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Chapter 8: Question 7Q (page 421)
Define 鈥渃ost鈥� as applied to the valuation of inventories.
In valuing inventory, product costs are attached to the inventory.
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Shania Twain Company was formed on December 1, 2016. The following information is available from Twain鈥檚 inventory records for Product BAP.
Units Unit Cost
January 1, 2017 (beginning inventory) 600 $ 8.00
Purchases:
January 5, 2017 1,200 9.00
January 25, 2017 1,300 10.00
February 16, 2017 800 11.00
March 26, 2017 600 12.00
A physical inventory on March 31, 2017, shows 1,600 units on hand.
Instructions
Prepare schedules to compute the ending inventory at March 31, 2017, under each of the following inventory methods.
(a) FIFO (b) LIFO. (c) Weighted-average (round unit costs to two decimal places).
Arruza Co. is considering switching from the specific-goods LIFO approach to the dollar-value LIFO approach. Because the financial personnel at Arruza know very little about dollar-value LIFO, they ask youto answer the following questions.
(a) What is a LIFO pool?
(b) Is it possible to use a LIFO pool concept and not use dollar-value LIFO? Explain.
(c) What is a LIFO liquidation?
(d) How are price indexes used in the dollar-value LIFO method?
(e) What are the advantages of dollar-value LIFO over specific-goods LIFO?
At December 31, 2016, Stacy McGill Corporation reported current assets of \(370,000 and current liabilities of \)200,000. The following items may have been recorded incorrectly.
1. Goods purchased costing \(22,000 were shipped f.o.b. shipping point by a supplier on December 28. McGill received andrecorded the invoice on December 29, 2016, but the goods were not included in McGill鈥檚 physical count of inventorybecause they were not received until January 4, 2017.
2. Goods purchased costing \)15,000 were shipped f.o.b. destination by a supplier on December 26. McGill received andrecorded the invoice on December 31, but the goods were not included in McGill鈥檚 2016 physical count of inventorybecause they were not received until January 2, 2017.
3. Goods held on consignment from Claudia Kishi Company were included in McGill鈥檚 December 31, 2016, physical countof inventory at \(13,000.
4. Freight-in of \)3,000 was debited to advertising expense on December 28, 2016.
Instructions
(a) Compute the current ratio based on McGill鈥檚 balance sheet.
(b) Recompute the current ratio after corrections are made.
(c) By what amount will income (before taxes) be adjusted up or down as a result of the corrections?
As compared with the FIFO method of costing inventories, does the LIFO method result in a larger or smaller net income in a period of rising prices? What is the comparative effect on net income in a period of falling prices?
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.
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