Chapter 8 Supplemental Questions

E8-1

(Inventoriable Costs)

Presented below is a list of items that may or may not be reported as inventory in a company's December 31 balance
sheet. Indicate which of these items would typically be reported as inventory in the financial statements. If an item
should not be reported as inventory, indicate how it should be reported in the financial statements.

Item in
Financial Statement Financial Statement
Goods sold on an installment basis (bad debts can be
1. Cost of goods sold Income statement
reasonably estimated).

2. Goods out on consignment at another company's store. Inventory Balance sheet

Goods purchased f.o.b. shipping point that are in transit at

3. Inventory Balance sheet
December 31.

Goods purchased f.o.b. destination that are in transit at

4. Not reported Not reported
December 31.
Goods sold to another company, for which our company has
5. signed an agreement to repurchase at a set price that covers all Inventory Balance sheet
costs related to the inventory.

6. Goods sold where large returns are predictable. Cost of goods sold Income statement

Goods sold f.o.b. shipping point that are in transit at December

7. Cost of goods sold Income statement
31.

8. Freight charges on goods purchased. Inventory Balance sheet

Interest costs incurred for inventories that are routinely

9. Interest expense Income statement
manufactured.

Materials on hand not yet placed into production by a

10. Inventory Balance sheet
manufacturing firm.

11. Costs incurred to advertise goods held for resale. Advertising expense Income statement

12. Office supplies. Office supplies Balance sheet

Raw materials on which a manufacturing firm has started

13. Inventory Balance sheet
production, but which are not completely processed.

14. Factory supplies. Inventory Balance sheet

15. Goods held in consignment from another company Not reported Not reported

Costs identified with units completed by a manufacturing firm,

16. Inventory Balance sheet
but not yet sold.

17. Goods sold f.o.b. destination that are in transit at December 31. Inventory Balance sheet

Short-term investments in stocks and bonds that will be resold

18. Short-term investments Balance sheet
in the near future.
E8-2

(Inventoriable Costs)

In your audit of Garza Company, you find that a physical inventory on December 31, 2010, showed merchandise with a cost
of $441,000 was on hand at that date. You also discover the following items were all excluded from the $441,000.

1. Merchandise of $61,000 which is held by Garza on consignment. The consignor is the Bontemps Company.
2. Merchandise costing $33,000 which was shipped by Garza f.o.b. destination to a customer on December 31, 2010.
The customer was expected to receive the merchandise on January 6, 2011.
3. Merchandise costing $46,000 which was shipped by Garza f.o.b. shipping point to a customer on December 29,
2010. The customer was scheduled to receive the merchandise on January 2, 2011.
4. Merchandise costing $73,000 shipped by a vendor f.o.b. destination on December 30, 2010, and received by Garza
on January 4, 2011.
5. Merchandise costing $51,000 shipped by a vendor f.o.b. seller on December 31, 2010, and received by Garza on
January 5, 2011.

Based on the above information, calculate the amount that should appear on Garza's balance sheet at December 31, 2010,
for inventory.
Inventory $525,000

Inventory per physical count $441,000

Goods in transit to customer, f.o.b. destination 33,000
Goods in transit from vendor, f.o.b. seller 51,000
Inventory to be reported on balance sheet $525,000

The consigned goods of $61,000 are not owned by Garza and were properly excluded.

The goods in transit to a customer of $46,000, shipped f.o.b. shipping point, are properly excluded from the inventory
because the title to the goods passed when they left the seller (Garza) and therefore a sale and related cost of goods sold
should be recorded in 2010.

The goods in transit from a vendor of $73,000, shipped f.o.b. destination, are properly excluded from the inventory because
the title to the goods does not pass to Garza until the buyer (Garza) receives them.

E8-3

(Inventoriable Costs)

Assume that in an annual audit of Webber Inc. at December 31, 2010, you find the following transactions below near
the closing date.

Assuming that each of the amounts is material, state whether the merchandise should be included in the client's
inventory.

1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of
the shipping room on December 31, 2010. The customer was billed on that date and the machine excluded from
inventory although it was shipped on January 4, 2011
Include
2. Merchandise costing $2,800 was received on January 3, 2011, and the related purchase invoice recorded January
5. The invoice showed the shipment was made on December 29, 2010, f.o.b. destination.
Do not include
3. A packing case containing a product costing $3,400 was standing in the shipping room when the physical
inventory was taken. It was not included in the inventory because it was marked "Hold for shipping instructions."
Your investigation revealed that the customer's order was dated December 18, 2010, but that the case was
shipped and the customer billed on January 10, 2011. The product was a stock item of your client.
Include
4. Merchandise costing $720 was received on December 28, 2010, and the invoice was not recorded. You located it
in the hands of the purchasing agent; it was marked "on consignment."
 Do not include
5. Merchandise received on January 6, 2011, costing $680 was entered in the purchase journal on January 7, 2011.
The invoice showed shipment was made f.o.b. supplier's warehouse on December 31, 2010. Because it was not
on hand at December 31, it was not included in inventory.
Include

E8-11

(Inventory Errors)

At December 31, 2010, Dwight Corporation reported current assets of $390,000 and current liabilities of $200,000. The
following items may have been recorded incorrectly. Dwight uses the periodic method.

1. Goods purchased costing $22,000 were shipped f.o.b. shipping point by a supplier on December 28. Dwight
received and recorded the invoice on December 29, 2010, but the goods were not included in Dwight's physical
count of inventory because they were not received until January 4, 2011.
2. Goods purchased costing $20,000 were shipped f.o.b. destination by a supplier on December 26. Dwight received
and recorded the invoice on December 31, but the goods were not included in Dwight's 2010 physical count of
inventory because they were not received until January 2, 2011.
3. Goods held on consignment from Kishi Company were included in Dwight's December 31, 2010, physical count of
inventory at $13,000.
4. Freight-in of $3,000 was debited to advertising expense on December 28, 2010.

(a) Compute the current ratio based on Dwight's balance sheet. (Round answer to 2 decimal places, e.g. 5.10.)
Current ratio 1.95 : 1
(b) Recompute the current ratio after corrections are made. (Round answer to 2 decimal places, e.g. 5.10.)
Current ratio 2.23 : 1
(c) By what amount will income (before taxes) be adjusted up or down as a result of the corrections?

$29,000

(a) $390,000
= 1.95 : 1
$200,000
(b) $390,000 + $22,000 - $13,000 + $3,000 $402,000
= = 2.23 : 1
$200,000 - $20,000 $180,000
(c) Adjust Income,
Event Effect of Error Increase Decrease)
1. Understatement of ending inventory Decreases net income $22,000
2. Overstatement of purchases Decreases net income 20,000
3. Overstatement of ending inventory Increases net income (13,000)
4. Overstatement of advertising expense;
understatement of cost of goods sold 0
$29,000

E8-15

(FIFO, LIFO, Average Cost Inventory)

Esplanade Company was formed on December 1, 2010. The following information is available from Esplanade's inventory
 records for Product BAP.

Units Unit Cost

January 1, 2010 (beginning inventory) 600 $8.00
Purchases:
January 5, 2010 1,100 9.00
January 25, 2010 1,300 10.00
February 16, 2010 800 11.00
March 26, 2010 600 12.00

A physical inventory on March 31, 2010, shows 1,500 units on hand.

Prepare schedules to compute the ending inventory at March 31, 2010, under each of the following inventory methods.
Assume Esplanade Company uses the periodic inventory method.

(a) FIFO
ESPLANADE COMPANY
Computation of Inventory for Product
BAP under FIFO Inventory Method
March 31, 2010
Units Unit Cost Total Cost
March 26, 2010 600 $12.00 $7,200
February 16, 2010 800 11.00 8,800
January 25, 2010 100 10.00 1,000
March 31, 2010, inventory 1,500 $17,000
(b) LIFO
ESPLANADE COMPANY
Computation of Inventory for Product
BAP under LIFO Inventory Method
March 31, 2010
Units Unit Cost Total Cost
Beginning inventory 600 $8.00 $4,800
January 5, 2010 900 9.00 8,100
March 31, 2010, inventory 1,500 $12,900
(c) Weighted average (Round weighted average cost to 2 decimal places, e.g. 2.25 and use this rounded
amount for future calculations. Round the inventory on March to 0 decimal places, e.g. 1,250.)
ESPLANADE COMPANY
Computation of Inventory for Product
BAP under Weighted Average Inventory Method
March 31, 2010
Units Unit Cost Total Cost
Beginning inventory 600 $8.00 $4,800
January 5, 2010 1,100 9.00 9,900
January 25, 2010 1,300 10.00 13,000
February 16, 2010 800 11.00 8,800
March 26, 2010 600 12.00 7,200
4,400 $43,700
Weighted Average cost $9.93

March 31, 2010, inventory $14,895

E8-15

(a) ESPLANADE COMPANY

Computation of Inventory for Product
BAP under FIFO Inventory Method
March 31, 2010
Units Unit Cost Total Cost
March 26, 2010 600 $12.00 $7,200
February 16, 2010 800 11.00 8,800
 January 25, 2010 (portion) 100 10.00 1,000
March 31, 2010, inventory 1,500 $17,000
(b) ESPLANADE COMPANY
Computation of Inventory for Product
BAP under LIFO Inventory Method
March 31, 2010
Units Unit Cost Total Cost
Beginning inventory 600 $8.00 $4,800
January 5, 2010 (portion) 900 9.00 8,100
March 31, 2010, inventory 1,500 $12,900
(c) ESPLANADE COMPANY
Computation of Inventory for Product
BAP under Weighted Average Inventory Method
March 31, 2010
Units Unit Cost Total Cost
Beginning inventory 600 $8.00 $4,800
January 5, 2010 1,100 9.00 9,900
January 25, 2010 1,300 10.00 13,000
February 16, 2010 800 11.00 8,800
March 26, 2010 600 12.00 7,200
4,400 $43,700
Weighted Average Cost
($43,700 ÷ 4,400) $9.93

March 31, 2010, inventory 1,500 $9.93 $14,895

P8-5 (Compute FIFO, LIFO and Average Cost - Periodic and Perpetual)

Some of the information found on a detail inventory card for Slatkin Inc. for the first month of operations is as follows.

Received Issued, Balance,

Date No. of Units Unit Cost No. of Units No. of Units
January 2 1,200 $3.00 1,200
7 700 500
10 600 3.20 1,100
13 500 600
18 1,000 3.30 300 1,300
20 1,100 200
23 1,300 3.40 1,500
26 800 700
28 1,600 3.50 2,300
31 1,300 1,000

P8-5 (a)

From these data compute the ending inventory on each of the following bases. Assume that perpetual inventory records are
kept in units only. (Round unit costs to 2 decimal places, e.g. 1.50 and ending inventory to 0 decimal places, e.g.
2,215 and use the rounded amount for future calculations. Round final answer to 0 decimal places, e.g. 2,215.)

1. First-in, first-out (FIFO).

$3,500

2. Last-in, first-out (LIFO).

$3,000
 3. Average cost.

$3,310

Assuming costs are not computed for each withdrawal (units received, 5,700, minus units issued, 4,700, equals ending
inventory at 1,000 units):
(1) First-in, first-out
Date of Invoice No. Units Unit Cost Total Cost
Jan. 28 1,000 $3.50 $3,500

(2) Last-in, first-out

Date of Invoice No. Units Unit Cost Total Cost
Jan. 2 1,000 $3.00 $3,000

(3) Average cost

Cost of goods available:
Date of Invoice No. Units Unit Cost Total Cost
Jan. 2 1,200 $3.00 $ 3,600
Jan. 10 600 3.20 1,920
Jan. 18 1,000 3.30 3,300
Jan. 23 1,300 3.40 4,420
Jan. 28 1,600 3.50 5,600
Totals Available 5,700 $18,840

Average cost per unit = $18,840 ÷ 5,700 = $3.31

Cost of inventory Jan. 31 = 1,000 × $3.31 = $3,310

P8-5 (b)

If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, what would the
amounts shown as ending inventory in 1, 2, and 3 above be? (Round computation for unit cost to 4 decimal places,
e.g. 2.115 when calculating average cost and use the rounded amount for future calculations. Round the final
answer to 0 decimal places, e.g. 1,250.)

1. First-in, first-out (FIFO).

$3,500

2. Last-in, first-out (LIFO).

$3,350

3. Average cost.

$3,463

Assuming costs are computed at the time of each withdrawal:

Under FIFO-Yes. The amount shown as ending inventory would be the same as in (a) above. In each case the units on hand
would be assumed to be part of those purchased on Jan. 28.

Under LIFO-No. During the month the available balance dropped below the ending inventory quantity so that the layers of
oldest costs were partially liquidated during the month.

Under Average Cost-No. A new average cost would be computed each time a withdrawal was made instead of only once for
all items purchased during the year.

The calculations to determine the inventory on this basis are given below.
(1) First-in, first-out
The inventory would be the same in amount as in part (a), $3,500

(2)Last-in, first-out
Received Issued Balance
No. of Unit No. of Unit No. of Unit
Date units cost units cost units cost Amount
Jan. 2 1,200 $3.00 1,200 $3.00 $3,600
Jan. 7 700 $3.00 500 3.00 1,500
Jan. 10 600 3.20 500 3.00
3,420
600 3.20
Jan. 13 500 3.20 500 3.00
1,820
100 3.20
Jan. 18 1,000 3.30 300 3.30 500 3.00
100 3.20 4,130
700 3.30
Jan. 20 700 3.30
100 3.20
300 3.00 200 3.00 600
Jan. 23 1,300 3.40 200 3.00
5,020
1,300 3.40
Jan. 26 800 3.40 200 3.00
2,300
500 3.40
Jan. 28 1,600 3.50 200 3.00
500 3.40 7,900
1,600 3.50
Jan. 31 1,300 3.50 200 3.00
500 3.40 3,350
300 3.50

Inventory, January 31 is $3,350

(3) Average cost

Received Issued Balance
No. of Unit No. of Unit No. of Unit
Date units cost units cost units cost Amount
Jan. 2 1,200 $3.00 1,200 $3.0000 $3,600
Jan. 7 700 $3.0000 500 3.0000 1,500
Jan. 10 600 3.20 1,100 3.1091 3,420
Jan. 13 500 3.1091 600 3.1091 1,865
Jan. 18 1,000 3.30 300 3.2281 1,300 3.2281 4,197
Jan. 20 1,100 3.2281 200 3.2281 646
Jan. 23 1,300 3.40 1,500 3.3773 5,066
Jan. 26 800 3.3773 700 3.3773 2,364
Jan. 28 1,600 3.50 2,300 3.4626 7,964
Jan. 31 1,300 3.4626 1,000 3.4626 3,463

Inventory, January 31 is $3,463