Chapter 8
Inventories and Cost of Goods Sold
PROBLEM 8.2
BLACK HAWK .INC
Perpetual Inventory Subsidiary Record: FIFO
Units
SOLD
Unit
Cost
8
$40
$320
21
10
$40
$400
31
2
13
$40
$45
$665
Date
Units
MAY 01
05
06
PURCHASED
Unit
Total
Cost
20
$45
Cost of
Goods
Sold
Units
$900
20
12
12
20
2
20
07
BALANCE
Unit
Balance
Cost
$40.00
$40
$40
$45
$40
$45
$45
$800
$480
$1380
$980
$315
PROBLEM 8.2
BLACK HAWK .INC
General Journal
Date
Particular
May 5 Account Receivable
Debit ($) Credit ($)
480
Sales
sold 6 unit of product on account @$60
5 Cost of Goods Sold
480
320
Inventory
320
To record cost of 8 units @$40 by FIFO method
Inventory
6
900
Account payable
Purchased 20 Units @$45
21 Account Receivable
900
600
Sales
sold 10 unit of product on account @$60
21 Cost of Goods Sold
600
400
Inventory
400
To record cost of 10 units @$40 by FIFO method
31 Account Receivable
975
Sales
sold 15 unit of product on account @$65
31
Cost of Goods Sold
Inventory
To record cost of 15 units @$40 by FIFO method 2 units @$40 and 13 units @$45
975
665
665
C: The FIOF method tend to overstate profitability by offsetting revenue with a cost of goods sold
based upon older unit cost (often low cost ) thus , it may be distorted company’s income statement
.the advantage of FIFO method is that ending inventory is valued at the most recent unit cost .
Therefore, this asset appears in the balance sheet at an amount most accurately reflecting its current
replacement cost.
PROBLEM 8.3
EXECUTIVE SUITES .INC
Perpetual Inventory Subsidiary Record: FIFO
Date
Units
Sept 01
04
PURCHASED
Unit
Total
Cost
20
65
40
65
40
70
Cost of
Goods
Sold
20
15
65.00
60.00
40
20
65.00
60.00
$3800
5
70
350
$2200
2600
20
25
SOLD
Unit
Cost
1300
08
09
Units
2800
30
Units
BALANCE
Unit
Balance
Cost
50
50
20
$60.00
$60.00
65.00
$3000
35
35
40
$60
60.00
65.00
$2100
15
15
40
15
35
60
60.00
70.00
60.00
70.00
$4300
$4700
$900
$3700
$3350
PROBLEM 8.3
EXECUTIVE SUITES .INC
General Journal
Date
May
Particular
4 Inventory
Debit ($) Credit ($)
1300
Account payable
Purchased 20 Units @$65
8 Account Receivable
1300
3500
Sales
sold 35 unit of product on account @$100
8
Cost of Goods Sold
Inventory
3500
2200
2200
To record cost of 35 units @$40 sold using LIFO method cost determine :
20 Units @$65 and 15Units @$60
9 Inventory
Account payable
Purchased 40 Units @$65
2600
2600
General Journal
Date
Particular
Account Receivable
Sales
Debit ($) Credit ($)
6000
6000
sold 60 unit of product on account @$100
25
Inventory
2800
Account payable
Purchased 40 Units @$70
30
30
2800
Account Receivable
Sales
sold 5 unit of product @$110
550
Cost of Goods Sold
Inventory
350
550
350
To record cost of 5 units sold today using LIFO method cost determine :
5 Units @ $70
C: The FIOF method tend to overstate profitability by offsetting revenue with a cost of goods sold based upon older unit cost (often
low cost ) thus , it may be distorted company’s income statement .the advantage of FIFO method is that ending inventory is valued at
the most recent unit cost . Therefore, this asset appears in the balance sheet at an amount most accurately reflecting its current
replacement cost.
a. PROBLEM 8.4
CALIFORNIA IRRIGATION
General Journal
2009
Debit
($)
Credit
($)
(1) Specific identification method:
Jan 15 Cost of Goods Sold
Inventory
9375
9375
To record cost of 1,000 RAIN MASTER-30 Sprinkler heads
sold to rancho landscaping
500 units @ $9.25; 500 units @$9.50
(2) Average-cost method:
Jan 15 Cost of Goods Sold
Inventory
9400
9400
To record cost of 1,000 RAIN MASTER-30 Sprinkler heads sold to rancho
landscaping by the average-cost method: 1,000 units @$9.40 ($14,100 total cost,
divided by 1,500 units).
(3) First-in, First-out (FIFO) method:
Jan 15 Cost of Goods Sold
Inventory
To record cost of 1,000 RAIN MASTER-30 Sprinkler heads
9350
9350
sold to rancho landscaping Cost determined by the FIFO flow
assumption: 600 units @$9.25, plus 400 units @ $9.50 = $9350.
General Journal
Date
Jan
15
Debit Credit
($)
($)
Particular
(4) Last-in, First-out (LIFO) method:
9475
Cost of Goods Sold
Inventory
To record cost of 1,000 RAIN MASTER-30 Sprinkler heads
sold to rancho landscaping Cost determined by the LIFO flow assumption: 900
units @$9.50, plus 100 units @ $9.25 = $9475
9475
B. Inventory Subsidiary Ledger Records:
Specific Identification Method:
Date
Dec 12
Jan 09
PURCHASED
Units
Unit
Total
Cost
600
$9.25
$5550
900
9.50
$8550
Jan 15
Units
500
500
SOLD
Unit
Cost
$9.25
9.50
Cost of
Units
Goods Sold
600
600
900
100
$9375
400
BALANCE
Unit
Balance
Cost
$9.25
$5550
$9.25
9.50
14100
$9.25
9.50
4725
Average-Cost Method:
Date
PURCHASED
Units
Unit
Total
Cost
Units
SOLD
Unit
Cost
Dec 12
600
$9.25
$5550
Jan 09
900
9.50
$8550
Jan 15
1,000
$9.40
$14100total cost ÷ 1,500 units = $9.40 average unit cost.
Cost of
Goods
Sold
$9400
BALANCE
Units
Unit
Balance
Cost
600
1,500
500
$9.25
$9.40
$9.40
$5550
14100
4700
First-In, First-Out (FIFO) Method:
Date
Units
Dec 12
Jan 09
600
900
Jan 15
PURCHASED
Unit
Total
Cost
$9.25
9.50
Units
SOLD
Unit
Cost
Cost of
Goods
Sold
$5550
$8550
600
400
$9.25
$9.50
$9350
Units
BALANCE
Unit
Balance
Cost
600
600
900
$9.25
$9.25
$9.50
$5550
500
$9.50
4750
14100
Last-In, First-Out (LIFO) Method:
Date
Dec 12
Jan 09
PURCHASED
Units Unit Total
Cost
600 $9.25 $5550
900
9.50 $8550
Jan 15
Units
SOLD
Unit
Cost of
Cost
Goods Sold
Units
600
600
900
900
100
$9.50
$9.25
$
9475
BALANCE
Unit Balance
Cost
$9.25
$5550
$9.25
$9.50
14100
500
$9.25
4625
c. No. As shown in part a , the LIFO method resulted in the highest cost of goods sold figure,
whereas the FIFO method resulted in the lowest. If the LIFO method is used for tax purposes,
income tax regulations require that it also be used for financial reporting purposes.
PROBLEM 8.7 BUNYON'S TREE & SHRUBS
a.
Shrinkage loss-40 trees
Debit ($) Credit ($)
(1) Average-cost method:
Cost of Goods Sold
Inventory
To record shrinkage loss of 40 trees using average cost of
$18.90 ($11340÷ 600 trees = $18.90 per tree).
756
756
(2) Last-in first-out (LIFO) method:
Cost of Goods Sold
Inventory
To record shrinkage loss of 40 trees using the LIFO flow
Assumption (40 trees @ $20).
800
800
b. Shrinkage loss and LCM adjustment
(1) Shrinkage loss, first-in, first-out (FIFO) method:
Cost of Goods Sold
Inventory
To record shrinkage loss of 40 trees using the FIFO flow
Assumption (40 trees @ $18).
720
720
(2) Write-down of inventory to the lower-of-cost-or-market:
Cost of Goods Sold
Inventory
2220
2220
To write down inventory to a market value below cost:
Cost (after shrinkage loss: $11340 - $720)
Market (560 trees x $15 per tree)
Loss from write-down to market value
$10620
8400
$2220
c. The only unethical act in this situation was committed by the employee against his employer.
There is nothing unethical about using a hidden security camera to protect one’s assets. The
camera was not used to entice (or entrap) the employee. In short, he made a conscious
decision to steal trees from his employer and should be held completely responsible for doing
so.