Accounting 303
Exam 3, Chapters 8-9
Spring 2010
I.
Name _______________________
Section _______
Row _______
Multiple Choice Questions. (2 points each, 20 points in total) Read each question
carefully and indicate your answer by circling the letter preceding the one best answer.
1.
While goods are in transit which were shipped f.o.b. shipping point, the goods should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. included in the inventory of both the seller and the buyer.
2.
Assuming no beginning inventory, what can be said about the trend of inventory prices if
cost of goods sold computed when inventory is valued using the FIFO method exceeds
cost of goods sold when inventory is valued using the LIFO method?
a. Prices increased.
b. Prices remained unchanged.
c. Prices decreased.
d. Price trend cannot be determined from information given.
3.
In a period of rising prices, the inventory method which tends to give the highest reported
net income is
a. moving average.
b. first-in, first-out.
c. last-in, first-out.
d. weighted-average.
4.
To begin the year, Johnson Company had 500 units of inventory at a cost of $4 each.
Then Johnson purchased, for $2,800, 300 more units of inventory. Johnson then sold 400
units at a selling price of $10 each, resulting in a gross profit of $1,600. The cost flow
assumption used by Johnson
a. is FIFO periodic.
b. is LIFO periodic.
c. is weighted (periodic) average.
d. cannot be determined from the information given.
5.
Tysen Retailers purchased merchandise with a list price of $50,000, subject to a trade
discount of 20% and terms of 2/10, n/30. If Tysen uses the periodic inventory (recorded
at gross) method, Tysen should record the cost of this merchandise as
a. $36,000.
b. $39,000.
c. $40,000.
d. $50,000.
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6.
In no case can "market" in the lower-of-cost-or-market rule be more than
a. estimated selling price in the ordinary course of business.
b. estimated selling price in the ordinary course of business less reasonably predictable
costs of completion and disposal.
c. estimated selling price in the ordinary course of business less reasonably predictable
costs of completion and disposal and an allowance for an approximately normal profit
margin.
d. estimated selling price in the ordinary course of business less reasonably predictable
costs of completion and disposal, an allowance for an approximately normal profit
margin, and an adequate reserve for possible future losses.
7.
Which statement is not true about the gross profit method of inventory valuation?
a. It may be used to estimate inventories for interim statements.
b. It may be used to estimate the amount of inventory lost in a fire.
c. It may be used by auditors.
d. It may be used to estimate inventories for external statements.
8.
Paul Konerko Company sells product 2005WSC for $20 per unit. The cost of one unit of
2005WSC is $18, and the replacement cost is $17. The estimated cost to dispose of a unit
is $4, and the normal profit is 40%. At what amount per unit should product 2005WSC be
reported, applying lower-of-cost-or-market?
a. $8.
b. $16.
c. $17.
d. $18.
9.
The following information is available for October for Horton Company.
Beginning inventory
Net purchases
Net sales
Gross profit ratio
$100,000
300,000
600,000
40.00%
A fire destroyed Horton’s October 31 inventory, leaving undamaged inventory with a
cost of $6,000. Using the gross profit method, the estimated ending inventory destroyed
by fire is
a. $34,000.
b. $154,000.
c. $160,000.
d. $200,000.
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10. The following information is available for Rila, Inc. from their December 31, 2010 trial
balance.
Account
Inventory January 1, 2010
Purchases
Purchases Returns
Sales
Sales Returns
Freight-in
Debit
32,000
240,000
Credit
10,000
380,000
12,000
17,000
Rila uses a periodic inventory system and based on a physical count, the inventory at
December 31, 2010 is $37,000. The entry Rila makes at December 31, 2010 to adjust its
inventory and record cost of goods sold will include a
a.
debit to Inventory of 32,000.
b.
debit to Sales Returns of 12,000.
c.
credit to Cost of Goods Sold of 242,000.
d.
credit Freight-in of 17,000.
3
II. Problems – (60 points in total) Show all work where appropriate!
1.
(14 points) Blagoevgrad Co. records purchases using the perpetual inventory method and
records at net amounts. Prepare journal entries in general journal form for the following:
(a) On April 5, 2010, purchased merchandise costing $9,000 with terms 2/10, n/30.
(b) On April 7, 2010, returned one-third of the goods purchased on April 5.
(c) On April 29, 2010, made payment to pay the liability due created by April 5 purchase.
(d) On May 1, 2010, sold all the remaining goods from the April 5 purchase for $17,000.
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2.
(12 points) During June, the following transactions took place:
Date
June 1
14
24
8
10
29
Transaction
Balance
Purchased
Purchased
Sold
Sold
Sold
Quantity - Unit Price
1,400 units @ $24
800 units @ $36
700 units @ $30
400 units @ $50
1,000 units @ $40
500 units @ $44
Total
$33,600
$28,800
$21,000
What is the cost of the ending inventory for this inventory item under each of the following
methods? (Show calculations.)
(a) FIFO periodic.
(b) LIFO perpetual.
(c) Average periodic. (round the average unit price to the nearest penny)
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3.
(15 points) Sofia Company manufactures one product. On December 31, 2008, Sofia
adopted the dollar-value LIFO inventory method. The inventory on that date using the
dollar-value LIFO inventory method was $180,000. Additional inventory data are as
follows:
Year
2009
2010
2011
Inventory at
year-end prices
$252,000
368,000
387,500
Price index
(base year 2009)
1.05
1.15
1.25
Compute the inventory value at December 31, 2009, 2010, and 2011, using the dollar-value
LIFO method for each year.
2009
2010
2011
6
4.
(19 points) The records of Varna Stores included the following data:
Inventory, May 1, at retail, $14,500; at cost, $10,440
Purchases during May, at retail, $42,900; at cost, $31,550
Freight-in, $2,000; purchase discounts, $250
Additional markups, $3,800; markup cancellations, $400; net markdowns, $1,300
Sales during May, $44,500
Required: Calculate the estimated inventory at May 31 on a Retail LIFO basis.
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Solutions
Multiple Choice
Question
1
2
3
4
5
6
7
8
9
10
Answer
b
c
b
c
c
b
d
b
a
d
Problems
Solution for Problem 1
Inventory
A/P
8820
A/P
Inventory
2940
A/P
Disc Lost
Cash
5880
120
A/R
CGS
Sales
Inventory
17000
5880
8820
2940
6000
17000
5880
Solution for Problem 2
(a) 700 @ $30 =
$21,000
300 @ $36 =
10,800
$31,800
(b) 800 @ $36 =
200 @ $30 =
$28,800
6,000
$34,800
8
(c) 83,400/2,900 = $28.76
1000 @ 28.76 = $28,760
Solution for Problem 3
At 12/31,
2009:
Ending
Inventory at
Base-Year Price
$252,000 ÷ 1.05
= $240,000
Layers at
Base-Year
Prices
$180,000
$60,000
Price Index
×
1.00
=
×
1.05
=
At 12/31,
2010:
$368,000 ÷ 1.15
= $320,000
$180,000
$60,000
$80,000
×
×
×
1.00
1.05
1.15
=
=
=
$180,000
63,000
92,000
$335,000
At 12/31,
2011:
$387,500 ÷ 1.25
= $310,000
$180,000
$60,000
$70,000
×
×
×
1.00
1.05
1.15
=
=
=
$180,000
63,000
80,500
$323,500
Ending Inventory
Dollar-Value LIFO
$180,000
63,000
$243,000
Solution for Problem 4
Inventory, May 1
Purchases
Freight-in
Purchase discounts
Net markups
Net markdowns
Totals excluding beginning inventory
Goods available
Cost
Retail
$10,440
31,550
2,000
(250)
$14,500
42,900
33,300
$43,740
Sales
Inventory, May 31
3,400
(1,300)
45,000
59,500
(44,500)
$15,000
Estimated inventory, May 31:
$14,500 × .72
$ 500 × .74
$10,440
370
$10,810
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Ratio
.72
.74