Accounting 303
Exam 3, Chapters 8-9
Spring 2011
I.
Name _______________________
Section _______
Row _______
Multiple Choice Questions. (2 points each, 34 points in total) Read each question carefully and
indicate your answer by circling the letter preceding the one best answer.
1.
The inventory method that will always produce the same amount for cost of goods sold in a
periodic inventory system as in a perpetual inventory system is
a. FIFO.
b. LIFO.
c. Weighted average.
d. None of the above.
2.
The Mateo Corporation's inventory at December 31, 2011, was $325,000 based on a physical
count priced at cost, and before any necessary adjustment for the following:
Merchandise costing $30,000, shipped F.o.b. shipping point from a vendor on December
30, 2011, was received on January 5, 2012.
Merchandise costing $22,000, shipped F.o.b. destination from a vendor on December 28,
2011, was received on January 3, 2012.
Merchandise costing $38,000 was shipped to a customer F.o.b. destination on December
28, arrived at the customer's location on January 6, 2012.
Merchandise costing $12,000 was being held on consignment by Traynor Company.
What amount should Mateo Corporation report as inventory in its December 31, 2011, balance
sheet?
a. $367,000.
b. $427,000.
c. $325,000.
d. $405,000.
3.
Ending inventory is equal to the cost of items on hand plus
a. Items in transit sold f.o.b. shipping point.
b. Purchases in transit f.o.b. destination.
c. Items in transit sold f.o.b. destination.
d. None of the above.
4.
During periods when costs are rising and inventory quantities are stable, cost of goods sold will be:
a. Higher under FIFO than LIFO.
b. Higher under FIFO than average cost.
c. Lower under average cost than LIFO.
d. Lower under LIFO than FIFO.
1
5.
Northwest Fur Co. started 2011 with $94,000 of merchandise inventory on hand. During 2011,
$400,000 in merchandise was purchased on account with credit terms of 1/15, n/45.
Merchandise with an invoice amount of $5,000 was returned for credit before any payments
were made for the merchandise. When the payments were made, all discounts were taken.
Purchases were all made f.o.b. shipping point. Northwest paid freight charges of $7,500. Cost
of goods sold for the year was $380,000. Northwest uses a perpetual inventory system.
What is ending inventory assuming Northwest uses the gross method to record purchases?
a.. $112,490.
b. $112,550.
c. $116,500.
d. $120,300.
6.
Company C is identical to Company D in every respect except that Company C uses LIFO and
Company D uses average costs. In an extended period of rising inventory costs, Company C's
ending inventory, gross profit and cost of goods sold, compared to Company D's, would be:
Ending
Gross
Cost of
Inventory
Profit
Goods Sold
a.
lower
higher
lower
b.
higher
higher
lower
c.
lower
lower
higher
d.
higher
lower
higher
7.
If a company uses LIFO, LIFO liquidation is problematic for a company's income taxes when
a. inventory purchase costs are declining.
b. inventory purchase costs are rising.
c. inventory purchase costs are declining or rising.
d. LIFO liquidations are not problematic for a company's income taxes.
8.
Dollar-value LIFO
a. starts with ending inventory measured at current costs and recreates LIFO layers for
measuring inventory costs.
b. increases the recordkeeping costs of LIFO.
c. only is allowed for internal reporting purposes.
d. compared to unit LIFO, is more susceptible to LIFO liquidation.
e. all of the above are correct.
9.
Linguini, Inc. had an ending inventory valued at year-end costs of €126,000. Linguini had
adopted dollar-value LIFO at the beginning of the current year when its inventory value was
€100,000 (base year with index 1.00). If for the current year Linguini added a new layer to its
ending inventory (measured in base year amounts) of €20,000, what was the cost index for the
current year?
a. 1.00
b. 1.025
c. 1.05
d. 1.06
2
10.
Masterlink Co., in applying the lower of cost or market method, reports its inventory at net
realizable value (NRV). Which of the following statements are correct?
Carrying cost is
NRV is greater than
greater than NRV. replacement cost.
a.
Yes
Yes
b.
No
No
c.
Yes
No
d.
No
Yes
11.
Data related to the inventories of Costco Medical Supply is presented below:
Selling price
Cost
Replacement cost
Disposal cost
Normal gross profit ratio
Surgical
Equipment
$260
170
240
30
30%
Surgical
Supplies
$120
90
80
5
30%
Rehab
Equipment
$340
250
235
25
30%
Rehab
Supplies
$165
162
158
10
20%
In applying the LCM rule, the inventory of rehab equipment would be valued at:
a. $315.
b. $247.
c. $150.
d. $235
12.
Data related to the inventories of Alpine Ski Equipment and Supplies is presented below:
In applying the LCM rule, the inventory of skis would be valued at:
a.. $162,000.
b. $128,000.
c. $120,000.
d. $126,000
13.
Coastal Shores Inc. (CSI) was completely destroyed by a hurricane on August 5, 2011. At
January 1, CSI reported an inventory of $170,000. Sales from January 1, 2011, to August 5,
2011, totaled $625,000 and purchases totaled $195,000 during that time. CSI's historical gross
profit percentage is 52%. The estimated inventory loss due to the hurricane would be:
a. $130,000.
b. $65,000.
c. $40,000.
d. None of the above is correct.
3
14.
In calculating the cost-to-retail percentage for the retail method, the retail column will not
include:
a. Purchases.
b. Purchase returns.
c. Markdowns.
d. Freight-in.
15.
Party City sells costumes which are subject to a great deal of price volatility. A recent item
which cost $170 was marked up $120, marked down by $60, and then had a markdown
cancellation of $30. The last selling price was
a. $200
b. $260
c. $290
d. $320
16.
If ending inventory is overstated,
a. net income is understated.
b. gross profit is overstated.
c. cost of goods sold is overstated.
d. the effect cannot be determined without more information.
17.
Bologna Co. uses a periodic inventory system. Beginning inventory on January 1 was
understated by $30,000, and its ending inventory on December 31 was understated by $17,000.
In addition, a purchase of merchandise costing $20,000 was incorrectly recorded as a $2,000
purchase. None of these errors were discovered until the next year. As a result, Bologna's cost
of goods sold for this year was
a. understated by $31,000.
b.. overstated by $31,000.
c. overstated by $5,000.
d. understated by $48,000
4
II. Problems – (66 points in total) Show all work where appropriate!
1.
(12 points) Monterosso Corporation purchased merchandise on March 26, 2011 on credit for
$125,000; terms 2/10, n/30. On March 31, 2011, they returned $15,000 of invoice amount of the
merchandise for credit. On April 3, 2011, they paid three fourths of the remaining liability due
and paid the remainder on April 22, 2011. The vendor allowed the cash discount to Monterosso
on their partial payment. Prepare the entries to record these transactions assuming Monterosso
used the perpetual inventory method and records purchases at net.
Date
Entry
Mar 26, 2011
Mar 31, 2011
Apr 3, 2011
Apr 22, 2011
5
2.
(12 points) The following transactions took place for Vernazza, Inc. for the month of May.
Purchases
Sales
May 1 (balance)
400 @ $4.20 = $1,680
May 3
300 @ $7.00 = $2,100
4
1,300 @ $4.10 = $5,330
6
1,000 @ 7.00 = $7,000
8
800 @ $4.30 = $3,440
12
900 @ 7.50 = $6,760
14
700 @ $4.40 = $3,080
18
400 @ 7.50 = $3,000
22
1,200 @ $4.50 = $5,400
25 1,400 @ 8.00 = $11,200
29
500 @ $4.55 = $2,275
4,000
$30,060
4,900
$21,205
What is Vernazza's cost of ending inventory under each of following methods? (Show calculations.)
a. Periodic FIFO.
b. Periodic LIFO.
c. Periodic Average (carry out average unit cost to nearest cent).
6
3.
(13 points) The Venetian Furniture Company adopted the dollar-value LIFO inventory method on
January 1, 2011. The inventory on that date using the dollar-value LIFO inventory method was
$200,000. Additional year-end inventory data are as follows:
Inventory at
Price index
Year
year-end prices (base year 2009)
2011
$258,300
1.05
2012
265,995
1.15
2013
299,000
1.25
Compute the inventory value at December 31, 2011, 2012, and 2013, using the dollar-value LIFO.
2011
2012
2013
7
4.
(17 points) The records of Lugano 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
Net markups, $3,400; net markdowns, $1,300
Sales during May, $40,000; employee discounts, $500
Calculate the estimated inventory at May 31 on a LIFO Retail basis for Lugano Stores. Show your
calculations in good form and label all amounts.
8
5.
(12 points) Maranello Motor Works uses the retail inventory method. Information relating to the
computation of the inventory at December 31, 2010, follows:
Cost
Retail
Inventory, January 1, 2007
$136,000
$220,000
Purchases
480,000
700,000
Freight-in
80,000
Sales
720,000
Net markups
160,000
Net markdowns
60,000
Compute the cost ratio for each of the following retail methods. Show all work.
a. LCM (Conventional) Retail Method
b. FIFO Retail Method
c.
Average Retail Method
9
Solutions
Multiple Choice
Question
Answer
Question
Answer
1
2
3
4
5
6
7
8
9
10
a
d
c
c
b
c
a
a
c
c
11
12
13
14
15
16
17
d
d
b
c or d
b
b
a
Problems
Solution for Problem 1
Inventory .............................................................................................
Accounts Payable .....................................................................
122,500
122,500
Accounts Payable .................................................................................
Inventory ..................................................................................
14,700
Accounts Payable .................................................................................
Cash ......................................................................................
(122500 – 14700 = 107800; 107800 x ¾ = 80850)
80,850
Accounts Payable .................................................................................
Interest Expense ...................................................................................
Cash .........................................................................................
(107800 – 80850 = 26950; 110000 – 82500 = 27500)
26,950
550
10
14,700
80,850
27,500
Solution for Problem 2
a. 500 @ $4.55 =
400 @ $4.50 =
$2,275
1,800
$4,075
b.
400 @ $4.20 =
500 @ $4.10 =
$1,680
2,050
$3,730
c.
21205/4900 = $4.33
900 @ $4.33 = $3,797
Solution for Problem 3
Ending
Inventory at
Base-Year Price
Layers at
Base-Year
Prices
At 12/31
2010:
$200,000 ÷ 1.00
$200,000
×
1.00
=
$200,000
At 12/31,
2011:
$258,300 ÷ 1.05
= $246,000
$200,000
$46,000
×
×
1.05
=
=
$200,000
48,300
$248,300
At 12/31,
2012:
$265,995 ÷ 1.15
= $231,300
$200,000
$31,300
×
×
1.00
1.05
=
=
$200,000
32,865
$232,865
At 12/31,
2013:
$299,000 ÷ 1.25
= $239200
$200,000
$31,300
$7,900
×
×
×
1.00
1.05
1.25
=
=
=
$200,000
32,865
9,875
$242,740
Ending Inventory
Dollar-Value LIFO
Price Index
11
Solution for Problem 4
At Cost
Beginning inventory, 5/1
Purchases
Freight In
Purchase Discount
Markups (net)
Markdowns (net)
Available for sale
Sales (net)
Employee discounts
Ending inventory, 5/31 at retail
$ 10,440
31,550
2,000
<250>
$286,000
At Retail
$ 14,500
42,900
3,400
<1,300>
$ 59,500
<40,000>
<500>
$ 19,000
Ratio:
$33,300 ÷ $45,000 = .740;
Ending inventory at LIFO cost:
$215,200 ÷ $326,500 = .659;
At Retail
Prior Period Layer
$ 14,500
Current Period Layer
$ 4,500 × .740 =
At Cost
$ 10,440
3,330
$ 13,770
Solution for Problem 5
Cost
$136,000
480,000
80,000
Inventory, January 1, 2007
Purchases
Freight-in
Net markups
Net markdowns
Total
a.
________
$696,000
1020000 + 60000 = 1080000
696000/1080000 = .644
b.
696000 – 136000 = 560000; 1020000 – 220000 = 800000
560000/800000 = .700
c.
696000/1020000 = .682
12
Retail
$220,000
700,000
160,000
60,000
$1,020,000