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Chapter 8: Q.8-10BE (page 423)

Bienvenu Enterprises reported cost of goods sold for 2017 of \(1,400,000 and retained earnings of \)5,200,000 at December 31, 2017. Bienvenu later discovered that its ending inventories at December 31, 2016 and 2017, were overstated by\(110,000 and \)35,000, respectively. Determine the corrected amounts for 2017 cost of goods sold and December 31, 2017,retained earnings.

Short Answer

Expert verified

Corrected COGS and retained earnings are$1,325,000 and $5,275,000, respectively.

Step by step solution

01

Correct amount of cost of goods sold for 2017

As the ending inventory for 2016 is overstated by $110,000, the opening inventory for 2017 would have the same effect.

The ending inventory for 2017 is overstated by $35,000.

Overstatedamountofcostofgoodssold=overstatedopeninginventory-overstatedclosinginventory=$110,000-$35,000=75,000

correctamountofcostofgoodssold=currentCOGS-overstatedamount=$1,400,000-$75,000=1,325,000

02

Correct amount of retained earnings for 2017

As the COGS has been overstated, there would be an opposite effect on the retained earnings. Thus the retained earnings have been underestimated.

Correctamountofretainedearnings=currentretainedearnings+overstatedCOGS=$5,200,000+$75,000=5,275,000

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Most popular questions from this chapter

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.

Inventory information for Part 311 of Monique Aaron Corp. discloses the following information for the month of June.

June 1 Balance 300 units @ \(10 June 10 Sold 200 units @ \)24

11 Purchased 800 units @ \(12 15 Sold 500 units @ \)25

20 Purchased 500 units @ \(13 27 Sold 300 units @ \)27

Instructions

(a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under(1) LIFO and (2) FIFO.

(b) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the value of the ending inventory at LIFO?

(c) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the gross profit if the inventory is valued at FIFO?

(d) Why is it stated that LIFO usually produces a lower gross profit than FIFO?

Midori Company had ending inventory at end-of-year prices of \(100,000 at December 31, 2016; \)119,900 at December 31, 2017; and $134,560 at December 31, 2018. The year-end price indexes were 100 at 12/31/16, 110 at 12/31/17,and 116 at 12/31/18. Compute the ending inventory for Midori Company for 2016 through 2018 using the dollar-valueLIFO method.

George Solti, the controller for Garrison Lumber Company, has recently hired you as assistant controller. He wishes to determine your expertise in the area of inventory accounting and therefore asks you to answer thefollowing unrelated questions.

(a) A company is involved in the wholesaling and retailing of automobile tires for foreign cars. Most of the inventory is imported,and it is valued on the company鈥檚 records at the actual inventory cost plus freight-in. At year-end, the warehousing costs areprorated over cost of goods sold and ending inventory. Are warehousing costs considered a product cost or a period cost?

(b) A certain portion of a company鈥檚 鈥渋nventory鈥� is composed of obsolete items. Should obsolete items that are not currentlyconsumed in the production of 鈥済oods or services to be available for sale鈥� be classified as part of inventory?

(c) A company purchases airplanes for sale to others. However, until they are sold, the company charters and services theplanes. What is the proper way to report these airplanes in the company鈥檚 financial statements?

(d) A company wants to buy coal deposits but does not want the financing for the purchase to be reported on its financialstatements. The company therefore establishes a trust to acquire the coal deposits. The company agrees to buy the coalover a certain period of time at specified prices. The trust is able to finance the coal purchase and pay off the loan as itis paid by the company for the minerals. How should this transaction be reported?

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.
See all solutions

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