Chapter 6 Homework
BRIEF EXERCISE 6-6
Dec. 31 Sales ............................................................
Merchandise Inventory (December 31) .....
Purchase Returns and Allowances ...........
Capital ..................................................
630,000
90,000
11,000
Dec. 31 Capital .........................................................
Merchandise Inventory (January 1)....
Purchases ............................................
Freight In ..............................................
476,000
BRIEF EXERCISE 6-7
Goods available for sale (GAS):
Units
Dollars
P
300 X $6 = $1,800
P
400 X $7 = 2,800
P
300 X $8 = 2,400
GAS 1,000
$7,000
-EI
400
CGS
600
(a) FIFO
731,000
60,000
400,000
16,000
CGS:
300 x $6 = $1,800
300 x $7 = 2,100
600
= $3,900
EI:
300 x $8 = $2,400
100 x $7 =
700
400
= $3,100
Check: CGS + EI = GAS
$3,900 + $3,100 = $7,000
(b) Weighted Average Cost
Weighted average unit cost: $7,000  1,000 = $7
CGS:
600 x $7 = $4,200
EI:
400 x $7 = $2,800
Check: CGS + EI = GAS
$4,200 + $2,800 = $7,000
BRIEF EXERCISE 6-7 (Continued)
(c) LIFO
CGS:
300 x $8 = $2,400
300 x $7 = 2,100
600
= $4,500
EI:
300 x $6 = $1,800
100 x $7 =
700
400
= $2,500
Check: CGS + EI = GAS
$4,500 + $2,500 = $7,000
BRIEF EXERCISE 6-8
(a) LIFO gives the highest inventory valuation when prices are falling. This is because the cost of the
units purchased earlier, at a higher cost, are assumed to be still in inventory.
(b) FIFO gives the highest cost of goods sold amount. This is because the cost of the units purchased
earlier, at a higher cost, are assumed to have been sold first and are allocated to cost of goods sold.
(c) In selecting a cost flow method, the company should consider their type of inventory and its actual
physical flow. While it is not essential to match the actual physical flow to the assumed cost flow
method, it does give the company an indication as to its flow of costs throughout the period. What
is important is choosing a method that best matches these costs to the revenue they generate.
BRIEF EXERCISE 6-9
BI + CGP = GAS – EI
= CGS
- U$7,000 = O$7,000
Sales – CGS
= NI
- O$7,000 = U$7,000
The understatement of ending inventory caused cost of goods sold to be overstated $7,000 and net
income to be understated $7,000. The correct net income for 2002 is $97,000 ($90,000 + $7,000).
A
= L + OE
U$7,000 =
U$7,000
Total assets and owner’s equity in the balance sheet will both be understated by the amount that ending
inventory is understated, $7,000. Remember that if net income is understated, then owner’s equity is also
understated as net income is a component of owner’s equity. Check your work by ensuring that the
accounting equation balances.
EXERCISE 6-4
Co. 1
BI
+P
$1,500
- PR&A
40
= NP
(a) 1,460
+ FI
110
= CGP + CGP (b) 1,570
= CGAS
Co. 2
Co. 3
Co. 4
$ 250
$ 120
$1,000
(j) $ 2,960
$1,080
(g) $7,500
$44,590
(d)
60
290
(k) 260
1,020
7,210
44,330
(e) 210
(h)
730
2,240
(b) 1,570
1,230 1,230
7,940
7,940 (l) 46,570 (l) 46,570
1,820
1,350
(i) 8,940
49,530
- EI
=CGS
310
(c) 1,510
(f) 100
1,250
1,450
7,490
Supporting Detail:
(a) $1,460 ($1,500 - $40)
(b) $1,570 ($1,460 + $110)
(c) $1,510 ($1,820 - $310)
(d) $60 ($1,080 - $1,020)
(e) $210 ($1,230 - $1,020)
(f) $100 ($1,350 - $1,250)
(g) $7,500 ($290 + $7,210)
(h) $730 ($7,940 - $7,210)
(i) $8,940 ($1,000 + $7,940)
(j) $2,960 ($49,530 - $46,570 from (l))
(k) $260 ($44,590 - $44,330)
(l) $46,570 ($44,330 + $2,240)
6,230
43,300
EXERCISE 6-5
(a)
OKANAGAN COMPANY
Income Statement
For the Year Ended January 31, 2003
Sales revenues
Sales ...........................................................................
Less: Sales returns and allowances .........................
Net
sales ...............................................................................
000
Cost of goods sold
Inventory, February 1, 2002 .......................................
Purchases .................................................. $200,000
Less: Purchase returns and allowances .
6,000
Net purchases ........................................... 194,000
Add: Freight in...........................................
10,000
Cost of goods purchased ..........................................
Cost of goods available for sale ...............................
Inventory, January 31, 2003.......................................
Cost of goods sold ........................................................
183,000
Gross profit ....................................................................
116,000
Operating expenses
Salary expense ...........................................................
Rent expense ..............................................................
Insurance expense .....................................................
Freight out ..................................................................
Total operating expenses ....................................
100,000
Net income .....................................................................
16,000
$312,000
13,000
$299,
$ 42,000
204,000
246,000
63,000
$ 61,000
20,000
12,000
7,000
$
EXERCISE 6-5 (Continued)
(b)
Jan. 31
Sales ...............................................................
Merchandise Inventory (Jan. 31, 2003) .........
Purchase Returns and Allowances...............
Capital .....................................................
312,000
63,000
6,000
Capital .............................................................
Merchandise Inventory (Feb. 1, 2002) ...
Purchases ...............................................
365,000
381,00
0
42,000
200,00
0
Freight In ................................................
Salary Expense ......................................
Rent Expense .........................................
Insurance Expense ................................
Freight Out..............................................
Sales Returns and Allowances .............
10,000
61,000
20,000
12,000
7,000
13,000
EXERCISE 6-6
(a) FIFO
Cost of Goods Sold: (#1012) $500 + (#1045) $450 = $950
(b) It could choose to sell specific units purchased at specific costs if
it wished to impact income selectively. If it wished to minimize net
income, it would choose to sell the units purchased at higher costs.
In this case, the cost of goods sold would be $950 [(#1012) $500 +
(#1045) $450]. If it wished to minimize net income, it would choose
to sell the units purchased at lower costs. In this case, the cost of
goods sold would be $850 [(#1045) $450 + (#1056) $400].
(c) I recommend Discount uses the FIFO method. FIFO provides a more
relevant balance sheet valuation for decision making (closer to
replacement cost) and reduces the opportunity to manipulate net
income.
Note to Instructor: This answer may vary depending on the
method the student chooses.
EXERCISE 6-7
(a)
FIFO
Cost of Goods Sold:
Date
Units
Unit Cost
5/1
5/15
5/24
30
25
15
70
$08
010
012
Date
Units
Unit Cost
5/24
20
$12
Total Cost
$240
0250
180
$670
Ending Inventory:
Proof:
CGS + EI = GAS
$670 + $240 = $910
(b)
WEIGHTED AVERAGE
$910 ÷ 90 = $10.11 average unit cost
Cost of Goods Sold:
70 x $10.11 = $708 (rounded)
Ending Inventory:
20 x $10.11 = $202 (rounded)
Proof:
CGS + EI = GAS
$708 + $202 = $910
Total Cost
$240
EXERCISE 6-8
Beginning inventory (200 X $5) .........................................
$1,000
Purchases: June 12 (300 X $6) ........................................... $1,800
June 23 (500 X $7)........................................... 03,500 5,300
Cost of goods available for sale (1,000 units) ..................
6,300
Less: Ending inventory (180 units)
Cost of goods sold (820 units)
(a)
(1) FIFO
Cost of Goods Sold:
Date
Units
Unit Cost
6/1
6/12
6/23
200
300
320
820
$5
6
7
Date
Units
Unit Cost
6/23
180
$7
Total Cost
$1,000
1,800
2,240
$5,040
Ending Inventory:
Total Cost
$1,260
Proof: CGS
+ EI
= GAS
$5,040 + $1,260 = $6,300
(2) LIFO
Cost of Goods Sold:
Date
6/23
6/12
6/1
Units
500
300
20
820
Unit Cost
$7
6
5
Total Cost
$3,500
1,800
100
$5,400
Ending Inventory:
Date
6/1
Units
Unit Cost
180
$5
Total Cost
$900
Proof: CGS + EI = GAS
$5,400 + $900 = $6,300
EXERCISE 6-8 (Continued)
(b) The FIFO method will produce the higher ending inventory
because costs have been rising. Under this method, the earliest
costs are assigned to cost of goods sold, and the latest costs
remain in ending inventory. For Dene Company, the ending
inventory under FIFO is $1,260 compared to $900 under LIFO.
(c) The LIFO method will produce the higher cost of goods sold for
Dene Company. Under LIFO, the most recent costs are charged to
cost of goods sold, and the earliest costs are included in the
ending inventory. The cost of goods sold is $5,400 compared to
$5,040 under FIFO.
EXERCISE 6-5
(a)
OKANAGAN COMPANY
Income Statement
For the Year Ended January 31, 2003
Sales revenues
Sales ...........................................................................
Less: Sales returns and allowances .........................
Net
sales ...............................................................................
000
Cost of goods sold
Inventory, February 1, 2002 .......................................
Purchases .................................................. $200,000
Less: Purchase returns and allowances .
6,000
Net purchases ........................................... 194,000
Add: Freight in...........................................
10,000
Cost of goods purchased ..........................................
Cost of goods available for sale ...............................
Inventory, January 31, 2003.......................................
Cost of goods sold ........................................................
183,000
Gross profit ....................................................................
116,000
$312,000
13,000
$299,
$ 42,000
204,000
246,000
63,000
Operating expenses
Salary expense ...........................................................
Rent expense ..............................................................
Insurance expense .....................................................
Freight out ..................................................................
Total operating expenses ....................................
100,000
Net income .....................................................................
16,000
$ 61,000
20,000
12,000
7,000
$
EXERCISE 6-5 (Continued)
(b)
Jan. 31
Sales ...............................................................
Merchandise Inventory (Jan. 31, 2003) .........
Purchase Returns and Allowances...............
Capital .....................................................
312,000
63,000
6,000
Capital .............................................................
Merchandise Inventory (Feb. 1, 2002) ...
Purchases ...............................................
365,000
381,00
0
42,000
200,00
0
Freight In ................................................
Salary Expense ......................................
Rent Expense .........................................
Insurance Expense ................................
Freight Out..............................................
Sales Returns and Allowances .............
10,000
61,000
20,000
12,000
7,000
13,000
EXERCISE 6-6
(a) FIFO
Cost of Goods Sold: (#1012) $500 + (#1045) $450 = $950
(b) It could choose to sell specific units purchased at specific costs if
it wished to impact income selectively. If it wished to minimize net
income, it would choose to sell the units purchased at higher costs.
In this case, the cost of goods sold would be $950 [(#1012) $500 +
(#1045) $450]. If it wished to minimize net income, it would choose
to sell the units purchased at lower costs. In this case, the cost of
goods sold would be $850 [(#1045) $450 + (#1056) $400].
(c) I recommend Discount uses the FIFO method. FIFO provides a more
relevant balance sheet valuation for decision making (closer to
replacement cost) and reduces the opportunity to manipulate net
income.
Note to Instructor: This answer may vary depending on the
method the student chooses.
EXERCISE 6-7
(a)
FIFO
Cost of Goods Sold:
Date
Units
Unit Cost
5/1
5/15
5/24
30
25
15
70
$08
010
012
Date
Units
Unit Cost
5/24
20
$12
Total Cost
$240
0250
180
$670
Ending Inventory:
Proof:
CGS + EI = GAS
$670 + $240 = $910
(b)
WEIGHTED AVERAGE
$910 ÷ 90 = $10.11 average unit cost
Cost of Goods Sold:
70 x $10.11 = $708 (rounded)
Ending Inventory:
20 x $10.11 = $202 (rounded)
Proof:
CGS + EI = GAS
$708 + $202 = $910
Total Cost
$240
EXERCISE 6-8
Beginning inventory (200 X $5) .........................................
$1,000
Purchases: June 12 (300 X $6) ........................................... $1,800
June 23 (500 X $7)........................................... 03,500 5,300
Cost of goods available for sale (1,000 units) ..................
6,300
Less: Ending inventory (180 units)
Cost of goods sold (820 units)
(a)
(1) FIFO
Cost of Goods Sold:
Date
Units
Unit Cost
6/1
6/12
6/23
200
300
320
820
$5
6
7
Date
Units
Unit Cost
6/23
180
$7
Total Cost
$1,000
1,800
2,240
$5,040
Ending Inventory:
Total Cost
$1,260
Proof: CGS
+ EI
= GAS
$5,040 + $1,260 = $6,300
(2) LIFO
Cost of Goods Sold:
Date
6/23
6/12
6/1
Units
500
300
20
820
Unit Cost
$7
6
5
Total Cost
$3,500
1,800
100
$5,400
Ending Inventory:
Date
6/1
Units
Unit Cost
180
$5
Total Cost
$900
Proof: CGS + EI = GAS
$5,400 + $900 = $6,300
EXERCISE 6-8 (Continued)
(b) The FIFO method will produce the higher ending inventory
because costs have been rising. Under this method, the earliest
costs are assigned to cost of goods sold, and the latest costs
remain in ending inventory. For Dene Company, the ending
inventory under FIFO is $1,260 compared to $900 under LIFO.
(c) The LIFO method will produce the higher cost of goods sold for
Dene Company. Under LIFO, the most recent costs are charged to
cost of goods sold, and the earliest costs are included in the
ending inventory. The cost of goods sold is $5,400 compared to
$5,040 under FIFO.
EXERCISE 6-9
(a)
Cost of Goods
Available for Sale
$6,300
÷
Total Units
Available for Sale
1,000
=
Weighted Average
Unit Cost
$6.30
Ending Inventory:
180 X $6.30 = $1,134
Cost of Goods Sold:
820 X $6.30 = $5,166
Proof: CGS + EI
= GAS
$5,166 + $1,134 = $6,300
(b) Ending inventory is lower than FIFO ($1,260) and higher than LIFO
($900). In contrast, cost of goods sold is higher than FIFO ($5,040)
and lower than LIFO ($5,400). When prices are changing, the
average cost method will always produce this type of result. That
is, average results will fall somewhere between those of FIFO and
LIFO.
(c) The average cost method uses a weighted average unit cost, not a
simple average of unit costs ($5 + $6 + $7 = $18 ÷ 3 = $6).
EXERCISE 6-10
(a)
Periodic Inventory Method
Purchases (100 x $10) ........................................
Accounts Payable ......................................
1,000
Accounts Receivable (70 x $15).........................
Sales ...........................................................
1,050
1,000
1,050
Perpetual Inventory Method
(b)
Merchandise Inventory (100 x $10) ....................
Accounts Payable ......................................
1,000
Accounts Receivable (70 x $15).........................
Sales ...........................................................
1,050
Cost of Goods Sold (70 x $10) ...........................
Merchandise Inventory..............................
700
1. FIFO
2. LIFO
3. Specific Identification
4. LIFO
1,000
1,050
700
EXERCISE 6-11
SELES HARDWARE
Income Statement (Partial)
Beginning inventory ..............................................
Cost of goods purchased .....................................
Cost of goods available for sale ...........................
Corrected ending inventory ..................................
Cost of goods sold ................................................
a
2002
2003
$020,000
150,000
0170,000
a
0025,000
$145,000
$025,000
175,000
0200,000
b
0 39,000
$161,000
$30,000 – $5,000 = $25,000
$35,000 + $4,000 = $39,000
b
SOLUTIONS TO PROBLEMS
PROBLEM 6-1A
1.
Title to the goods does not transfer to the customer until March
2. Include the $800 in ending inventory.
2.
Kananaskis owns the goods once they are shipped on February
26. Include inventory of $375.
3.
Include $500 in inventory.
4.
Exclude the items from Kananaskis’ inventory.
5.
Title of the goods does not transfer to Kananaskis until March 2.
Exclude this amount from the February 28 inventory.
6.
The sale will be recorded on February 26. The goods should be
excluded from Kananaskis’ inventory at the end of February.
PROBLEM 6-2A
ONLY A PARTIAL ANSWER GUIDE ******* for this question….
(a)
GENERAL JOURNAL
J1
Date
Account Titles and Explanation
Debit Credit
Apr.
5
7
9
Purchases .........................................................
Accounts Payable .....................................
1,600
Freight In...........................................................
Cash ...........................................................
80
Accounts Payable ............................................
Purchase Returns and Allowances..........
100
1,600
80
100