60. (Round to two decimal places.)
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