CHAPTER 4

Inventories
Problem 1 (Venice Merchandising Company)
Reported inventory
Merchandise purchased FOB destination still in transit
Merchandise held on consignment
Merchandise purchased FOB destination still in transit
Correct amount of inventory

345,600
(14,800)
(19,200)
(40,000)
271,600

Problem 2 (Serendra Company)

Units on hand, July 31 (650 + 700 850)

500

a.

100 units @ 55
400 units @ 52
Cost of inventory, July 31 using FIFO

b.

Cost of goods available for sale

(650 x 51) + (600 x 52) + (100 x 55)
Number of units available for sale
Weighted average cost per unit

c.

July 1
July 3
July 5

Beginning
inventory
Sale
Balance
Purchase
Balance

5,500
20,800
26,300
69,850
1.350
51.74

650 units @ 51

33,150

(600 units @ 51)

50 units @ 51
600 units @ 52
650 units @ 51.92

(30,600)
2,550
31,200
33,750

Problem 3 (Mahogany Company)

Profit under FIFO
Difference in
Beginning inventory
Ending inventory
Profit under weighted average

2011
720,000

2012
1,000,000

2013
1,400,000

(280,000)
440,000

280,000
(200,000)
1,080,000

200,000
(500,000)
1,100,000

Problem 4 (Tuscany, Inc.)

a.

Sales
Purchases
Less ending inventory
Cost of goods sold
Gross profit
Gross profit rate 2012 600,000/2,400,000
Gross profit rate 2013 25% + 5%

2,400,000
2,200,000
400,000
1,800,000
600,000
25%
30%

b.

Merchandise inventory, beginning

Net purchases
Merchandise available for sale
Estimated cost of goods sold (3,120,000 x 70%)
Estimated ending inventory
Cost of undamaged merchandise (100,000 x 70%)
Realizable value of damaged merchandise
Inventory loss

400,000
2,320,000
2,720,000
2,184,000
536,000
(70,000)
(8,000)
458,000

c.

Estimated ending inventory

Cost of undamaged merchandise (100,000 x 70%)
Cost of damaged merchandise (30,000 x 70%)

536,000
(70,000)
(21,000)

13

Inventory loss

445,000

Problem 5 (Lafayette Company)

a.

b.
c.

Cost
115,000
600,000

Beginning inventory
Purchases
Additional markups
Markdowns

_______
600,000
715,000

Available for sale

Sales revenue
Ending inventory, at retail
Cost to retail ratio (600,000/1,000,000)
Estimated cost of ending inventory (60% x
400,000)
Cost to retail ratio (715,000/1,300,000)
Estimated cost of ending inventory (55% x
400,000)
Cost to retail ratio (600,000/1,200,000)
Estimated cost of ending inventory (50% x
400,000)

Retail
300,000
1,100,000
100,000
(200,000)
1,000,000
1,300,000
(900,000)
400,000
60%
240,000
55%
220,000
50%
200,000

Problem 6 (Palazzo Company)

a.
b.
c.

Amount of loss, December 31, 2013

1,000 sacks x (1,200 1,150)
Amount of gain from recovery, April 1,
2014
1,000 sacks x (1,180 1,150)
None. No loss and liability is recognized
if contract is cancellable.

50,000
30,000

Multiple Choice - Theory

1.

6.

2.

7.

3.

8.

4.

9.

5.

10
.

11
.
12
.
13
.
14
.
15
.

16.

21.

17.

22.

18.

23.

19.

24.

20.

D
25.

Multiple Choice - Problems

1.

2.

3.

4.

Reported inventory
Merchandise sold FOB destination still in
transit
Merchandise purchased FOB seller
Correct inventory, December 31, 2013
Physical count of inventory on December 31, 2013
Goods purchased FOB shipping point still in transit
Correct inventory, December 31, 2013
Purchases, net of returns (656,000 + 180,000 16,000)
Cash discount rate
Cash discounts available
Cash discounts taken
Discounts lost
Reported inventory
Goods sold in transit FOB destination (245,00020,000=225,000;225,000/1.5)

14

364,000
62,000
54,000
480,000
750,000
25,000
775,000
820,000
3%
24,600
(5,400)
19,200
1,500,000
150,000

5.

6.

7.

8.

9.

10.

11.

12.

13.
14.

A
B

Purchases of goods still in transit FOB shipping point

(300,000 + 30,000)
Cost of goods out on consignment (150,0001.5=100,000;
100,000+15,000)
Correct inventory, December 31, 2013
Reported inventory
Goods segregated and not yet delivered
Goods purchased FOB shipping point still in transit
Goods out on approval
Goods purchased FOB destination still in transit included in
inventory
Correct merchandise inventory
Physical count of inventory, October 31
Goods purchased FOB shipping point still in transit
Correct amount of inventory
Beginning inventory
80 units @ 2,000
Sale
(40 units @ 2,000)
Balance
40 units @ 2,000
Purchase
120 units @ 2,400
Balance
160 units @ 2,300
Beginning inventory
24 units @ 1,075
January 5 purchase
19 units @ 1,135
Balance
43 units @ 1,102
January 8 sales
(22 units @ 1,102)
Balance
21 units @ 1,102
January 24 purchase
38 units @ 1,180
Balance
59 units @ 1,152
January 30 sales
(36 units @ 1,152)
Balance
23 units @ 1,152
Cost of goods available for sale (25,800 + 21,565 +
44,840)
Units available for sale
Weighted average cost per unit
Units in ending inventory
Cost of inventory, January 31
Weighted average cost per unit
187,500 + 240,000 + 167,700 = 595,200; 595,200
48,000 units
Number of units in ending inventory (279,000 / 12.40)
Inventory, March 31 using FIFO
13,000 units
9,500 units @ 12.00
Total
Net profit under FIFO 2011-2013
Net profit under weighted average 2011-2013
Difference in ending inventory of 2013
2013 ending inventory under FIFO
2013 ending inventory under weighted average
Profit for 2011-2013 under weighted average
Difference in ending inventory of 2013 (2,150,000
1,720,000)
Profit for 2011-2013 under FIFO basis
Estimated cost of goods sold (3,640,000 1.30)
Inventory, January 1, 2013
Purchases
Available for sale
Estimated cost of goods sold (3,640,000 x 70%)
Estimated cost of merchandise , at the end
Realizable value of damaged merchandise

15

330,000
115,000
2,095,000
2,500,000
40,000
15,000
200,000
(25,000)
2,730,000
38,750
3,000
41,750
160,000
(80,000)
80,000
288,000
368,000
25,800
21,565
47,365
(24,244)
23,121
44,840
67,961
(41,472)
26,489
92,205
81
1,138
x 23
26,174
12.40
22,500
167,700
114,000
281,700
910,000
560,000
350,000
710,000
360,000
2,950,000
430,000
3,380,000
2,800,000
550,000
3,000,000
3,550,000
2,548,000
1,002,000
50,000

15.

16.

17.

18.

Estimated cost of merchandise lost by the fire

Inventory, January 1, 2013
Purchases (net)
Available for sale
Estimated cost of goods sold (6,260,000 x 60%)
Estimated ending inventory
Cost of undamaged merchandise (60% x 210,000)
Net realizable value of damaged merchandise
Inventory lost by fire

952,000
1,700,000
3,600,000
5,300,000
3,756,000
1,544,000
(126,000)
(53,000)
1,365,000

Inventory, December 31, 2012

Purchases
Unrecorded purchase
Deposit with suppliers entered as purchases
Cost of goods available for sale
Estimated cost of goods sold
Cash sales
Credit sales (1,800,000 + 300,000
250,000)
Total sales
Cost percentage
Estimated cost of inventory, December
31, 2013
Reported amount of inventory
Estimated inventory shortage
Inventory, January 1, 2013
Purchases
Total received and recorded
Freight in
Credit memo for purchase returns
Purchase discounts
Goods purchased FOB shipping point still
in transit
Cost of goods available for sale
Estimated cost of goods sold
Sales delivered and recorded
Unrecorded sales invoice
Sales returns
Net sales
Cost rate
Estimated ending inventory
Salvaged merchandise
Goods still in transit, undamaged
Inventory loss

320,000
1,410,000
10,000
(20,000)
1,720,000
350,000
1,850,000
2,200,000
60%

360,000
40,000
550,000
3,000,000
60,000
(200,000)
(80,000)
120,000

Available for sale

Cost to retail ratio (3,150,000
4,200,000) = 75%
Net sales
Ending inventory at retail

16

2,900,000
3,450,000

3,600,000
300,000
(160,000)
3,740,000
70%

Cost
650,000
2,450,000
50,000

Beginning inventory
Purchases
Freight in
Net markups
Net markdowns

1,320,000
400,000

________
2,500,000
3,150,000

2,618,000
832,000
(50,000)
(120,000)
662,000
Retail
1,075,000
3,025,000
400,000
(300,000)
3,125,000
4,200,000
(3,880,000)
320,000

19.
20.

21.

B
C

22.

23.

24.

25.

26.

Ending inventory at estimated cost

(320,000 x 75%)
Cost to retail ratio (2,500,000 3,125,000) = 80%
Ending inventory at estimated cost
(320,000 x 80%)
Cost
Beginning inventory
180,000
Purchases
1,020,000
Net markups
Net markdowns
________
Available for sale
1,200,000
Cost to retail ratio (1,200,000
1,875,000) = 64%
Sales
Normal shoplifting losses
Ending inventory at retail
Ending inventory at estimated cost
(150,000 x 64%)
Cost
Beginning inventory
800,000
Purchases
2,970,000
Freight in
40,000
Net markups
________
3,010,000
Cost to retail ratio (3,010,000
4,300,000) = 70%
Cost of goods available for sale
3,810,000
Sales
Shortages
Net markdowns
Ending inventory at retail
Ending inventory at estimated cost
(1,600,000 x 70%)
Cost
Net realizable value (1,200 420)
Lower
Cost
Inventory valuation at lower net realizable value
(408,000 -20,000)
Loss
Total cost
Total inventory valuation at lower of cost or net
realizable value
A
700,000
B
1,500,0
00
C
1,450,0
00
D
800,000
Inventory write down
Allowance for inventory write down before
adjustment
Loss on inventory write down
Profit before adjustments
Cash advance for 2014 sales credited to sales of 2013
Overstated beginning inventory
Understated ending inventory
Correct profit
Reported net income

17

240,000
256,000
Retail
250,000
1,575,000
175,000
(125,000)
1,875,000
(1,705,000)
(20,000)
150,000
96,000
Retail
1,400,000
4,200,000
100,000
4,300,000
5,700,000
(4,000,000)
(80,000)
(20,000)
1,600,000
1,120,000
680
780
680
400,000
388,000
12,000
5,000,000

4,450,000
550,000
200,000
350,000
658,000
(40,000)
71,000
96,000
785,000
320,000

27.

28.

29.

30.

Understated beginning inventory

(20,000)
Goods counted twice in December 31 inventory
(12,000)
Understated sales for goods shipped FOB shipping point
33,000
12/29/13
Correct profit
321,000
The costs per unit increases (inflation situation); thus, FIFO profit
would tend to be higher than average method.
Cost : 29,000; NRV: 54,000 20,000 3,000
4,000 = 27,000
Lower is 27,000
Product
Cost
NRV
Lower
Splendid
2,500
2,400
2,400 x
200=480,000
White Sugar
1,500
1,600
1,500 x
500=750,000
Muscovado
1,300
2,000
1,300 x
250=325,000
Total
1,555,000
Product
Cost (FIFO)
Net realizable
Lower
value/unit
A
30,000 @ 8.00
8.00 x .90 x .90 =
45,000 x 6.48 =
6.48
291,600
15,000 @ 6.50
B
25,000 @ 10.50
11.00 x .90 x .90 =
25,000 x 8.91 =
8.91
222,750
C
30,000 @ 1.25
2.00 x .90 x .90 =
30,000 x 1.25 =
1.62
37,500
20,000 @ 0.90
20,000 x 0.90 =
18,000
569,850

18