26. V ery Thin Paper Company purchases timber as raw materials inventory in its

Question

26. V ery Thin Paper Company purchases timber as raw materials inventory in its paper manufacturing business. Very Thin signed a contract in early 2017 for timber cutting rights valued at $5,000,000. The timber was to be cut in 2018. As of December 31, 2017, the market price of the timber cutting rights was $3,000,000. VeryThin made the appropriate adjusting entry for December 31, 2017. When VeryThin cuts the timber in 2018 at a cost of $5,000,000, market prices had not changed from December 31, 2017 Its entry when it cuts the a debit Inventory 3,000,000 b. credit Estimated Liability on Purchase Commitments $2,000,000 c. credit Cash $3,000,000 d. credit Loss on Purchase Commitments $2,000,000 e. debit Estimated Liability on Purchase Commitments $3,000,000 would include: On October 31, a fire destroyed PH Inc.'s entire retail inventory. The inventory on hand as of January 1 totaled $2,720,000. From January 1 through the time of the fire, the company made purchases of $660,000 and had sales of $1,440,000. Assuming the rate of gross profit to selling price is 40%, what is the approximate value of the inventory that was 27. a. $2,720,000 b. $2,692,000 c. $1,940,000 d. $2,516,000 e. $2,351,429 Refer to question 27 above. Compute the cost of the ending inventory assuming gross profit is 40% of cost. a. $2,720,000 b. $2,692,000 c. $1,940,000 d. $%2,516,000 e· $2,351,429 28.

Explanation / Answer

26.

Since the contract is for $5,000,000 with market cutting timer value of $3,000,000 thus, at the date of cutting timber the inventory shall be debited by $3,000,000. Thus, the option (a) is correct.

27.

Value of inventory as on January 01

2720000

Add: Purchases made from January till the date of fire

660000

3380000

Less: Cost of goods sold (Note 1)

864000

Inventory destroyed by fire

2516000

Thus, option (d) is correct. The inventory value destroyed by fire $2,516,000

Note 1

Cost of goods sold

Sales

1440000

Less: Gross profit @40%

576000

Cost of goods sold

864000

28.

Value of inventory as on January 01

2720000

Add: Purchases made from January till the date of fire

660000

3380000

Less: Cost of goods sold (Note 1)

1028571

Inventory destroyed by fire

2351429

Thus, option (e) is correct. The inventory value destroyed by fire $2,351,429.

Note 1

Cost of goods sold

Sales           

1440000

Less: Gross profit @40%

411428.6

Cost of goods sold

1028571

29.

Inventory as at 01/01/2017

147000

Add: Purchases

833000

980000

Less; Cost of sales

1218000

-238000

Sales less mark up

Sales

1250000

Less: Mark up

42000

1208000

Add: Mark down

10000

1218000

Less: Gross margin

304500

913500

30.

The fact must be disclosed as the amount involved in the future contract is material.

Value of inventory as on January 01

2720000

Add: Purchases made from January till the date of fire

660000

3380000

Less: Cost of goods sold (Note 1)

864000

Inventory destroyed by fire

2516000

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