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Chapter 8: Question 8Q (page 421)
Distinguish between product costs and period costs as they relate to inventory.
Product costs are directly attached to the inventory, whereas period costs are indirectly related to inventory.
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Trout Company uses the LIFO method for financial reporting purposes but FIFO for internal reporting purposes. At January 1, 2017, the LIFO reserve has a credit balance of \(1,300,000. At December 31, 2017, Trout鈥檚 internal reports indicatedthat the FIFO inventory balance was \)2,900,000 and for external reporting purposes the LIFO inventory balance was $1,500,000.What is the amount of the LIFO reserve and the LIFO effect related to 2017? What is the journal entry needed to record the LIFOeffect at December 31, 2017?
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.
Case 1: T J International
T J International was founded in 1969 as Trus Joist International. The firm, a manufacturer of specialty building products, has its headquarters in Boise, Idaho. The company, through its partnership in the Trus Joist MacMillan joint venture, develops and manufactures engineered lumber. This product is a high-quality substitute for structural lumber and uses lower-grade wood and materials formerly considered waste. The company also is majority owner of the Outlook Window Partnership, which is a consortium of three wood and vinyl window manufacturers.
Following is T J International鈥檚 adapted income statement and information concerning inventories from its annual report.
T J International
Sales \(618,876,000
Cost of goods sold 475,476,000
Gross profit 143,400,000
Selling and administrative expenses 102,112,000
Income from operations 41,288,000
Other expense 24,712,000
Income before income tax 16,576,000
Income taxes 7,728,000
Net income \) 8,848,000
Inventories.Inventories are valued at the lower of cost or market and include material, labor, and production overhead costs. Inventories consisted of the following:
Current Year Prior Year
Finished goods \(27,512,000 \)23,830,000
Raw materials and
work-in-progress 34,363,00033,244,000
61,875,000 57,074,000
Reduction to LIFO cost (5,263,000) (3,993,000)
\(56,612,000 \)53,081,000
The last-in, first-out (LIFO) method is used for determining the cost of lumber, veneer, Microllamlumber, TJI joists, and open web joists. Approximately 35 percent of total inventories at the end of the current year were valued using the LIFO method. The first-in, first-out (FIFO) method is used to determine the cost of all other inventories.
Instructions
(a) How much would income before taxes have been if FIFO costing had been used to value all inventories?
(b) If the income tax rate is 46.6%, what would income tax have been if FIFO costing had been used to value all inventories ? In your opinion, is this difference in net income between the two methods material? Explain.
(c) Does the use of a different costing system for different types of inventory mean that there is a different physical flow of goods among the different types of inventory? Explain.
Question: In January 2017, Susquehanna Inc. requested and secured permission from the commissioner of the Internal Revenue Service to compute inventories under the last-in, first-out (LIFO) method and elected to determine inventory cost under the dollar-value LIFO method. Susquehanna Inc. satisfied the commissioner that cost could be accurately determined by use of an index number computed from a representative sample selected from the company鈥檚 single inventory pool.
Instructions
(a) Why should inventories be included in (1) a balance sheet and (2) the computation of net income?
(b) The Internal Revenue Code allows some accountable events to be considered differently for income tax reporting purposes and financial accounting purposes, while other accountable events must be reported the same for both purposes. Discuss why it might be desirable to report some accountable events differently for financial accounting purposes than for income tax reporting purposes.
(c) Discuss the ways and conditions under which the FIFO and LIFO inventory costing methods produce different inventory valuations. Do not discuss procedures for computing inventory cost.
Explain the following terms.
(a) LIFO layer.
(b) LIFO reserve.
(c) LIFO effect.
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