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Chapter 8: Q4E. (page 424)

Colin Davis Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, which is debited for materials purchased and credited for materials requisitioned for use.

1. An invoice for \(8,100, terms f.o.b. destination, was received and entered January 2, 2017. The receiving report shows that the materials were received December 28, 2016.

2. Materials costing \)28,000, shipped f.o.b. destination, were not entered by December 31, 2016, 鈥渂ecause they were in a railroad car on the company鈥檚 siding on that date and had not been unloaded.鈥�

3. Materials costing \(7,300 were returned to the supplier on December 29, 2016, and were shipped f.o.b. shipping point. The return was entered on that date, even though the materials are not expected to reach the supplier鈥檚 place of business until January 6, 2017.

4. An invoice for \)7,500, terms f.o.b. shipping point, was received and entered December 30, 2016. The receiving report shows that the materials were received January 4, 2017, and the bill of lading shows that they were shipped January 2, 2017.

5. Materials costing $19,800 were received December 30, 2016, but no entry was made for them because 鈥渢hey were ordered with a specified delivery of no earlier than January 10, 2017.鈥�

Instructions -

Prepare correcting general journal entries required at December 31, 2016, assuming that the books have not been closed.

Short Answer

Expert verified

There would be two transactions dated Jan 2, 2017, and Dec 30, 2016 (Transaction no. 1 & 4 respectively) that needs to be corrected.

Step by step solution

01

Analysis of transaction

1) The purchase was based on f.o.b. destination, so the entry would be recorded on the receiving date of the inventory. As the receiving date of inventory is 28 Dec., there is a need to correct the journal entry.

2) There is no need to correct this transaction as the sale was f.o.b. destination so the sale would be recognized on unloading the inventory.

3) The entry has been recorded correctly because here, the material has been shipped on f.o.b. shipping point.

4) As the purchase is based on f.o.b. shipping point, the purchase would be recognized on the date of shipping. Thus, there is a need to correct the entry.

5) As the order is based on specific delivery, there is no need to correct books of accounts.

02

Correct journal entry

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Most popular questions from this chapter

Case 3: The Kroger Company

The Kroger Company reported the following data in its annual report (in millions).

January 31, February 1, February 2,

2015 2014 2013

Net sales \(108,465 \)98,375 $96,619

Cost of sales (using LIFO) 85,512 78,138 76,726

Year-end inventories using FIFO 6,933 6,801 6,244

Year-end inventories using LIFO 5,688 5,651 5,146

Instructions

(a) Compute Kroger鈥檚 inventory turnovers for fiscal years ending January 31, 2015, and February 1, 2014, using:

(1) Cost of sales and LIFO inventory.

(2) Cost of sales and FIFO inventory.

(b) Some firms calculate inventory turnover using sales rather than cost of goods sold in the numerator. Calculate Kroger鈥檚 fiscal years ending January 31, 2015, and February 1, 2014, turnover, using:

(1) Sales and LIFO inventory.

(2) Sales and FIFO inventory.

(c) State which method you would choose to evaluate Kroger鈥檚 performance. Justify your choice.

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.)

Norman鈥檚 Televisions produces television sets in three categories: portable, midsize, and flat-screen. On January 1, 2017, Norman adopted dollar-value LIFO and decided to use a single inventory pool. The company鈥檚January 1 inventory consists of:

Category Quantity Cost per Unit Total Cost

Portable 6,000 \(100 \) 600,000

Midsize 8,000 250 2,000,000

Flat-screen 3,000 400 1,200,000

17,000 \(3,800,000

During 2017, the company had the following purchases and sales.

QuantitySelling Price

Category Purchased Cost per Unit Sold per Unit

Portable 15,000 \)110 14,000 $150

Midsize 20,000 300 24,000 405

Flat-screen 10,000 500 6,000 600

45,000 44,000

Instructions

(Round to four decimals.)

(a) Compute ending inventory, cost of goods sold, and gross profit.

(b) Assume the company uses three inventory pools instead of one. Repeat instruction (a).

Question:Data for Amsterdam Company are presented in BE8-4. Compute the April 30 inventory and the April cost of

goods sold using the FIFO method.

Jane Yoakam, president of Estefan Co., recently read an article that claimed that at least 100 of the country鈥檚 largest 500 companies were either adopting or considering adopting the last-in, first-out (LIFO) method for valuing inventories. The article stated that the firms were switching to LIFO to

(1) neutralize the effect of inflation in their financial statements,

(2) eliminate inventory profits, and (3) reduce income taxes. Ms. Yoakam wonders if the switch would benefit her company.

Estefan currently uses the first-in, first-out (FIFO) method of inventory valuation in its periodic inventory system. The company has a high inventory turnover rate, and inventories represent a significant proportion of the assets.

Ms. Yoakam has been told that the LIFO system is more costly to operate and will provide little benefit to companies with high turnover. She intends to use the inventory method that is best for the company in the long run rather than selecting a method just because it is the current fad.

Instructions

(a) Explain to Ms. Yoakam what 鈥渋nventory profits鈥� are and how the LIFO method of inventory valuation could reduce them.

(b) Explain to Ms. Yoakam the conditions that must exist for Estefan Co. to receive tax benefits from a switch to the LIFO method.
See all solutions

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