Accounting 220 Help Week 3

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Problem B-05.01

Harold Frieze owns Euro Lighting, a lighting products store that specializes in energy efficient and aesthetically pleasing fixtures. Sales have grown rapidly due to recent consumer interest in reducing energy consumption for economic and environmental reasons.
Increased sales have brought new challenges. First, the "modern" styling of the fixtures looks great in the store, but consumers often find they clash with other fixtures once they take them home. This has brought about a high rate of return. Harold accepts returns of undamaged goods with original packaging.
Second, many of the fixtures are rather technical and require care when installing them. Customers frequently damage the products (and packaging) when attempting to do an installation. Harold does not accept such goods for return, but has established a policy of refunding a portion of the purchase price as an "allowance" for customers who complain of such problems.
(a) Prepare a journal entry for each of the following scenarios.
A customer purchased a lighting fixture for cash of €350
A customer purchased a lighting fixture on account for €500
A customer returned a lighting fixture for a cash refund of €275
A customer returned a fixture for a credit on account of €600
A complaining customer received a €100 allowance in cash
A complaining customer received a €70 credit on account
A customer paid their balance on account of €475
(b) Calculate Euro Lighting's net sales and gross profit based on the following information, and show how such information would appear on the upper portion of the income statement for the year ending December 31, 20X3.
Gross sales, €760,000 Sales returns and allowances, €42,500 Cost of goods sold, €312,000
&R&"Myriad Web Pro,Bold"&20B-05.01
B-05.01

Worksheet(a)

(a) GENERAL JOURNAL        Page
Date Accounts Debit Credit
350
350
A customer purchased a lighting fixture for cash of €350
500
500
A customer purchased a lighting fixture on account for €500
275
275
A customer returned a lighting fixture for a cash refund of €275
600
600
A customer returned a fixture for a credit on account of €600
100
100
A complaining customer received a €100 allowance in cash
70
70
A complaining customer received a €70 credit on account
475
475
A customer paid their balance on account of €475
&L&"Myriad Web Pro,Bold"&12Name: Date: Section: &R&"Myriad Web Pro,Bold"&20B-05.01(a)
B-05.01(a)

Worksheet(b)

(b)
EURO LIGHTING
Income Statement
For the Year Ending December 31, 20X3
*
* In many European countries, "Sales" is referred to as "Turnover."
&L&"Myriad Web Pro,Bold"&12Name: Date: Section: &R&"Myriad Web Pro,Bold"&20I-05.01(b)
I-05.01(b)

Problem B-05.02

College Bookstore is facing increased competition from online resellers and electronic media forms. To combat eroding sales, management adopted new discounting policies as follows:
Students are offered a trade discount based on the number of books purchased:
A student purchasing one book gets 0% discount.
A student purchasing two books gets a 10% discount.
A student purchasing three books gets a 20% discount.
A student purchasing four or more books gets a 30% discount.
Students are now offered credit terms at the time of purchase. If the student pays within 30 days of the date of purchase, he or she receives a 3% cash discount.
(a) Calculate the amount of the sale that should be recorded by College Bookstore for each of the following transactions. How much should be ultimately be collected for each transaction?
Student A, 3 books, $425 list price, purchased on August 11, paid on August 19
Student B, 2 books, $210 list price, purchased on August 18, paid on October 4.
Student C, 1 books, $90 list price, purchased on Sept. 3, paid on Sept. 3
Student D, 7 books, $1,205 list price, purchased on August 5, paid on Sept. 20
(b) Demonstrate the appropriate journal entry to record the sale and subsequent collection from students A and B.
B-05.02

Worksheet B-05.02

(a)
If you elect to solve this problem with the electronic spreadsheet -- all you need to do is enter the number of books in column C and the list price in column D. The rest is automated -- but that is not much of an assignment so I have intentionally included two "errors" in the "If statements" in column H. You will need to identify the errors and correct them to get the right automated answers! Good luck!
Sale Date Books List Price Trade Discount Sale Amount Date Paid Collection
A 11-Aug 0 $ - 0 19-Aug $ - 0
B 18-Aug 0 - 0 4-Oct - 0
C 3-Sep 0 - 0 3-Sep - 0
D 5-Aug 0 - 0 20-Sep - 0
(b)
A Accounts Receivable 0.00
Sales 0.00
To record sale to Student A
Cash 0.00
Sales Discount 0.00
Accounts Receivable 0.00
To record collection from Student A
B Accounts Receivable 0.00
Sales 0.00
To record sale to Student B
Cash 0.00
Sales Discount 0.00
Accounts Receivable 0.00
To record collection from Student B
B-05.02
This spreadsheet includes "If statements" in cells E5 To E8, and cells H5 to H8. "If statements" return alternative values/calculations depending on whether some condition is true or false. In column E, the "If statement" returns a discount based on the number of books entered in Column C. In column H, the "If statement" determines (based on the number days from sale to payment) if a discount is due, and accordingly calculates the payment.

Problem B-05.03

Shirley Williams Apparel Store purchases clothing merchandise on account from various vendors. Below is an invoice from Terra Wear.
Terra Wear
Action Sport Clothing
High Point, CO
Bill to: Shirley Williams Apparel Store INVOICE # 3778
Denver Sports Center, #1234
Denver, CO
DELIVERY DATE INVOICE DATE F.O.B. POINT TERMS
May 5, 20X1 May 5, 20X1 Denver 1/10,n/30
QTY Description UNIT PRICE TOTAL
70 Work Out Wonder sport collection $ 125 $ 8,750
30 Sun Fun - fun wear 35 $ 1,050
10 Fall Color collection 60 $ 600
THANK YOU FOR YOUR BUSINESS! TOTAL $ 10,400
(a) Prepare Shirley's journal entries for each of the following transactions, assuming use of a periodic inventory system and the "gross method" of recording:
To record the invoice on May 5.
To record the return of the Fall Color collection on May 7.
To record the payment of the balance due if payment occurred on May 10.
To record the payment of the balance due if payment occurred on May 20.
(b) Repeat requirement (a) assuming Shirley uses the periodic inventory system and the "net method" of recording.
B-05.03

Worksheet B-05.03

(a) GENERAL JOURNAL     Page
Date Accounts Debit Credit
5-May
Purchased merchandise on account, terms 1/10,n/30
7-May
Returned the Fall Color collection
10-May
Paid invoice, discount taken
20-May
Paid invoice, discount missed
(b) GENERAL JOURNAL     Page
Date Accounts Debit Credit
5-May
Purchased merchandise on account, terms 1/10,n/30
7-May
Returned the Fall Color collection
10-May
Paid invoice, discount taken
20-May
Paid invoice, discount missed

Problem B-05.04

Gerloff Supply sells cables, connectors, and other basic wiring components to audio video dealers across the country. Dealers with "preferred status" receive a 20% discount off of list price. All sales are on account, and payment terms are 2/10, n/30. Sales of $1,000 and up (large orders) will ship F.O.B. destination. Orders less than $1,000 (small orders) are always F.O.B. shipping point. However, Gerloff will prepay freight on small orders by "preferred dealers." Otherwise, small orders are shipped freight collect by the common carrier making the delivery. In no event may a customer apply the cash discount terms to freight charges.
Prepare journal entries to record the sale and subsequent collection for each of the following transactions:
Transaction Customer Status List Price Freight Cost Date of Sale Date of Payment
1 Preferred $ 1,500 $ 125 3-Jun 9-Jun
2 Regular 300 30 7-Jun 20-Jun
3 Preferred 700 45 9-Jun 20-Jun
4 Regular 2,000 200 10-Jun 17-Jun
5 Regular 1,800 230 12-Jun 29-Jun
6 Preferred 2,400 180 15-Jun 27-Jun
B-05.04

Worksheet B-05.04

1 GENERAL JOURNAL Page
Date Accounts Debit Credit
3-Jun
9-Jun
2 GENERAL JOURNAL Page
Date Accounts Debit Credit
7-Jun
20-Jun
3 GENERAL JOURNAL Page
Date Accounts Debit Credit
9-Jun
20-Jun
4 GENERAL JOURNAL Page
Date Accounts Debit Credit
10-Jun
17-Jun
5 GENERAL JOURNAL Page
Date Accounts Debit Credit
12-Jun
29-Jun
6 GENERAL JOURNAL Page
Date Accounts Debit Credit
15-Jun
27-Jun

Problem B-05.05

Gunnison Creamery produces a variety of specialty ice creams and buys ingredients from many suppliers. Each supplier seems to have unique policies about discounts and freight terms. Gunnison Creamery records all purchases "gross" and uses a periodic inventory system. Gunnison recently hired a new bookkeeper and needs your help to develop a template of sample journal entries for different scenarios. For purposes of preparing the template, assume that the purchase is $1,000 and freight is $100.
Scenario Cash Discount Freight Terms Discount Condition
1 2/10, n/30 F.O.B. Shipping point/freight prepaid taken
2 2/10, n/30 F.O.B. Shipping point/freight prepaid missed
3 2/10, n/30 F.O.B. Destination/freight prepaid taken
4 2/10, n/30 F.O.B. Destination/freight prepaid missed
5 2/10, n/30 F.O.B. Shipping point/freight collect taken
6 2/10, n/30 F.O.B. Shipping point/freight collect missed
The first scenario is done as an example on the preprinted worksheet, and the electronic spreadsheet version expedites your solution by including a journal pick list of the following accounts:
Cash
Purchases
Accounts Payable
Purchases Discounts
Freight-in
B-05.05

Worksheet B-05.05

GENERAL JOURNAL     Page
Date Accounts Debit Credit
purchase Purchases 1,000
Freight-in 100
Accounts Payable 1,100
F.O.B. Shipping point/freight prepaid
pay Accounts Payable 1,100
Purchases Discounts 20
Cash 1,080
discount taken
GENERAL JOURNAL     Page
Date Accounts Debit Credit
purchase
F.O.B. Shipping point/freight prepaid
pay
discount missed
GENERAL JOURNAL     Page
Date Accounts Debit Credit
purchase
F.O.B. Destination/freight prepaid
pay
discount taken
GENERAL JOURNAL     Page
Date Accounts Debit Credit
purchase
F.O.B. Destination/freight prepaid
pay
discount missed
GENERAL JOURNAL     Page
Date Accounts Debit Credit
purchase
F.O.B. Shipping point/freight collect
pay
discount taken
GENERAL JOURNAL     Page
Date Accounts Debit Credit
purchase
F.O.B. Shipping point/freight collect
pay
discount missed

Problem B-05.06

Partial information follows about net sales, net purchases, cost of goods sold, gross profit, total expenses, and net income for Slabaugh Company. Compute the missing values.
NET SALES
Sales $ 800,000
Sales discounts 20,000
Sales returns and allowances ?
Net sales 735,000
NET PURCHASES
Purchases $ 400,000
Freight-in 20,000
Purchases discounts ?
Purchases returns and allowances 2,500
Net purchases 413,500
COST OF GOODS SOLD
Beginning inventory $ 85,400
Ending inventory 74,500
Cost of goods sold ?
GROSS PROFIT
Gross profit ?
TOTAL EXPENSES
Rent $ 36,000
Salaries 145,700
Utilities 12,300
Freight-out ?
Other 24,100
Total expenses 242,200
NET INCOME
Net income ?
B-05.06

Worksheet B-05.06

Sales $ 800,000
Less: Sales discounts $ 20,000
Sales returns and allowances 45,000 65,000
Net sales $ 735,000
B-05.06
This problem presents an excellent opportunity to use the solver function. It is found on the Data tab under the Analysis group. (Note: You may need to enable the solver add-in in the Excel options.) In older versions of Excel, this function is called goal seek and is found in the Excel tools menu. For example, one would construct the basic structure and formulas as shown for the net sales calculations. Then, launch goal seek and set cell "E6" to equal the known value of "$735,000" by changing the unknown cell D5. The value to input into cell D5 is calculated automatically. You are encouraged to experiment with the solver function/goal seek to solve this problem.

Problem B-05.07

Pitkin Health Care Products provides the following alphabetic list of accounts and their respective balances. All accounts have normal balances, and income statement account balances are for the year ending December 31, 20X4. A physical count of merchandise inventory on hand at year end revealed a balance of $277,390. Use this information to prepare a comprehensive income statement.
Accounts payable $ 93,789
Accounts receivable 82,890
Accumulated depreciation 166,554
Beginning inventory, Jan. 1 244,956
Capital stock 144,000
Cash 25,442
Depreciation expense 65,990
Dividends 12,000
Equipment 324,556
Freight-in 43,441
Freight-out 3,566
Insurance expense 8,700
Marketing expense 111,991
Note Payable 250,000
Purchase discounts 1,788
Purchase returns & allowances 6,665
Purchases 433,443
Rent expense 42,335
Retained earnings, Jan. 1 24,327
Salaries expense 233,998
Salaries payable 9,955
Sales 977,932
Sales discounts 8,817
Sales returns and allowances 13,998
Utilities expense 18,887
B-05.07

Worksheet B-05.07

PITKIN HEALTHCARE PRODUCTS
Income Statement
For the Year Ending December 31, 20X4
B-05.07

Problem B-05.08

Interiors With Oohs and Aahs sells custom home décor. Following is the corporation's income statement. Use this statement to prepare closing entries. No dividends were declared during the period.
INTERIORS WITH OOHS AND AAHS
Income Statement
For the Year Ending December 31, 20X4
Revenues
Sales $ 887,654
Less: Sales discounts $ 4,667
         Sales returns and allowances 9,880 14,547
Net sales $ 873,107
Cost of goods sold
Beginning inventory, Jan. 1 $ 182,343
Add: Purchases $ 593,356
        Freight-in 21,090
$ 614,446
Less: Purchase discounts $ 3,501
         Purchase returns & allowances 19,009 22,510
Net purchases 591,936
Goods available for sale $ 774,279
Less: Ending inventory, Dec. 31 199,055
Cost of goods sold 575,224
Gross profit $ 297,883
Expenses
Salaries $ 188,000
Insurance 9,152
Utilities 7,760
Freight-out 2,434
Depreciation 13,773 221,119
Net income $ 76,764
B-05.08

Worksheet B-05.08

GENERAL JOURNAL   Page
Date Accounts Debit Credit
Dec. 31
Dec. 31
Dec. 31

Problem B-05.09

J & S Pet Supplies uses a perpetual inventory system. Prepare journal entries necessary to record the purchase (for $22 on account) and resale (for $39 cash) of a 50 pound bag of dog chow.
B-05.09

Worksheet B-05.09

GENERAL JOURNAL  Page
Date Accounts Debit Credit
purchase
sale

Problem B-05.10

Stober's Lawn Sprinkler Company sells irrigation equipment. Below is information necessary to prepare Stober's income statement for the year ending December 31, 20X7. Stobler attributes 60% of the rent and utilities to selling functions, and the remainder to general and administrative activities. 70% of the salaries are devoted to sales. Prepare an income statement in both the single-step and multiple-step formats.
Advertising expense $ 33,998
Cost of goods sold 466,773
Rent expense 144,000
Salaries expense 166,321
Net sales 972,299
Income tax expense 30,000
Utilities expense 26,997
Interest expense 18,500
B-05.10

Worksheet B-05.10

MULTIPLE-STEP APPROACH
STOBER'S LAWN SPRINKLER COMPANY
Income Statement
For the Year Ending December 31, 20X7
SINGLE-STEP APPROACH
STOBER'S LAWN SPRINKLER COMPANY
Income Statement
For the Year Ending December 31, 20X7
B-05.10

Problem B-05.11

Morton Corporation and Skyline Corporation each sell playground equipment. Morton Corporation's strategy is to focus on selling quality units at the best possible prices, while attempting to minimize selling, general, and administrative expenses (SG&A). Skyline Corporation has concluded that many customers will differentiate more on brand than quality, and is promoting its inferior goods with a significant marketing campaign. Study each company's income statement below, and calculate the respective proportion of sales returns, the gross profit margin, and the net profit on sales. Both companies are subject to a 25% tax rate. Assuming no change in SG&A, which company would experience the biggest increase in profit from a 10% increase in net sales? Which company would experience the biggest decline in profit from a 10% decrease in net sales?
MORTON CORPORATION
Income Statement
For the Year Ending December 31, 20X6
Net sales
Gross sales $ 945,876
Less: Sales returns 18,918 $ 926,958
Cost of goods sold 709,407
Gross profit $ 217,551
Selling expenses $ 45,000
General & administrative expenses 120,000 165,000
Income before taxes $ 52,551
Income tax expense (25%) 13,138
Net income $ 39,413
SKYLINE CORPORATION
Income Statement
For the Year Ending December 31, 20X6
Net sales
Gross sales $ 985,876
Less: Sales returns 58,918 $ 926,958
Cost of goods sold 417,131
Gross profit $ 509,827
Selling expenses $ 337,276
General & administrative expenses 120,000 457,276
Income before taxes $ 52,551
Income tax expense (25%) 13,138
Net income $ 39,413
B-05.11

Worksheet B-05.11

Morton Corporation
Sales returns rate:
Gross profit margin
Net profit margin
Skyline Corporation
Sales returns rate:
Gross profit margin
Net profit margin
Morton Skyline
10% increase in net sales
Net sales ($926,958 X 110%)
Cost of goods sold
Gross profit (net sales X gross profit margin)
SG&A
Income before taxes
Income tax expense (25%)
Net income
10% decrease in net sales
Net sales ($926,958 X 90%)
Cost of goods sold
Gross profit (net sales X gross profit margin)
SG&A
Income before taxes
Income tax expense (25%)
Net income
B-05.11

B-05.12

Seaside Village is a retirement community, and many residents work together on a local charitable auction to raise money to support community endeavors. Basically, volunteers solicit residents and local merchants to donate items for the auction. The night of the auction, volunteers bring in their donated items for display on tables placed around the floor of the town's school gymnasium. Virtually the whole town turns out to bid on items that are up for sale. The lucky purchaser makes payment at a collection booth that is staffed by two of the volunteers. At the end of the evening, the buyers collect their items. A volunteer takes the money home to count. The money is deposited to the charity's bank account on the following day.
Following last year's auction, many complaints were heard. One merchant complained that he had donated an expensive LCD television, but it was not offered for sale at the auction. One of the buyers complained that the item she paid for was not to be found at the end of the evening. Another donor complained that he needed a receipt for tax purposes, and another person complained that some people were making up receipts for donations that were never made.
The charity's board is considering expanded controls for next year's event, and is considering ten specific proposals received from various volunteers. Which five of these proposals are the most valid strengthening of the control structure?
Donors will be sent a thank you letter, which will include a paragraph asking them to confirm that their donated item was present at the auction.
Proceeds should be counted and recorded by two or more people immediately following the auction, and then taken directly to the bank for deposit in the night depository.
The person taking the money to the bank will be required to perform a bank reconciliation at the end of the month to verify the deposit's posting.
All volunteers should be emailed a blank receipt form. Volunteers are encouraged to reprint a generous supply and be sure to issue one to each donor.
Prenumbered receipt books (with carbon copy film) should be used for donated items, and a log should be maintained of who received a receipt book. The receipts should be reconciled to donated items.
A paid receipt prepared by collection booth volunteers must be presented by a purchaser before being allowed to leave the gym with an item of merchandise.
An advertisement will be run in the local paper asking for support of the upcoming auction. The advertisement will include instructions to donors reminding them to always ask for a receipt for their gift, and encouraging them to call in to a special phone number to register to be eligible for a special prize drawing for donors!
Only one person at a time will be allowed in the collection booth. Each collection booth volunteer will be limited to a one-hour shift. No volunteer is to remove funds from the booth.
The charity's president will be required to perform an audit of the books and records related to the annual event. The president must issue a written audit report.
Donated items must be taken to a local storage facility upon receipt. A warehouse custodian volunteer will log the items, and another volunteer will be authorized to lock and unlock the warehouse.
B-05.12

Worksheet B-05.12

The strengths are as follows:
Use this problem as an opportunity to generally consider the benefits of limited access to assets, separation of duties, authorization, use of prenumbered documents, and proper independent verification/audit. Consider how the "other five" suggestions might be ineffective or harmful to the control environment. Be prepared to discuss other ideas (there are many -- e.g., logging the bid price and matching with payments, etc.) for improving controls at the auction.

Problem I-5.01

Tic Toc Clock Shop reported the following merchandising-related transactions during June. Tic Tock Clock Shop records all purchases "gross" and credit terms are precisely followed on both purchases and sales. Prepare journal entries to record each transaction.
3-Jun Purchased $4,000 of clocks on account from Swiss Time, F.O.B. destination, terms 1/10, n/30.
5-Jun Sold a $1,500 clock to Janci Holgren on account, terms 2/10, n/eom. The customer picked up the clock from the shop.
9-Jun Paid the amount due for the purchase of June 3.
11-Jun Purchased $8,000 of clocks on account from Melbourne Clockworks, F.O.B. shipping point, terms 2/10, n/30. Freight charges of $460 were prepaid by Melbourne and added to the invoice. No discount is permitted on the freight charges.
19-Jun Sold a $3,500 clock on account, terms 2/10, n/eom. Tic Toc sold the clock F.O.B. destination, and paid the freight charges of $330.
23-Jun The customer of June 19 called to report that the clock was received damaged. An agreement was reached to reduce the invoice by 20%.
27-Jun Paid Melbourne Clockworks for the purchase of June 11.
27-Jun Janci Holgren paid for the purchase of June 5.
28-Jun The customer of June 19 paid the balance due.
I-05.01

Worksheet I-5.01

GENERAL JOURNAL Page
Date Accounts Debit Credit
3-Jun
Purchased clocks on account, terms 1/10,n/30
5-Jun
Sold clock on account, terms 2/10, n/eom
9-Jun
Paid for the puchase of June 3, taking the 1% discount
11-Jun
Purchased clocks on account, 2/10,n/30, F.O.B. shipping point
19-Jun
Sold clock on account, 2/10, n/eom, F.O.B. destination
23-Jun
Reduced balance due from customer on account of damage
GENERAL JOURNAL Page
Date Accounts Debit Credit
27-Jun
Paid the full amount due for the purchase of June 11
27-Jun
Collected the amount due for the sale on June 5
28-Jun
Collected remaining amount for June 19 sale, less 2% discount

Problem I-5.02

Ahson Tariq is director of operations for CTC. CTC specializes in global merchandising of the world's finest cotton fibers. It is common practice for CTC to purchase cotton in bulk from regional growers, and then apply grading and measurement techniques to the fiber. Substandard fibers are subject to return or purchase price adjustment. CTC has negotiated credit terms with all suppliers of 1/10, n/30. Following are summary statements about June's purchases.
Purchased cotton for 80,000,000 Pakistan Rupees (PKR), on account
Returned cotton for credit on account, PKR 3,000,000
Agreed with suppliers to purchase price allowances, PKR 5,000,000
Made payment on PKR 60,000,000 of open accounts within discount period, and received PKR 600,000 purchase discounts
Made payment on PKR 12,000,000 of open accounts outside of discount period, and lost PKR 120,000 purchase discounts
Additional information for June follows:
Net sales, PKR 97,000,000 Beginning inventory, PKR 6,000,000 Ending inventory, PKR 5,000,000 Freight-in, PKR 2,200,000 Freight-out, PKR 1,700,000 Rent expense, PKR 3,500,000 Salaries expense, PKR 2,400,000
(a) Prepare summary journal entries for the purchase related transactions, using the "gross" method.
(b) Prepare summary journal entries for the purchase related transactions, using the "net" method.
(c) Prepare an income statement for June, assuming use of the entries recorded in part (a).
(d) Prepare an income statement for June, assuming use of the entries recorded in part (b).
I-05.02

Worksheet I-5.02

GENERAL JOURNAL  Page (c)
Date Accounts Debit Credit
(a) CTC
Income Statement
Purchased cotton for 80,000,000 Pakistan Rupees (PKR), on account For the Month Ending June 30, 20XX
(all amounts in thousands of PKR)
Returned cotton for credit on account, PKR 3,000,000 Revenues
Net sales 97,000
Cost of goods sold
Agreed with suppliers to purchase price allowances, PKR 5,000,000
Made payment on PKR 60,000,000 of open accounts within discount period, and received PKR 600,000 purchase discounts
Made payment on PKR 12,000,000 of open accounts outside of discount period, and lost PKR 120,000 purchase discounts Gross profit
Expenses
GENERAL JOURNAL  Page
Date Accounts Debit Credit Net income
(b)
Purchased cotton for 80,000,000 Pakistan Rupees (PKR), on account
(d)
CTC
Returned cotton for credit on account, PKR 3,000,000 Income Statement
For the Month Ending June 30, 20XX
(all amounts in thousands of PKR)
Agreed with suppliers to purchase price allowances, PKR 5,000,000
Revenues
Net sales 97,000
Cost of goods sold
Made payment on PKR 60,000,000 of open accounts within discount period, and received PKR 600,000 purchase discounts
Made payment on PKR 12,000,000 of open accounts outside of discount period, and lost PKR 120,000 purchase discounts
Gross profit
Expenses
Net income
I-05.02(c)(d)

B-8.01

C & L Coach buys luxury cars from manufacturers and then "saws them in half" and adds a number of components to upgrade and stretch them into exotic limousines. Examine the following items and decide if each should be included in inventory. If so, should the item be shown as raw materials, work in process, or finished goods?
Inventory Category
Yes No Raw Material Work in Process Finished Goods
Finished stretch limos awaiting sale ✓ ✓
Limos under production that have been ordered by specific customers and a deposit made
Finished limos shipped to dealers, terms FOB shipping point
Luxury cars ordered from a manufacturer and in transit, FOB destination
Sheet metal in the company's warehouse
Wiring produced in China, in transit on a ship in the Pacific Ocean, terms FOB Shanghai
Leather installed on a limo currently under production
LCD monitors installed in a finished limo awaiting shipment to a customer
Finished and sold limo returned to the factory for repair under warranty
B-08.01

Worksheet B-8.01

Inventory Category
Yes No Raw Material Work in Process Finished Goods
Finished stretch limos awaiting sale ✓ ✓
Limos under production that have been ordered by specific customers and a deposit made
Finished limos shipped to dealers, terms FOB shipping point
Luxury cars ordered from a manufacturer and in transit, FOB destination
Sheet metal in the company's warehouse
Wiring produced in China, in transit on a ship in the Pacific Ocean, terms FOB Shanghai
Leather installed on a limo currently under production
LCD monitors installed in a finished limo awaiting shipment to a customer
Finished and sold limo returned to the factory for repair under warranty
B-08.01

B-8.02

Sid Breman Art Gallery operates a retail store in Florida. All art displayed in the gallery is available for purchase. Much of the art is owned by the gallery. However, there are also works on display that belong to other artists. When the consigned art is sold, Sid remits 75% of the proceeds to the creator and retains a 25% commission. Art belonging to the gallery is marked to sell at 200% of cost.
Following is a complete list of art on display in the gallery, along with the retail selling price.
NAME SELLING PRICE OWNERSHIP
See Shining Sea $ 2,500 Gallery
Mermaids 1,800 Artist
Big Fish 910 Gallery
Shells At Dawn 3,000 Gallery
Sand Forever 1,090 Gallery
Development! 4,200 Artist
Taking a Chance 20,000 Gallery
Tides and Moons 500 Gallery
Mystery Sea 1,200 Gallery
On the Beach 1,650 Artist
Too Much Sun 4,775 Artist
Spring Break 5,000 Artist
Inland 7,880 Gallery
Alligators Return 19,720 Artist
Frost and Farm 14,300 Gallery
(a) Identify if Sid Breman Art Gallery is the consignor or the consignee. Should the consigned inventory be reported on the balance sheet of the gallery? What special accounting/control challenges are presented by the existence of consigned inventory?
(b) Determine the correct inventory valuation to be reported by the gallery.
(c) Prepare a compound journal entry to reflect the sale of a consigned art item for $1,000 cash. Assume Sid reports only the commission as a revenue, and reflects the amount due to the artist as a payable.

Worksheet B-8.02

(a) The art gallery is the ___________ and the artists are the ____________. The inventory should be carried on the balance sheets of the_____________.
(b) The items for inclusion in inventory are to be selected from the list below:
See Shining Sea Gallery $ 2,500
Mermaids Artist 1,800
Big Fish Gallery 910
Shells At Dawn Gallery 3,000
Sand Forever Gallery 1,090
Development! Artist 4,200
Taking a Chance Gallery 20,000
Tides and Moons Gallery 500
Mystery Sea Gallery 1,200
On the Beach Artist 1,650
Too Much Sun Artist 4,775
Spring Break Artist 5,000
Inland Gallery 7,880
Alligators Return Artist 19,720
Frost and Farm Gallery 14,300
TOTAL OWNED INVENTORY AT RETAIL $ -
DIVIDED BY MARKUP RATE
TOTAL INVENTORY VALUE FOR THE BALANCE SHEET $ -
(c)
GENERAL JOURNAL                                                                 
Date Accounts Debit Credit
To record sale of art held on consignment

B-8.03

Elizabeth Egbert owns a galvanizing plant. Customers bring in their fabricated steel products (like light poles, towers, trailers, etc.), and Egbert dips them into a vat of molten zinc. The zinc bonds to the metal and produces a highly durable corrosion resistant product.
Egbert's primary inventory is molten zinc. Zinc is purchased from suppliers in large blocks of solid material. These blocks are immersed in the heated vat and they melt together with the zinc already in the pool. Egbert generally keeps the vat relatively full, and it is never allowed to cool.
Egbert started the year, 20X8, with 500,000 pounds of zinc in the pool. During the year Egbert purchased 2,800,000 pounds of zinc. At year's end, the pool contained 520,000 pounds of zinc.
(a) How much zinc was used during 20X8?
(b) Accountants frequently refer to "goods available for sale." Is this concept the same as ending inventory? How much zinc, in pounds, was "available for sale?"
(c) If the beginning inventory cost $1.25 per pound, and purchases during 20X8 cost $1.50 per pound, how much is the "cost of goods available for sale"?
(d) In preparing financial statements for 20X8, to what financial statement elements will the amount you calculated in part (c) be allocated?
(e) If Egbert uses FIFO, how much should be attributed to ending inventory and how much to cost of goods sold?
(f) If Egbert uses LIFO, how much should be attributed to ending inventory and how much to cost of goods sold?
(g) What will be the difference in profitability between choosing the FIFO and LIFO methods? Does is seem reasonable the choice of accounting method can change the reported profit?
B-08.03

Worksheet B-8.03

(a)
(b)
(c)
(d)
(e)
(f)
(g)
B-08.03

B-8.04

Patti Devine owns Devine Decorating. One of her most popular items is the Remind-a-Chime digital clock. This programmable clock issues "voice-based" reminders of important events like birthdays, anniversaries, etc.
Following is the Remind-a-Clock inventory activity for January. The clocks on hand at January 1 had a unit cost of $140.
Date Purchases Sales Units on Hand
1-Jan 40
5-Jan 60 units @ $150 each 100
16-Jan 70 units @ $255 each 30
23-Jan 90 units @ $170 each 120
28-Jan 55 units @ $295 each 65
(a) If Devine uses the first-in, first-out (FIFO) inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit?
(b) If Devine uses the last-in, first-out (LIFO) inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit?
(c) If Devine uses the weighted-average inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit?
B-08.04

Worksheet B-8.04

(a) FIFO
Beginning inventory $ -
Plus: Purchases -
Cost of goods available for sale $ -
Less: Ending inventory -
Cost of goods sold $ -
Sales $ -
Cost of goods sold -
Gross profit $ -
(b) LIFO
Beginning inventory $ -
Plus: Purchases -
Cost of goods available for sale $ -
Less: Ending inventory -
Cost of goods sold $ -
Sales $ -
Cost of goods sold -
Gross profit $ -
(c) Weighted-average
Beginning inventory $ -
Plus: Purchases -
Cost of goods available for sale $ -
Less: Ending inventory -
Cost of goods sold $ -
Sales $ -
Cost of goods sold -
Gross profit $ -
B-08.04

B-8.05

Tom Pryor is conducting an audit of the computerized inventory system used by Zix Corporation. Tom has inserted hypothetical data into the computer program that tracks inventory on a perpetual basis. Below are the hypotheical data inserted by Tom:
Transaction Units Cost per unit
Beginning inventory 10 $10
Purchase, day 1 5 $11
Sale, day 2 6
Purchase, day 3 8 $12
Sale, day 4 9
The computer program returned the following ending inventory values: FIFO perpetual, $96 LIFO perpetual, $80 Moving average, $88
Which of the three values appears to be incorrect, and what "error" might be causing this condition?
B-08.05

Worksheet B-8.05

FIFO perpetual:
Date Purchases Cost of Goods Sold Balance
Day 0 10 X $10 = $100
Day 1
5 X $11 = $55
Day 2
Day 3
8 X $12 = $96
Day 4
Ending
LIFO perpetual:
Date Purchases Cost of Goods Sold Balance
Day 0 10 X $10 = $100
Day 1
5 X $11 = $55
Day 2
Day 3
8 X $12 = $96
Day 4
Ending
Moving average:
Date Purchases Cost of Goods Sold Balance
Day 0 10 X $10 = $100
Day 1
5 X $11 = $55
Day 2
Day 3
8 X $12 = $96
Day 4
Ending
B-08.05

B-8.06

B. J. Stewart Furniture Company had the following transactions relating to the purchase and sale of leather sofas. There was no beginning inventory.
Purchased 100 units on account at $1,000 per unit Sold 75 units for cash at $2,000 per unit Customers returned 3 defective units for cash refunds Stewart returned the 3 defective units to its supplier for credit on account
(a) Assuming Stewart uses a periodic inventory system, what journal entries would be needed to record the preceding activity?
(b) Assuming Stewart uses a periodic inventory system, show the calculation of gross profit. You may assume that Stewart conducted a physical count of ending inventory and confirmed that 25 were still on hand.
(c) Assuming Stewart uses a perpetual inventory system, what journal entries would be needed to record the preceding activity?
(d) Assuming Stewart uses a perpetual inventory system, show the calculation of gross profit. If Stewart uses a perpetual system, would there be any need to perform a periodic physical count of leather sofas on hand?
B-08.06

Worksheet B-8.06

(a)
GENERAL JOURNAL 
Date Accounts Debit Credit
B-08.06

B-8.07

Park Place Luxury Autos uses the specific identification method to value its inventory. Below is a listing of automobiles that were either in beginning inventory or acquired during the year:
Automobile Date Acquired Cost
Bentley Beginning inventory $ 120,000
Rolls Royce Beginning inventory 160,000
Cadillac January 40,000
Lexus March 50,000
Land Rover June 60,000
Jaguar July 42,000
Porsche September 75,000
Mercedes November 85,000
BMW December 64,000
Infiniti December 39,000
Park Place uses the specific identification method. Total sales during the year were $600,000. Automobiles in ending inventory were the Rolls Royce, Lexus, Jaguar, and BMW. Determine the ending inventory, cost of goods sold, and gross profit for Park Place.
B-08.07

Worksheet B-8.07

UNITS SOLD
UNITS IN ENDING INVENTORY
Sales
Cost of goods sold
Gross profit
B-08.07

B-8.08

Carson's Camera Store has a number of video recording cameras in stock. All units are priced to provide a normal profit margin of $150. Some of these units are quite old. Carson's has concluded that some "lower-of-cost-or-market" adjustments may be needed, and has gathered the following unit pricing data:
Beta CamCorder, $900 cost, $950 replacement cost, $300 selling price VHS CamCorder, $800 cost, $250 replacement cost, $500 selling price DVD CamCorder, $400 cost, $375 replacement cost, $400 selling price Blu-Ray CamCorder, $600 cost, $750 replacement cost, $800 selling price
(a) What unit value should be attached to each type of camera, assuming item-by-item application of the lower-of-cost-or-market rule?
(b) Assuming an item-by-item application of the lower-of-cost-or-market rule, what journal entry is needed to reduce the Beta CamCorder? 11 such units remain in stock.
(c) As a general rule, is the item-by-item approach required? Is the item-by-item approach the most "conservative?"
(d) If an item of inventory is written down, but subsequently recovers in value during a subsequent year, can it be written back up?
B-08.08

Worksheet B-8.08

(a)
Beta VHS DVD BLU-RAY
Cost
Vs. "Market":
Replacement cost
Net realizable value
NRV less normal profit margin
VALUE TO REPORT
(b) Loss Due to Decline in Market Value of Inventory
Inventory
To record decline in value of Beta inventory
(Note: Some companies will establish an allowance account rather than actually reducing the inventory account.)
B-08.08

B-8.09

Aurora Wedding Gowns was burglarized in May of 20X5. It is unclear how many dresses were stolen. Aurora and its insurance company are currently working to estimate the dollar value of the stolen goods in order to reach a financial settlement under the existing property insurance policy.
Aurora's tax return prepared at the end of 20X4 revealed that the company ended 20X4 with a total inventory of $189,000. Aurora uses the same inventory accounting methods for tax and accounting purposes.
The insurance company has contacted Aurora's suppliers and confirmed Aurora's claim that purchases for 20X5, prior to the date of the burglary, were $376,000. All inventory was purchased, FOB destination.
20X5 Sales taxes collected by Aurora and remitted to the state, prior to the date of the theft, were $48,000. The sales tax rate is 6% of sales.
An inventory was taken immediately after the burglary and the cost of dresses in stock was $123,000.
Aurora consistently sells dresses at a gross profit margin of 45%.
Use the gross profit method to estimate the dollar value of stolen dresses.
B-08.09

Worksheet B-8.09

Sales*
Cost of goods sold
Gross profit
* Sales = $48,000/.06 =
Beginning inventory
Plus: Purchases
Cost of goods available for sale
Less: Ending inventory before theft
Cost of goods sold

B-8 .10

The Quilting Pad is a retail store that sells materials for custom quilts. The store has a quilting room where quilters gather to sew and visit.
The store's inventory consists of bolts of fabrics, spools of thread, and trays of various batting and backing material. Customers generally select what they need, and pay for what they use. The retail price of goods is clearly marked on the bolts, spools, and trays. The Quilting Pad has virtually no problem with theft or shortages of inventory.
It is virtually impossible to track inventory in any detailed fashion. The store simply marks up all goods by a constant percentage. The mark up formula has been consistently applied to all items in inventory for many years.
The Quilting Pad uses the retail inventory technique. Following is information for 20X7:
Beginning inventory at cost $ 46,800
Beginning inventory at retail 78,000
Cost of purchases of inventory during the year 230,000
At the end of the year, the Quilting Pad's inventory was physically counted and it was determined that $100,000 was the retail value of goods on hand.
Calculate the cost to retail percentage by analyzing the beginning inventory data. Apply the retail method to estimate the sales and gross profit for 20X7.
B-08.10

Worksheet B-8.10

The cost to retail percentage is __________.
The following analysis shows that sales of__________ were matched with cost of sales of _____________. This results in gross profit of _______________.
At Cost (___% of retail) At Retail
Beginning inventory $ 46,800 $ 78,000
Purchases* 230,000 -
Goods available for sale $ - $ -
Sales - -
Ending inventory** $ - $ 100,000
* Purchases at retail =
** Ending inventory at cost =
B-08.10

B-8 .11

Bell Computers assembles and sells notebook styled computers. The company is attempting to better manage cash flow and reduce inventory. The most recent strategy has been to require major vendors to establish warehouses adjacent to Bell's factory locations. Bell then buys components from vendors as needed for same day delivery.
During 20X2, Bell had beginning inventory of $23,000,000 and cost of goods sold $168,000,000. Inventory at the end of 20X2 was $33,000,000. During 20X3, cost of goods sold was $440,000,000. Inventory at the end of 20X3 was $55,000,000.
(a) What is the relationship between cash flow and inventory?
(b) One of Bell's product managers was very disappointed with the continuing increase in inventory from the beginning of 20X2 through the end of 20X3. He felt his directives to better manage inventory were not being followed. Prepare an inventory turnover ratio analysis for 20X2 and 20X3. Based on your analysis, is the company better managing inventory levels? How is it possible that the ratios are improving at the same time that inventory levels are expanding?
B-08.11

Worksheet B-8.11

(a)
(b) 20X2 Inventory Turnover Ratio =
20X3 Inventory Turnover Ratio =
B-08.11

B-8 .12

Citrin Corporation reported the following information related to 20X7 and 20X8:
20X7 20X8
Beginning inventory $ 634,400 $ 530,400
Purchases 1,899,990 2,450,500
Cost of goods available for sale $ 2,534,390 $ 2,980,900
Less: Ending inventory 530,400 480,000
Cost of goods sold $ 2,003,990 $ 2,500,900
Sales $ 3,003,990 $ 4,500,900
Cost of goods sold 2,003,990 2,500,900
Gross profit $ 1,000,000 $ 2,000,000
The 20X7 ending inventory value used in the above presentation erroneously failed to include $200,000 of goods purchased FOB shipping point. The purchase and related accounts payable were correctly recorded by Citrin Corporation. Citrin Corporation uses a periodic inventory system.
(a) Prepare a corrected presentation of the above data.
(b) Prepare a corrected presentation of the above data, but this time assume that the company had also failed to record the purchase before 20X8 (in addition to omitting the $200,000 from 20X7 ending inventory).
(c) In part (a), does the error matter, given that the combined gross profit for both years is $3,000,000 under both the incorrect and correct presentation?
(d) In part (b), does the error matter, given that the gross profit for each year is the same under both the incorrect and correct presentation?
B-08.12

Worksheet B-8.12

(a)
20X7 20X8
Beginning inventory $ - $ -
Purchases - -
Cost of goods available for sale $ - $ -
Less: Ending inventory - -
Cost of goods sold $ - $ -
Sales $ - $ -
Cost of goods sold - -
Gross profit $ - $ -
(b)
20X7 20X8
Beginning inventory $ - $ -
Purchases - -
Cost of goods available for sale $ - $ -
Less: Ending inventory - -
Cost of goods sold $ - $ -
Sales $ - $ -
Cost of goods sold - -
Gross profit $ - $ -
(c)
(d)
B-08.12

I-8.02

Adriaan Taylor Corporation is a newly formed entity that engages in the purchase and resale of amphibious tour vehicles. Purchases for the first year of operation were as follows:
Date Purchases
7-Jan 50 units @ $15,000 each
15-Mar 70 units @ $16,000 each
16-Jun 30 units @ $16,500 each
3-Aug 90 units @ $17,000 each
11-Oct 25 units @ $17,200 each
Sales for this first year of operation amounted to 210 units and totaled $4,250,000.
(a) If Adriaan Taylor uses the first-in, first-out (FIFO) inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit?
(b) If Adriaan Taylor uses the last-in, first-out (LIFO) inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit?
(c) If Adriaan Taylor uses the weighted-average inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit?
(d) Which of the above techniques produces the highest profit? Which of the above techniques reports the most "current" cost on a balance sheet? Which of the above techniques report the most "current" cost in measuring income? Which of the above techniques results in the lowest income tax obligation?
I-08.02

Worksheet I-8.02

(a) FIFO
Purchases
50 units @ $15,000 each
70 units @ $16,000 each
30 units @ $16,500 each
90 units @ $17,000 each
25 units @ $17,200 each
Beginning inventory $ -
Plus: Purchases -
Cost of goods available for sale $ -
Less: Ending inventory -
Cost of goods sold $ -
Sales $ -
Cost of goods sold -
Gross profit $ -
(b) LIFO
Beginning inventory $ -
Plus: Purchases -
Cost of goods available for sale $ -
Less: Ending inventory -
Cost of goods sold $ -
Sales $ -
Cost of goods sold -
Gross profit $ -
(c) Weighted-average
Beginning inventory $ -
Plus: Purchases -
Cost of goods available for sale $ -
Less: Ending inventory -
Cost of goods sold $ -
Sales $ -
Cost of goods sold -
Gross profit $ -
(d) The highest gross profit is produced under __________.
The most current cost in inventory is reported under __________.
The most current cost on the income statement is reported under __________.
The lowest profit and tax obligation is produced under __________.

I-8.03

Ali Naeem was recently placed in charge of inventory accounting for Sialkot Surgical Supply. This company is located in Pakistan and deals in surgical supplies for global export. The company has been using the last-in, first-out inventory method applied on a perpetual basis. The company's export trade is denominated and settled in dollars, and that currency is used within the company's ledger.
Ali's responsibility is to bring Sialkot Surgical's inventory accounting into conformity with international accounting standards that have been embraced by the Institute of Chartered Accountants of Pakistan. As a result of his research, Ali was surprised to learn that LIFO does not have global acceptance and it is not a GAAP method in his country.
Below is January's preliminary inventory schedule for surgical clamps. This schedule was prepared on a LIFO basis.
Date Purchases Sales Cost of Goods Sold Balance
1-Jan 5,000 X $20 = $100,000
5-Jan 5,000 X $20 = $100,000
7,000 X $21 = $147,000 7,000 X $21 = $147,000
$247,000
12-Jan 9,000 @ $35 = $315,000 7,000 X $21 = $147,000
2,000 X $20 = $ 40,000 3,000 X $20 = $ 60,000
$187,000
17-Jan 3,000 X $20 = $ 60,000
4,000 X $22 = $ 88,000 4,000 X $22 = $ 88,000
$148,000
26-Jan 3,000 @ $37 = $111,000 3,000 X $22 = $66,000 3,000 X $20 = $ 60,000
1,000 X $22 = $ 22,000
$ 82,000
31-Jan 3,000 X $20 = $ 60,000
1,000 X $22 = $ 22,000
$ 82,000
(a) Examine Sialkot's LIFO inventory schedule, and redo the presentation assuming perpetual FIFO. For this problem, you may assume that the beginning inventory would be the same as under LIFO.
(b) Examine Sialkot's LIFO inventory schedule, and redo the presentation assuming a moving average method. For this problem, you may assume that the beginning inventory would be the same as under LIFO.
(c) Prepare journal entries necessary to reflect the FIFO perpetual application.
(d) Show that the Inventory account balance resulting from part (c) agrees with the schedule from part (a). If Ali applied FIFO on a periodic basis, rather than a perpetual basis, would the same results occur?
(e) By applying FIFO, rather than LIFO, will Sialkot Surgical's income be increased or decreased?
(f) Do you suspect that global divergence in accounting practices can contribute to difficulties in cross-border financing and global trade?
I-08.03

Worksheet I-8.03

(a) FIFO perpetual:
Date Purchases Sales Cost of Goods Sold Balance (c)
1-Jan 5,000 X $20 = $100,000 GENERAL JOURNAL 
5-Jan Date Accounts Debit Credit
7,000 X $21 = $147,000 7-Jan
12-Jan 9,000 @ $35 = $315,000 Purchased $147,000 of inventory on account (7,000 X $21)
17-Jan 12-Jan
4,000 X $22 = $ 88,000
Sold merchandise on account (9,000 X $35)
12-Jan
26-Jan 3,000 @ $37 = $111,000
To record the cost of merchandise sold
31-Jan
17-Jan
Purchased $88,000 of inventory on account (4,000 X $22)
(b) Moving average:
Date Purchases Sales Cost of Goods Sold Balance 26-Jan
1-Jan 5,000 X $20 = $100,000
5-Jan Sold merchandise on account (3,000 X $37)
7,000 X $21 = $147,000
26-Jan
12-Jan 9,000 @ $35 = $315,000
To record the cost of merchandise sold
17-Jan
4,000 X $22 = $ 88,000
(d)
26-Jan 3,000 @ $37 = $111,000 (e)
31-Jan (f)
I-08.03(a,b)
I-08.03(c-f)