EXERCISES E6-1 Determine the correct inventory amount . Tri-State Bank and Trust
ID: 341404 • Letter: E
Question
EXERCISES
E6-1
Determine the correct inventory amount.
Tri-State Bank and Trust is considering giving Josef Company a loan. Before doing so, management decides that further discussions with Josef's accountant may be desirable. One area of particular concern is the inventory account, which has a year-end balance of $297,000. Discussions with the accountant reveal the following.
Josef shipped goods costing $38,000 to Sorci Company, FOB shipping point, on December 28. The goods are not expected to arrive at Sorci until January 12. The goods were not included in the physical inventory because they were not in the warehouse.
The physical count of the inventory did not include goods costing $95,000 that were shipped to Josef FOB destination on December 27 and were still in transit at year-end.
Josef received goods costing $22,000 on January 2. The goods were shipped FOB shipping point on December 26 by Solita Co. The goods were not included in the physical count.
Josef shipped goods costing $35,000 to Natali Co., FOB destination, on December 30. The goods were received at Natali on January 8. They were not included in Josef's physical inventory.
Josef received goods costing $44,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was supposed to arrive December 31. This purchase was included in the ending inventory of $297,000.
Instructions
Determine the correct inventory amount on December 31.
E6-2
Determine the correct inventory amount.
Rachel Warren, an auditor with Laplante CPAs, is performing a review of Schuda Company's inventory account. Schuda did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $740,000. However, the following information was not considered when determining that amount.
Included in the company's count were goods with a cost of $250,000 that the company is holding on consignment. The goods belong to Harmon Corporation.
The physical count did not include goods purchased by Schuda with a cost of $40,000 that were shipped FOB destination on December 28 and did not arrive at Schuda's warehouse until January 3.
Included in the inventory account was $14,000 of office supplies that were stored in the warehouse and were to be used by the company's supervisors and managers during the coming year.
The company received an order on December 29 that was boxed and sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $40,000 and a cost of $28,000. The goods were not included in the count because they were sitting on the dock.
On December 29, Schuda shipped goods with a selling price of $80,000 and a cost of $60,000 to Reza Sales Corporation FOB shipping point. The goods arrived on January 3. Reza had only ordered goods with a selling price of $10,000 and a cost of $8,000. However, a sales manager at Schuda had authorized the shipment and said that if Reza wanted to ship the goods back next week, it could.
Included in the count was $40,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Schuda's products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep them on the books at cost, “since that is what we paid for them, after all.”
Instructions
Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for each item.
E6-3
Calculate cost of goods sold using specific identification and FIFO.
On December 1, Marzion Electronics Ltd. has three DVD players left in stock. All are identical, all are priced to sell at $150. One of the three DVD players left in stock, with serial #1012, was purchased on June 1 at a cost of $100. Another, with serial #1045, was purchased on November 1 for $90. The last player, serial #1056, was purchased on November 30 for $80.
Instructions
(a) Calculate the cost of goods sold using the FIFO periodic inventory method assuming that two of the three players were sold by the end of December, Marzion Electronics' year-end.
(b) If Marzion Electronics used the specific identification method instead of the FIFO method, how might it alter its earnings by “selectively choosing” which particular players to sell to the two customers? What would Marzion's cost of goods sold be if the company wished to minimize earnings? Maximize earnings?
(c) Which of the two inventory methods do you recommend that Marzion use? Explain why.
E6-4
Compute inventory and cost of goods sold using FIFO and LIFO.
Linda's Boards sells a snowboard, Xpert, that is popular with snowboard enthusiasts. Information relating to Linda's purchases of Xpert snowboards during September is shown below. During the same month, 121 Xpert snowboards were sold. Linda's uses a periodic inventory system.
Instructions
(a) Compute the ending inventory at September 30 and cost of goods sold using the FIFO and LIFO methods. Prove the amount allocated to cost of goods sold under each method.
(b) For both FIFO and LIFO, calculate the sum of ending inventory and cost of goods sold. What do you notice about the answers you found for each method?
Explanation / Answer
E6-1 Inventory balance at the end of year 297000 Add: Good purchased FOB shipping point by Solita not received yet 22000 Add: Goods sold on FOB destination to Natali not received by customer yet 35000 Less: Good purchased FOB destination not received on year end. -44000 Correct valuation of Inventory 310,000
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