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Exam 8: Cost-Based Inventories and Cost of Sales

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Question 61

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Based on the following data, determine the approximate valuation of ending inventory in each case given below: $\begin{array} { | l | l | l | } \hline \text { Cost of goods available for sale } & \$ 400 & \\\hline \text { Net sales } & & 600 \\\hline\end{array}$ Case A-Gross margin rate on sales = 40 percent: Inventory valuation is $________________________ Case B-Gross margin rate on cost = 100 percent: Inventory valuation is $________________________

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Question 62

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Which of the following items should not be included in the inventory at year-end?

A) Goods that are owned by a company
B) Goods returned by a customer
C) Goods out on consignment
D) Goods held on consignment for sale on commission

E) A) and D)
F) B) and D)

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Question 63

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Inventories are assets consisting of goods owned by the business and held for future sale or for use in the manufacture of goods for sale.

Sporting Goods Galore Ltd. uses the retail method of inventory. Data for the year 2013 follows: $\begin{array} { | l | l | l | } \hline & \text { Cost } & \text { Retail } \\\hline \text { Beginning inventory } & \$ 19,840 & \$ 30,000 \\\hline \text { Purchases (net) } & 53,360 & 86,000 \\\hline \text { Mark-ups (net) } & & 6,000 \\\hline \text { Markdowns (net) } & & ( 2,000 ) \\\hline \text { Goods available for sale } & \$ 73,200 & 120,000 \\\hline \text { Net sales } & & 80,000 \\\hline \text { Ending inventory: } & & \\\hline \text { At retail } & & \$ 40,000 \\\hline\end{array}$ At cost, assuming FIFO, LCM? $_____________.

The purchases account used in a periodic inventory system contains a running balance of the inventory during the accounting period.

State-of-the-Art Inc. uses a perpetual inventory system. A fire damaged certain merchandise that had a sale price of $10,000 and cost $4,000. The insurance company agreed to pay $1,000 for the damage and let the company keep the merchandise. The company estimated that the goods can be sold for $3,800 and that $600 will be spent to clean and sell the damage goods. Give the entry to record the fire damage, including the receivable from the insurance company.

The balance in a company's accounts payable at December 31, 2012 was $900,000 before any necessary year-end adjustment relating to the following: Goods were in transit from a vendor to the company on December 31, 2012. The invoice cost was $50,000, and the goods were shipped f.o.b. shipping point on December 29, 2012. The goods were received on January 4, 2013. Goods shipped f.o.b. shipping point on December 20, 2012 from a vendor to the company were lost in transit. The invoice cost was $25,000. On January 5, 2013, the company filed a $25,000 claim against the common carrier. Goods shipped f.o.b. destination on December 21, 2012 from a vendor to the company were received on January 6, 2013. The invoice cost was $15,000. What amount should the company report as accounts payable on its December 31, 2012 balance sheet?

The allowance method and the direct reduction method of reporting the holding losses on lower-of-cost or NRV inventory valuation will produce the same cost of goods sold amount.

Nuts-2-U Ltd. purchased 1,000 bags of pecans at a total cost of $6,920. In addition, the company incurred $100 for transportation and grading. The pecans were graded as follows: $\begin{array} { | l | l | l | } \hline \text { Grade } & \text { Quantity } & \text { Current Market Price Per Bag } \\\hline \text { A } & 500 & \$ 12.00 \\\hline \text { B } & 150 & 10.00 \\\hline \text { C } & 300 & 4.00 \\\hline \text { Waste } & 50 & - 0 - \\\hline\end{array}$ Assuming the relative sales value method is used to allocate joint costs: (a) Give the entry to record the purchase, assuming perpetual inventory records are kept. Include transportation and sorting costs in the entry. Show computations. (b) Give the valuation of the ending inventory, assuming the following quantities on hand (show computations): $\begin{array} { | l | l | l | l | } \hline \text { Grade } & \text { Quantity on Hand } & \text { Unit Cost } & \text { Valuation } \\\hline \text { A } & 100 \text { bags } & \$ & \$ \\\hline \text { B } & 50 \text { bags } & \$ & \$ \\\hline \text { C } & 10 \text { bags } & \$ & \$ \\\hline\end{array}$ Total $

The specific cost identification inventory cost flow method has all of the following characteristics except:

Explain how ethical issues may arise in the application of Lower of Cost & NRV rules.

Salvage Sales Ltd. suffered a loss of some inventory by fire on May 7. Cost of inventory on hand on January 1 was $100,000 and purchases between January 1 and May 7 amounted to $70,000 while freight-in and purchase returns, respectively, amounted to $6,000 and $4,000. Between January 1 and May 7 sales totalled $84,000. Goods which cost $24,500 were undamaged by the fire while the remainder of the inventory was destroyed. What was the approximate cost of the goods destroyed if: $\begin{array} { | l | l | } \hline \text { (a) Mark-up is } 25 \text { percent on cost? } & \$ \\\hline \text { (b) Mark-up is } 25 \text { percent on selling price? } & \$ \\\hline\end{array}$

Many department stores allow their employees to purchase goods from the store at a discount. Explain the treatment and rationale for such sales in the retail method (average, LCM).

Purchase discounts should be reported as a(n) :

Goods held on consignment from a supplier should be included in the ending inventory count of the retailer.

Sales taxes paid by the purchaser that cannot be claimed back will usually become a part of the cost of the inventory.

ASPE provides separate guidance for Biological Assets.

F Corporation should include the following in its inventory:

Harris company has items that were incorrectly omitted from purchases made in 2013, but entered correctly in ending inventory. These would have overstated pre-tax income and understated liabilities.

Lumber Number Ltd. began business in 2001. It uses a periodic inventory system and values inventory at lower-of-cost-or-market. The following data represents price information related to the inventory on a unit basis: $\begin{array} { | l | l | l | l | l | } \hline & 2002 \text { Inventory } & &{ 2003 \text { Inventory } } \\\hline & \text { Beginning } & \text { Ending } & \text { Beginning } & \text { Ending } \\\hline \text { Cost } & \$ 80 & \$ 86 & \$ 86 & \$ 98 \\\hline \text { Market } 80 & 84 & 84 & 90 \\\hline\end{array}$ What effect will this information have on the 2003 statement of income if the allowance method is used?