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Norman’s Televisions produces television sets in three categories: portable, midsize, and flat-screen. On January 1, 2014, Norman adopted dollar-value LIFO and decided to use a single inventory pool. The company’s January 1 inventory consists of:
\r\nCategory Quantity Cost per Unit Total Cost
\r\nPortable 6,000 $100 $ 600,000
\r\nMidsize 8,000 250 2,000,000
\r\nFlat-screen 3,000 400 1,200,000 17,000 $3,800,000
\r\nDuring 2014, the company had the following purchases and sales.
\r\nQuantity Quantity Selling Price
\r\nCategory Purchased Cost per Unit Sold per Unit
\r\nPortable 15,000 $110 14,000 $150
\r\nMidsize 20,000 300 24,000 405
\r\nFlat-screen 10,000 500 6,000 600
\r\n45,000 44,000
\r\nInstructions
\r\n(Round to four decimals.)
\r\n(a) Compute ending inventory, cost of goods sold, and gross profit.
\r\n(b) Assume the company uses three inventory pools instead of one. Repeat instruction (a).
The management of Tritt Company has asked its accounting
\r\ndepartment to describe the effect upon the company’s financial position and its income statements of accounting for inventories on the LIFO rather than the FIFO basis during 2014 and 2015. The accounting department is to assume that the change to LIFO would have been effective on January 1, 2014, and that the initial LIFO base would have been the inventory value on December 31, 2013. Presented below are the company’s financial statements and other data for the years 2014 and 2015 when the FIFO method was employed.
\r\nFinancial Position as of
\r\n12/31/13 12/31/14 12/31/15
\r\nCash $ 90,000 $130,000 $154,000
\r\nAccounts receivable 80,000 100,000 120,000
\r\nInventory 120,000 140,000 176,000
\r\nOther assets 160,000 170,000 200,000
\r\nTotal assets $450,000 $540,000 $650,000
\r\nAccounts payable $ 40,000 $ 60,000 $ 80,000
\r\nOther liabilities 70,000 80,000 110,000
\r\nCommon stock 200,000 200,000 200,000
\r\nRetained earnings 140,000 200,000 260,000
\r\nTotal liabilities and equity $450,000 $540,000 $650,000
\r\nIncome for Years Ended
\r\n12/31/14 12/31/15
\r\nSales revenue $900,000 $1,350,000
\r\nLess: Cost of goods sold 505,000 756,000
\r\nOther expenses 205,000 304,000
\r\n710,000 1,060,000
\r\nIncome before income taxes 190,000 290,000
\r\nIncome taxes (40%) 76,000 116,000
\r\nNet income $114,000 $ 174,000
\r\nOther data:
\r\n1. Inventory on hand at December 31, 2013, consisted of 40,000 units valued at $3.00 each.
\r\n2. Sales (all units sold at the same price in a given year):
\r\n2014—150,000 units @ $6.00 each 2015—180,000 units @ $7.50 each
\r\n3. Purchases (all units purchased at the same price in given year):
\r\n2014—150,000 units @ $3.50 each 2015—180,000 units @ $4.40 each
\r\n4. Income taxes at the effective rate of 40% are paid on December 31 each year.
\r\nInstructions
\r\nName the account(s) presented in the financial statements that would have different amounts for 2015 if
\r\nLIFO rather than FIFO had been used, and state the new amount for each account that is named. Show computations.
Ehlo Company is a multiproduct firm. Presented below is information concerning one of its products, the Hawkeye.
\r\nDate Transaction Quantity Price/Cost
\r\n1/1 Beginning inventory 1,000 $12
\r\n2/4 Purchase 2,000 18
\r\n2/20 Sale 2,500 30
\r\n4/2 Purchase 3,000 23
\r\n11/4 Sale 2,200 33
\r\nInstructions
\r\nCompute cost of goods sold, assuming Ehlo uses:
\r\n(a) Periodic system, FIFO cost flow. (d) Perpetual system, LIFO cost flow.
\r\n(b) Perpetual system, FIFO cost flow. (e) Periodic system, weighted-average cost flow.
\r\n(c) Periodic system, LIFO cost flow. (f) Perpetual system, moving-average cost flow.
Some of the information found on a detail inventory card for Slatkin Inc. for the first month of operations is as follows.
\r\nReceived
\r\nIssued, Balance,
\r\nDate No. of Units Unit Cost No. of Units No. of Units
\r\nJanuary 2 1,200 $3.00 1,200
\r\n7 700 500
\r\n10 600 3.20 1,100
\r\n13 500 600
\r\n18 1,000 3.30 300 1,300
\r\n20 1,100 200
\r\n23 1,300 3.40 1,500
\r\n26 800 700
\r\n28 1,600 3.50 2,300
\r\n31 1,300 1,000
\r\nInstructions
\r\n(a) From these data compute the ending inventory on each of the following bases. Assume that perpetual inventory records are kept in units only. (Carry unit costs to the nearest cent and ending inventory to the nearest dollar.)
\r\n(1) First-in, first-out (FIFO).
\r\n(2) Last-in, first-out (LIFO).
\r\n(3) Average-cost.
\r\n(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, would the amounts shown as ending inventory in (1), (2), and (3) above be the same?
\r\nExplain and compute. (Round average unit costs to four decimal places.)
Hull Company’s record of transactions concerning part X for the month of April was as follows.
\r\nPurchases Sales
\r\nApril 1 (balance on hand) 100 @ $5.00 April 5 300
\r\n4 400 @ 5.10 12 200
\r\n11 300 @ 5.30 27 800
\r\n18 200 @ 5.35 28 150
\r\n26 600 @ 5.60
\r\n30 200 @ 5.80
\r\nInstructions
\r\n(a) Compute the inventory at April 30 on each of the following bases. Assume that perpetual inventory records are kept in units only. Carry unit costs to the nearest cent.
\r\n(1) First-in, first-out (FIFO).
\r\n(2) Last-in, first-out (LIFO).
\r\n(3) Average-cost.
\r\n(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, what amount would be shown as ending inventory in (1), (2), and (3) above? (Carry average unit costs to four decimal places.)
Some of the transactions of Torres Company during August are listed below. Torres uses the periodic inventory method.
\r\nAugust 10 Purchased merchandise on account, $12,000, terms 2/10, n/30.
\r\n13 Returned part of the purchase of August 10, $1,200, and received credit on account.
\r\n15 Purchased merchandise on account, $16,000, terms 1/10, n/60.
\r\n25 Purchased merchandise on account, $20,000, terms 2/10, n/30. 28 Paid invoice of August 15 in full.
\r\nInstructions
\r\n(a) Assuming that purchases are recorded at gross amounts and that discounts are to be recorded when taken:
\r\n(1) Prepare general journal entries to record the transactions.
\r\n(2) Describe how the various items would be shown in the financial statements.
\r\n(b) Assuming that purchases are recorded at net amounts and that discounts lost are treated as financial expenses:
\r\n(1) Prepare general journal entries to enter the transactions.
\r\n(2) Prepare the adjusting entry necessary on August 31 if financial statements are to be prepared at that time.
\r\n(3) Describe how the various items would be shown in the financial statements.
\r\n(c) Which of the two methods do you prefer and why?
Dimitri Company, a manufacturer of small tools, provided the following information from its accounting records for the year ended December 31, 2014.
\r\nInventory at December 31, 2014 (based on physical count of goods in Dimitri’s plant, at cost, on December 31, 2014) $1,520,000
\r\nAccounts payable at December 31, 2014 1,200,000
\r\nNet sales (sales less sales returns) 8,150,000
\r\nAdditional information is as follows.
\r\n1. Included in the physical count were tools billed to a customer f.o.b. shipping point on December 31,
\r\n2014. These tools had a cost of $31,000 and were billed at $40,000. The shipment was on Dimitri’s loading dock waiting to be picked up by the common carrier.
\r\n2. Goods were in transit from a vendor to Dimitri on December 31, 2014. The invoice cost was $76,000, and the goods were shipped f.o.b. shipping point on December 29, 2014.
\r\n3. Work in process inventory costing $30,000 was sent to an outside processor for plating on December 30, 2014.
\r\n4. Tools returned by customers and held pending inspection in the returned goods area on December
\r\n31, 2014, were not included in the physical count. On January 8, 2015, the tools costing $32,000 were inspected and returned to inventory. Credit memos totaling $47,000 were issued to the customers onthe same date.
\r\n5. Tools shipped to a customer f.o.b. destination on December 26, 2014, were in transit at December 31,
\r\n2014, and had a cost of $26,000. Upon notification of receipt by the customer on January 2, 2015,
\r\nDimitri issued a sales invoice for $42,000.
\r\n6. Goods, with an invoice cost of $27,000, received from a vendor at 5:00 p.m. on December 31, 2014, were recorded on a receiving report dated January 2, 2015. The goods were not included in the physical count, but the invoice was included in accounts payable at December 31, 2014.
\r\n7. Goods received from a vendor on December 26, 2014, were included in the physical count. However,
\r\nthe related $56,000 vendor invoice was not included in accounts payable at December 31, 2014, because the accounts payable copy of the receiving report was lost.
\r\n8. On January 3, 2015, a monthly freight bill in the amount of $8,000 was received. The bill specifically related to merchandise purchased in December 2014, one-half of which was still in the inventory at
\r\nDecember 31, 2014. The freight charges were not included in either the inventory or in accounts payable at December 31, 2014.
\r\nInstructions
\r\nUsing the format shown below, prepare a schedule of adjustments as of December 31, 2014, to the initial amounts per Dimitri’s accounting records. Show separately the effect, if any, of each of the eight transactions on the December 31, 2014, amounts. If the transactions would have no effect on the initial amount shown, enter NONE.
\r\nAccounts Net
\r\nInventory Payable Sales
\r\nInitial amounts $1,520,000 $1,200,000 $8,150,000
\r\nAdjustments—increase (decrease)
\r\n1
\r\n2
\r\n3
\r\n4
\r\n5
\r\n6
\r\n7
\r\n8
\r\nTotal adjustments
\r\nAdjusted amounts $ $ $
The following independent situations relate to inventory accounting.
\r\n1. Kim Co. purchased goods with a list price of $175,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. How much should Kim Co. record as the cost of these goods?
\r\n2. Keillor Company’s inventory of $1,100,000 at December 31, 2014, was based on a physical count of goods priced at cost and before any year-end adjustments relating to the following items.
\r\n(a) Goods shipped from a vendor f.o.b. shipping point on December 24, 2014, at an invoice cost of
\r\n$69,000 to Keillor Company were received on January 4, 2015.
\r\n(b) The physical count included $29,000 of goods billed to Sakic Corp. f.o.b. shipping point on
\r\nDecember 31, 2014. The carrier picked up these goods on January 3, 2015.
\r\nWhat amount should Keillor report as inventory on its balance sheet?
\r\n3. Zimmerman Corp. had 1,500 units of part M.O. on hand May 1, 2014, costing $21 each. Purchases of part M.O. during May were as follows.
\r\nUnits Unit Cost
\r\nMay 9 2,000 $22.00
\r\n17 3,500 23.00
\r\n26 1,000 24.00
\r\n4 5
\r\n8A physical count on May 31, 2014, shows 2,000 units of part M.O. on hand. Using the FIFO method, what is the cost of part M.O. inventory at May 31, 2014? Using the LIFO method, what is the inventory cost? Using the average-cost method, what is the inventory cost?
\r\n4. Ashbrook Company adopted the dollar-value LIFO method on January 1, 2014 (using internal price indexes and multiple pools). The following data are available for inventory pool A for the 2 years following adoption of LIFO.
\r\nAt Base- At Current-
\r\nInventory Year Cost Year Cost
\r\n1/1/14 $200,000 $200,000
\r\n12/31/14 240,000 264,000
\r\n12/31/15 256,000 286,720
\r\nComputing an internal price index and using the dollar-value LIFO method, at what amount should the inventory be reported at December 31, 2015?
\r\n5. Donovan Inc., a retail store chain, had the following information in its general ledger for the year 2015.
\r\nMerchandise purchased for resale $909,400
\r\nInterest on notes payable to vendors 8,700
\r\nPurchase returns 16,500
\r\nFreight-in 22,000
\r\nFreight-out (delivery expense) 17,100
\r\nCash discounts on purchases 6,800
\r\nWhat is Donovan’s inventoriable cost for 2015?
\r\nInstructions
\r\nAnswer each of the preceding questions about inventories, and explain your answers.ROBLEMS
Question:
\r\nThe following information relates to the Jimmy Johnson Company. Ending Inventory Price
\r\nDate (End-of-Year Prices) Index
\r\nDecember 31, 2010 $ 70,000 100
\r\nDecember 31, 2011 90,300 105
\r\nDecember 31, 2012 95,120 116
\r\nDecember 31, 2013 105,600 120
\r\nDecember 31, 2014 100,000 125
\r\nInstructions
\r\nUse the dollar-value LIFO method to compute the ending inventory for Johnson Company for 2010 through 2014.
Presented below is information related to Dino Radja Company. Ending Inventory Price
\r\nDate (End-of-Year Prices) Index
\r\nDecember 31, 2011 $ 80,000 100
\r\nDecember 31, 2012 115,500 105
\r\nDecember 31, 2013 108,000 120
\r\nDecember 31, 2014 122,200 130
\r\nDecember 31, 2015 154,000 140
\r\nDecember 31, 2016 176,900 145
\r\nInstructions
\r\nCompute the ending inventory for Dino Radja Company for 2011 through 2016 using the dollar-value LIFO method.
The dollar-value LIFO method was adopted by Enya Corp. on January 1, 2014.
\r\nIts inventory on that date was $160,000. On December 31, 2014, the inventory at prices existing on that date amounted to $140,000. The price level at January 1, 2014, was 100, and the price level at December 31, 2014, was 112.
\r\nInstructions
\r\n(a) Compute the amount of the inventory at December 31, 2014, under the dollar-value LIFO method.
\r\n(b) On December 31, 2015, the inventory at prices existing on that date was $172,500, and the price level was 115. Compute the inventory on that date under the dollar-value LIFO method.
Oasis Company has used the dollar-value LIFO method for inventory cost determination for many years. The following data were extracted from Oasis’ records.
\r\nPrice Ending Inventory Ending Inventory
\r\nDate Index at Base Prices at Dollar-Value LIFO
\r\nDecember 31, 2014 105 $92,000 $92,600
\r\nDecember 31, 2015 ? 97,000 98,350
\r\nInstructions
\r\nCalculate the index used for 2015 that yielded the above results.
Tori Amos Corporation began operations on December 1, 2013. The only inventory transaction in 2013 was the purchase of inventory on December 10, 2013, at a cost of $20 per unit. None of this inventory was sold in 2013. Relevant information is as follows. Ending inventory units
\r\nDecember 31, 2013 100
\r\nDecember 31, 2014, by purchase date
\r\nDecember 2, 2014 100
\r\nJuly 20, 2014 50 150
\r\nDuring the year, the following purchases and sales were made.
\r\nPurchases Sales
\r\nMarch 15 300 units at $24 April 10 200
\r\nJuly 20 300 units at 25 August 20 300
\r\nSeptember 4 200 units at 28 November 18 150
\r\nDecember 2 100 units at 30 December 12 200
\r\nThe company uses the periodic inventory method.
\r\nInstructions
\r\n(a) Determine ending inventory under (1) specific identification, (2) FIFO, (3) LIFO, and (4) average cost.
\r\n(b) Determine ending inventory using dollar-value LIFO. Assume that the December 2, 2014, purchase cost is the current cost of inventory. (Hint: The beginning inventory is the base layer priced at $20 per unit.)
The following example was provided to encourage the use of the LIFO method. In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a
\r\nLIFO reserve account on the books. The LIFO benefit grows as inflation widens the gap between currentyear and past-year (minus inflation) inventory costs. This gap is: With LIFO Without LIFO
\r\nRevenues $3,200,000 $3,200,000
\r\nCost of goods sold 2,800,000 2,800,000
\r\nOperating expenses 150,000 150,000
\r\nOperating income 250,000 250,000
\r\nLIFO adjustment 40,000 0
\r\nTaxable income $ 210,000 $ 250,000
\r\nIncome taxes @ 36% $ 75,600 $ 90,000
\r\nCash fl ow $ 174,400 $ 160,000
\r\nExtra cash $ 14,400 0
\r\nIncreased cash fl ow 9% 0%
\r\nInstructions
\r\n(a) Explain what is meant by the LIFO reserve account.
\r\n(b) How does LIFO subtract inflation from inventory costs?
\r\n(c) Explain how the cash flow of $174,400 in this example was computed. Explain why this amount may not be correct.
\r\n(d) Why does a company that uses LIFO have extra cash? Explain whether this situation will always exist.
Johnny Football Shop began operations on January 2, 2014. The following stock record card for footballs was taken from the records at the end of the year.
\r\nUnits Unit Invoice Gross Invoice
\r\nDate Voucher Terms Received Cost Amount
\r\n1/15 10624 Net 30 50 $20 $1,000
\r\n3/15 11437 1/5, net 30 65 16 1,040
\r\n6/20 21332 1/10, net 30 90 15 1,350
\r\n9/12 27644 1/10, net 30 84 12 1,008
\r\n11/24 31269 1/10, net 30 76 11 836
\r\nTotals 365 $5,234
\r\nA physical inventory on December 31, 2014, reveals that 100 footballs were in stock. The bookkeeper informs you that all the discounts were taken. Assume that Johnny Football Shop uses the invoice price less discount for recording purchases.
\r\nInstructions
\r\n(a) Compute the December 31, 2014, inventory using the FIFO method.
\r\n(b) Compute the 2014 cost of goods sold using the LIFO method.
\r\n(c) What method would you recommend to the owner to minimize income taxes in 2014, using the inventory information for footballs as a guide?
You are the vice president of finance of Sandy Alomar Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2014.
\r\nThese schedules appear below.
\r\nSales Cost of Gross
\r\n($5 per unit) Goods Sold Margin
\r\nSchedule 1 $150,000 $124,900 $25,100
\r\nSchedule 2 150,000 129,400 20,600
\r\nThe computation of cost of goods sold in each schedule is based on the following data.
\r\nCost Total
\r\nUnits per Unit Cost
\r\nBeginning inventory, January 1 10,000 $4.00 $40,000
\r\nPurchase, January 10 8,000 4.20 33,600
\r\nPurchase, January 30 6,000 4.25 25,500
\r\nPurchase, February 11 9,000 4.30 38,700
\r\nPurchase, March 17 11,000 4.40 48,400
\r\nJane Torville, the president of the corporation, cannot understand how two different gross margins can be computed from the same set of data. As the vice president of finance, you have explained to Ms. Torville that the two schedules are based on different assumptions concerning the flow of inventory costs, i.e., FIFO and LIFO. Schedules 1 and 2 were not necessarily prepared in this sequence of cost flow assumptions.
\r\nInstructions
\r\nPrepare two separate schedules computing cost of goods sold and supporting schedules showing the composition of the ending inventory under both cost flow assumptions.
The board of directors of Ichiro Corporation is considering whether or not it should instruct the accounting department to shift from a first-in, first-out (FIFO) basis of pricing inventories to a last-in, first-out (LIFO) basis. The following information is available.
\r\nSales 21,000 units @ $50
\r\nInventory, January 1 6,000 units @ 20
\r\nPurchases 6,000 units @ 22
\r\n10,000 units @ 25
\r\n7,000 units @ 30
\r\nInventory, December 31 8,000 units @ ?
\r\nOperating expenses $200,000
\r\nInstructions
\r\nPrepare a condensed income statement for the year on both bases for comparative purposes.
The following is a record of Pervis Ellison Company’s transactions for Boston Teapots for the month of May 2014.
\r\nMay 1 Balance 400 units @ $20 May 10 Sale 300 units @ $38
\r\n12 Purchase 600 units @ $25 20 Sale 540 units @ $38
\r\n28 Purchase 400 units @ $30
\r\nInstructions
\r\n(a) Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 560 units on hand, what is the cost of the ending inventory using (1) FIFO and
\r\n(2) LIFO?
\r\n(b) Assuming that perpetual records are maintained and they tie into the general ledger, calculate the ending inventory using (1) FIFO and (2) LIFO.
Presented below is information related to
\r\nBlowfish radios for the Hootie Company for the month of July.
\r\nUnits Unit Units Selling
\r\nDate Transaction In Cost Total Sold Price Total
\r\nJuly 1 Balance 100 $4.10 $ 410
\r\n6 Purchase 800 4.20 3,360
\r\n7 Sale 300 $7.00 $ 2,100
\r\n10 Sale 300 7.30 2,190
\r\n12 Purchase 400 4.50 1,800
\r\n15 Sale 200 7.40 1,480
\r\n18 Purchase 300 4.60 1,380
\r\n22 Sale 400 7.40 2,960
\r\n25 Purchase 500 4.58 2,290
\r\n30 Sale 200 7.50 1,500
\r\nTotals 2,100 $9,240 1,400 $10,230
\r\nInstructions
\r\n(a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions.
\r\n(1) FIFO.
\r\n(2) LIFO.
\r\n(3) Weighted-average.
\r\n(b) Answer the following questions.
\r\n(1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why.
\r\n(2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why.
Shania Twain Company was formed on December 1, 2013.
\r\nThe following information is available from Twain’s inventory records for Product BAP.
\r\nUnits Unit Cost
\r\nJanuary 1, 2014 (beginning inventory) 600 $ 8.00
\r\nPurchases:
\r\nJanuary 5, 2014 1,200 9.00
\r\nJanuary 25, 2014 1,300 10.00
\r\nFebruary 16, 2014 800 11.00
\r\nMarch 26, 2014 600 12.00
\r\nA physical inventory on March 31, 2014, shows 1,600 units on hand.
\r\nInstructions
\r\nPrepare schedules to compute the ending inventory at March 31, 2014, under each of the following inventory methods.
\r\n(a) FIFO. (b) LIFO. (c) Weighted-average (round unit costs to two decimal places).
John Adams Company’s record of transactions for the month of April was as follows.
\r\nPurchases Sales
\r\nApril 1 (balance on hand) 600 @ $ 6.00 April 3 500 @ $10.00
\r\n4 1,500 @ 6.08 9 1,400 @ 10.00
\r\n8 800 @ 6.40 11 600 @ 11.00
\r\n13 1,200 @ 6.50 23 1,200 @ 11.00
\r\n21 700 @ 6.60 27 900 @ 12.00
\r\n29 500 @ 6.79 4,600
\r\n5,300
\r\nInstructions
\r\n(a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and (2) average-cost.
\r\n(b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO.
\r\n(c) Compute cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.
\r\n(d) In an inflationary period, which inventory method—FIFO, LIFO, average-cost—will show the highest net income?
Inventory information for Part 311 of Monique Aaron
\r\nCorp. discloses the following information for the month of June.
\r\nJune 1 Balance 300 units @ $10 June 10 Sold 200 units @ $24
\r\n11 Purchased 800 units @ $12 15 Sold 500 units @ $25
\r\n20 Purchased 500 units @ $13 27 Sold 300 units @ $27
\r\nInstructions
\r\n(a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under (1) LIFO and (2) FIFO.
\r\n(b) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the value of the ending inventory at LIFO?
\r\n(c) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the gross profit if the inventory is valued at FIFO?
\r\n(d) Why is it stated that LIFO usually produces a lower gross profit than FIFO?
The net income per books of Linda Patrick Company was determined without knowledge of the errors indicated.
\r\nNet Income Error in Ending
\r\nYear per Books Inventory
\r\n2009 $50,000 Overstated $ 3,000
\r\n2010 52,000 Overstated 9,000
\r\n2011 54,000 Understated 11,000
\r\n2012 56,000 No error
\r\n2013 58,000 Understated 2,000
\r\n2014 60,000 Overstated 8,000
\r\nInstructions
\r\nPrepare a worksheet to show the adjusted net income figure for each of the 6 years after taking into account the inventory errors.
At December 31, 2013, Stacy McGill Corporation reported current assets of $370,000 and current liabilities of $200,000. The following items may have been recorded incorrectly.
\r\n1. Goods purchased costing $22,000 were shipped f.o.b. shipping point by a supplier on December 28.
\r\nMcGill received and recorded the invoice on December 29, 2013, but the goods were not included in
\r\nMcGill’s physical count of inventory because they were not received until January 4, 2014.
\r\n2. Goods purchased costing $15,000 were shipped f.o.b. destination by a supplier on December 26.
\r\nMcGill received and recorded the invoice on December 31, but the goods were not included in McGill’s 2013 physical count of inventory because they were not received until January 2, 2014.
\r\n3. Goods held on consignment from Claudia Kishi Company were included in McGill’s December 31, 2013, physical count of inventory at $13,000.
\r\n4. Freight-in of $3,000 was debited to advertising expense on December 28, 2013.
\r\nInstructions
\r\n(a) Compute the current ratio based on McGill’s balance sheet.
\r\n(b) Recompute the current ratio after corrections are made.
\r\n(c) By what amount will income (before taxes) be adjusted up or down as a result of the corrections?
Ann M. Martin Company makes the following errors during the current year. (Evaluate each case independently and assume ending inventory in the following year is correctly stated.)
\r\n1. Ending inventory is overstated, but purchases and related accounts payable are recorded correctly.
\r\n2. Both ending inventory and purchases and related accounts payable are understated. (Assume this purchase was recorded and paid for in the following year.)
\r\n3. Ending inventory is correct, but a purchase on account was not recorded. (Assume this purchase was recorded and paid for in the following year.)
\r\nInstructions
\r\nIndicate the effect of each of these errors on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for the current year and the subsequent year.
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