Select Page

Week Three Exercise Assignment

Inventory

1. Specific identification method. Boston Galleries uses the specific identification method for inventory valuation. Inventory information for several oil paintings follows.

 Painting Cost 1/2 Beginning inventory Woods \$21,000 4/19 Purchase Sunset 21,800 6/7 Purchase Earth 31,200 12/16 Purchase Moon 4,000

WoodsandMoonwere sold during the year for a total of \$35,000. Determine the firm s

a. cost of goods sold.

b. gross profit.

c. ending inventory.

2. Inventory valuation methods: basic computations. The January beginning inventory of the Gilette Company consisted of 300 units costing \$40 each. During the first quarter, the company purchased two batches of goods: 700 Units at \$44 on February 21 and 800 units at \$50 on March 28. Sales during the first quarter were 1,400 units at \$75 per unit. The White Company uses a periodic inventory system. Using the White Company data, fill in the following chart to compare the results obtained under the FIFO, LIFO, and weighted-average inventory methods.

 FIFO LIFO Weighted Average Goods available for sale \$ \$ \$ Ending inventory, March 31 Cost of goods sold

3.Perpetual inventory system: journal entries. At the beginning of 20X3, Beehler Company implemented a computerized perpetual inventory system. The first transactions that occurred during 20X3 follow:

• 1/2/20X3 Purchases on account: 500 units @\$6 = \$3,000

• 1/15/20X3 Sales on account: 300 units @ \$8.50 = \$2,550

• 1/20/20X3 Purchases on Account: 200 units @ 5 = \$1,000

• 1/25/20X3 Sales on Account: 300 units @ \$8.50 = \$2,550

The company president examined the computer-generated journal entries for these transactions and was confused by the absence of a Purchases account.

a. Duplicate the journal entries that would have appeared on the computer printout under FIFO & LIFO

b. Calculate the balance in the firm s Inventory account under each method.

c. Briefly explain the absence of the Purchases account to the company president.

4. Inventory valuation methods: computations and concepts.

Wild Riders Surfboard Company began business on January 1 of the current year. Purchases of surfboards were as follows:

 Date Quantity Unit Cost Total Cost 1/3 100 \$125 \$12,500 4/3 200 \$135 \$27,000 6/3 100 \$145 \$14,500 7/3 100 \$155 \$15,500 Total 500 \$69,500

Wild Riders sold 400 boards at \$250 per board on the dates listed below. The company uses a perpetual inventory system.

 Date Quantity Sold Unit Price Total Sales 3/17 50 \$250 \$12,500 5/17 75 \$250 \$18,750 8/10 275 \$250 \$68,750 Total 400 \$100,000

Instructions

1. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods:

• First-in, first-out

• Last-in, first-out

• Weighted average

b. Which of the three methods would be chosen if management s goal is to

(1) produce an up-to-date inventory valuation on the balance sheet?

(2) show the lowest net income for tax purposes?

5. Depreciation methods.Mike Davis Enterprises purchased a delivery van for \$40,000 in January 20X7. The van was estimated to have a service life of 5 years and a residual value of \$6,000. The company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by using each of the following methods:

a. Units-of-output, assuming 17,000 miles were driven during 20X8

b. Straight-line

c. Double-declining-balance

6. Depreciation computations.Alpha Alpha Alpha, a college fraternity, purchased a new heavy-duty washing machine on January 1, 20X3. The machine, which cost \$2,000, had an estimated residual value of \$100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following:

a. The machine s book value on December 31, 20X5, assuming use of the straight-line depreciation method

b. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500.

c. Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method.

7. Depreciation computations: change in estimate.Aussie Imports purchased a specialized piece of machinery for \$50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of \$5,000. During the 5 years of operations (20X3 – 20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.

Instructions

a. Compute depreciation for 20X3 – 20X7 by using the following methods: straight line, units of output, and double-declining-balance.

b. On January 1, 20X5, management shortened the remaining service life of the machine to 15 months. Assuming use of the straight-line method, compute the company s depreciation expense for 20X5.

c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid \$47,800 for the machinery rather than \$50,000 In addition, assume that the company incurred \$800 of freight charges \$1,400 for machine setup and testing, and \$300 for insurance during the first year of use.

1. LIFO vs. FIFO

The controller of Sagehen Enterprises believes that the company should switch from the LIFO method to the FIFO method. The controller s bonus is based on the next income. It is the controller s belief that the switch in inventory methods would increase the net income of the company. What are the differences between the LIFO and FIFO methods?

Guided Response:
Analyze several of your peers posts. Let at least two of your peers know if a company is better off it switches from a LIFO method to a FIFO method? Explain your reasoning.

2. Depreciation

A variety of depreciation methods are used to allocate the cost of an asset to all of the accounting periods benefited by the use of the asset. Your client has just purchased a piece of equipment for \$100,000. Explain the concept of depreciation. Which of the following depreciation methods would you recommend: straight-line depreciation, double declining balance method, or an alternative method?

Guided Response: