Chapter 6 Homework BRIEF EXERCISE 6-6

Chapter 6 Homework

BRIEF EXERCISE 6-6

Dec. 31 Sales ... 630,000 Merchandise Inventory (December 31) ... 90,000 Purchase Returns and Allowances ... 11,000

Capital ... 731,000 Dec. 31 Capital ... 476,000

Merchandise Inventory (January 1).... 60,000 Purchases ... 400,000 Freight In ... 16,000

BRIEF EXERCISE 6-7

Goods available for sale (GAS):

Units Dollars P 300 X $6 = $1,800 P 400 X $7 = 2,800 P 300 X $8 = 2,400

GAS 1,000 $7,000

-EI 400 CGS 600 (a) FIFO

CGS: 300 x $6 = $1,800 300 x $7 = 2,100 600 = $3,900 EI: 300 x $8 = $2,400 100 x $7 = 700 400 = $3,100 Check: CGS + EI = GAS

$3,900 + $3,100 = $7,000 (b) Weighted Average Cost

Weighted average unit cost: $7,000  1,000 = $7 CGS: 600 x $7 = $4,200

EI: 400 x $7 = $2,800 Check: CGS + EI = GAS

$4,200 + $2,800 = $7,000

BRIEF EXERCISE 6-7 (Continued)

(c) LIFO

CGS: 300 x $8 = $2,400 300 x $7 = 2,100 600 = $4,500 EI: 300 x $6 = $1,800 100 x $7 = 700 400 = $2,500 Check: CGS + EI = GAS

$4,500 + $2,500 = $7,000

BRIEF EXERCISE 6-8

(a) LIFO gives the highest inventory valuation when prices are falling. This is because the cost of the units purchased earlier, at a higher cost, are assumed to be still in inventory.

(b) FIFO gives the highest cost of goods sold amount. This is because the cost of the units purchased earlier, at a higher cost, are assumed to have been sold first and are allocated to cost of goods sold.

(c) In selecting a cost flow method, the company should consider their type of inventory and its actual physical flow. While it is not essential to match the actual physical flow to the assumed cost flow method, it does give the company an indication as to its flow of costs throughout the period. What is important is choosing a method that best matches these costs to the revenue they generate.

BRIEF EXERCISE 6-9

BI + CGP = GAS – EI = CGS - U$7,000 = O$7,000 Sales – CGS = NI

- O$7,000 = U$7,000

The understatement of ending inventory caused cost of goods sold to be overstated $7,000 and net income to be understated $7,000. The correct net income for 2002 is $97,000 ($90,000 + $7,000).

A = L + OE U$7,000 = U$7,000

Total assets and owner’s equity in the balance sheet will both be understated by the amount that ending inventory is understated, $7,000. Remember that if net income is understated, then owner’s equity is also understated as net income is a component of owner’s equity. Check your work by ensuring that the accounting equation balances.

EXERCISE 6-4

Co. 1 Co. 2 Co. 3 Co. 4

BI $ 250 $ 120 $1,000 (j) $ 2,960

+ P $1,500 $1,080 (g) $7,500 $44,590

- PR&A 40 (d) 60 290 (k) 260

= NP (a) 1,460 1,020 7,210 44,330

+ FI 110 (e) 210 (h) 730 2,240

= CGP + CGP (b) 1,570 (b) 1,570 1,230 1,230 7,940 7,940 (l) 46,570 (l) 46,570

= CGAS 1,820 1,350 (i) 8,940 49,530

- EI 310 (f) 100 1,450 6,230

=CGS (c) 1,510 1,250 7,490 43,300

Supporting Detail:

(a) $1,460 ($1,500 - $40) (g) $7,500 ($290 + $7,210) (b) $1,570 ($1,460 + $110) (h) $730 ($7,940 - $7,210) (c) $1,510 ($1,820 - $310) (i) $8,940 ($1,000 + $7,940)

(d) $60 ($1,080 - $1,020) (j) $2,960 ($49,530 - $46,570 from (l)) (e) $210 ($1,230 - $1,020) (k) $260 ($44,590 - $44,330)

(f) $100 ($1,350 - $1,250) (l) $46,570 ($44,330 + $2,240)

EXERCISE 6-5 (a)

OKANAGAN COMPANY Income Statement

For the Year Ended January 31, 2003 Sales revenues

Sales ... $312,000 Less: Sales returns and allowances ... 13,000 Net

sales ... $299, 000

Cost of goods sold

Inventory, February 1, 2002 ... $ 42,000 Purchases ... $200,000

Less: Purchase returns and allowances . 6,000 Net purchases ... 194,000 Add: Freight in ... 10,000

Cost of goods purchased ... 204,000 Cost of goods available for sale ... 246,000 Inventory, January 31, 2003... 63,000 Cost of goods sold ...

183,000

Gross profit ...

116,000

Operating expenses

Salary expense ... $ 61,000 Rent expense ... 20,000 Insurance expense ... 12,000 Freight out ... 7,000 Total operating expenses ...

100,000

Net income ... $ 16,000

EXERCISE 6-5 (Continued) (b)

Jan. 31 Sales ... 312,000 Merchandise Inventory (Jan. 31, 2003) ... 63,000 Purchase Returns and Allowances ... 6,000

Capital ... 381,00 0

Capital ... 365,000

Merchandise Inventory (Feb. 1, 2002) ... 42,000 Purchases ... 200,00 0

Freight In ... 10,000 Salary Expense ... 61,000 Rent Expense ... 20,000 Insurance Expense ... 12,000 Freight Out... 7,000 Sales Returns and Allowances ... 13,000

EXERCISE 6-6 (a) FIFO

Cost of Goods Sold: (#1012) $500 + (#1045) $450 = $950

(b) It could choose to sell specific units purchased at specific costs if it wished to impact income selectively. If it wished to minimize net income, it would choose to sell the units purchased at higher costs.

In this case, the cost of goods sold would be $950 [(#1012) $500 + (#1045) $450]. If it wished to minimize net income, it would choose to sell the units purchased at lower costs. In this case, the cost of goods sold would be $850 [(#1045) $450 + (#1056) $400].

(c) I recommend Discount uses the FIFO method. FIFO provides a more relevant balance sheet valuation for decision making (closer to replacement cost) and reduces the opportunity to manipulate net income.

Note to Instructor: This answer may vary depending on the method the student chooses.

EXERCISE 6-7

(a)

FIFO Cost of Goods Sold:

Date Units Unit Cost Total Cost

5/1 5/15 5/24

30 25 15 70

$08 010 012

$240 0250 180

$670 Ending Inventory:

Date Units Unit Cost Total Cost

5/24 20 $12 $240

Proof:

CGS + EI = GAS

$670 + $240 = $910 (b)

WEIGHTED AVERAGE

$910 ÷ 90 = $10.11 average unit cost Cost of Goods Sold:

70 x $10.11 = $708 (rounded) Ending Inventory:

20 x $10.11 = $202 (rounded) Proof:

CGS + EI = GAS

$708 + $202 = $910

EXERCISE 6-8

Beginning inventory (200 X $5) ... $1,000 Purchases: June 12 (300 X $6) ... $1,800

June 23 (500 X $7)... 03,500 5,300 Cost of goods available for sale (1,000 units) ... 6,300 Less: Ending inventory (180 units)

Cost of goods sold (820 units)

(a)

(1) FIFO Cost of Goods Sold:

Date Units Unit Cost Total Cost

6/1 6/12 6/23

200 300 320 820

$5 6 7

$1,000 1,800 2,240

$5,040 Ending Inventory:

Date Units Unit Cost Total Cost

6/23 180 $7 $1,260

Proof: CGS + EI = GAS

$5,040 + $1,260 = $6,300

(2) LIFO Cost of Goods Sold:

Date Units Unit Cost Total Cost

6/23 6/12 6/1

500 300 20 820

$7 6 5

$3,500 1,800 100

$5,400 Ending Inventory:

Date Units Unit Cost Total Cost

6/1 180 $5 $900

Proof: CGS + EI = GAS

$5,400 + $900 = $6,300

EXERCISE 6-8 (Continued)

(b) The FIFO method will produce the higher ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory. For Dene Company, the ending inventory under FIFO is $1,260 compared to $900 under LIFO.

(c) The LIFO method will produce the higher cost of goods sold for Dene Company. Under LIFO, the most recent costs are charged to cost of goods sold, and the earliest costs are included in the ending inventory. The cost of goods sold is $5,400 compared to

$5,040 under FIFO.

EXERCISE 6-5 (a)

OKANAGAN COMPANY Income Statement

For the Year Ended January 31, 2003 Sales revenues

Sales ... $312,000 Less: Sales returns and allowances ... 13,000 Net

sales ... $299, 000

Cost of goods sold

Inventory, February 1, 2002 ... $ 42,000 Purchases ... $200,000

Less: Purchase returns and allowances . 6,000 Net purchases ... 194,000 Add: Freight in ... 10,000

Cost of goods purchased ... 204,000 Cost of goods available for sale ... 246,000 Inventory, January 31, 2003... 63,000 Cost of goods sold ...

183,000

Gross profit ...

116,000

Operating expenses

Salary expense ... $ 61,000 Rent expense ... 20,000 Insurance expense ... 12,000 Freight out ... 7,000 Total operating expenses ...

100,000

Net income ... $ 16,000

EXERCISE 6-5 (Continued) (b)

Jan. 31 Sales ... 312,000 Merchandise Inventory (Jan. 31, 2003) ... 63,000 Purchase Returns and Allowances ... 6,000

Capital ... 381,00 0

Capital ... 365,000

Merchandise Inventory (Feb. 1, 2002) ... 42,000 Purchases ... 200,00 0

Freight In ... 10,000 Salary Expense ... 61,000 Rent Expense ... 20,000 Insurance Expense ... 12,000 Freight Out... 7,000 Sales Returns and Allowances ... 13,000

EXERCISE 6-6 (a) FIFO

Cost of Goods Sold: (#1012) $500 + (#1045) $450 = $950

(b) It could choose to sell specific units purchased at specific costs if it wished to impact income selectively. If it wished to minimize net income, it would choose to sell the units purchased at higher costs.

In this case, the cost of goods sold would be $950 [(#1012) $500 + (#1045) $450]. If it wished to minimize net income, it would choose to sell the units purchased at lower costs. In this case, the cost of goods sold would be $850 [(#1045) $450 + (#1056) $400].

(c) I recommend Discount uses the FIFO method. FIFO provides a more relevant balance sheet valuation for decision making (closer to replacement cost) and reduces the opportunity to manipulate net income.

Note to Instructor: This answer may vary depending on the method the student chooses.

EXERCISE 6-7

(a)

FIFO Cost of Goods Sold:

Date Units Unit Cost Total Cost

5/1 5/15 5/24

30 25 15 70

$08 010 012

$240 0250 180

$670 Ending Inventory:

Date Units Unit Cost Total Cost

5/24 20 $12 $240

Proof:

CGS + EI = GAS

$670 + $240 = $910 (b)

WEIGHTED AVERAGE

$910 ÷ 90 = $10.11 average unit cost Cost of Goods Sold:

70 x $10.11 = $708 (rounded) Ending Inventory:

20 x $10.11 = $202 (rounded) Proof:

CGS + EI = GAS

$708 + $202 = $910

EXERCISE 6-8

Beginning inventory (200 X $5) ... $1,000 Purchases: June 12 (300 X $6) ... $1,800

June 23 (500 X $7)... 03,500 5,300 Cost of goods available for sale (1,000 units) ... 6,300 Less: Ending inventory (180 units)

Cost of goods sold (820 units)

(a)

(1) FIFO Cost of Goods Sold:

Date Units Unit Cost Total Cost

6/1 6/12 6/23

200 300 320 820

$5 6 7

$1,000 1,800 2,240

$5,040 Ending Inventory:

Date Units Unit Cost Total Cost

6/23 180 $7 $1,260

Proof: CGS + EI = GAS

$5,040 + $1,260 = $6,300

(2) LIFO Cost of Goods Sold:

Date Units Unit Cost Total Cost

6/23 6/12 6/1

500 300 20 820

$7 6 5

$3,500 1,800 100

$5,400 Ending Inventory:

Date Units Unit Cost Total Cost

6/1 180 $5 $900

Proof: CGS + EI = GAS

$5,400 + $900 = $6,300

EXERCISE 6-8 (Continued)

(b) The FIFO method will produce the higher ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory. For Dene Company, the ending inventory under FIFO is $1,260 compared to $900 under LIFO.

(c) The LIFO method will produce the higher cost of goods sold for Dene Company. Under LIFO, the most recent costs are charged to cost of goods sold, and the earliest costs are included in the ending inventory. The cost of goods sold is $5,400 compared to

$5,040 under FIFO.

EXERCISE 6-9 (a)

Cost of Goods Available for Sale

$6,300

÷

Total Units Available for Sale

1,000

=

Weighted Average Unit Cost

$6.30 Ending Inventory:

180 X $6.30 = $1,134 Cost of Goods Sold:

820 X $6.30 = $5,166 Proof: CGS + EI = GAS

$5,166 + $1,134 = $6,300

(b) Ending inventory is lower than FIFO ($1,260) and higher than LIFO ($900). In contrast, cost of goods sold is higher than FIFO ($5,040) and lower than LIFO ($5,400). When prices are changing, the average cost method will always produce this type of result. That is, average results will fall somewhere between those of FIFO and LIFO.

(c) The average cost method uses a weighted average unit cost, not a simple average of unit costs ($5 + $6 + $7 = $18 ÷ 3 = $6).

EXERCISE 6-10

(a) Periodic Inventory Method

Purchases (100 x $10) ... 1,000

Accounts Payable ... 1,000 Accounts Receivable (70 x $15) ... 1,050

Sales ... 1,050 Perpetual Inventory Method

Merchandise Inventory (100 x $10) ... 1,000

Accounts Payable ... 1,000 Accounts Receivable (70 x $15) ... 1,050

Sales ... 1,050 Cost of Goods Sold (70 x $10) ... 700

Merchandise Inventory ... 700

(b) 1. FIFO 2. LIFO

3. Specific Identification 4. LIFO

EXERCISE 6-11

SELES HARDWARE Income Statement (Partial)

2002 2003

Beginning inventory ...

Cost of goods purchased ...

Cost of goods available for sale ...

Corrected ending inventory ...

Cost of goods sold ...

$020,000 150,000 0170,000 0025,000^a

$145,000

$025,000 175,000 0200,000 0 39,000^b

$161,000

a$30,000 – $5,000 = $25,000

b$35,000 + $4,000 = $39,000

SOLUTIONS TO PROBLEMS

PROBLEM 6-1A

1. Title to the goods does not transfer to the customer until March 2. Include the $800 in ending inventory.

2. Kananaskis owns the goods once they are shipped on February 26. Include inventory of $375.

3. Include $500 in inventory.

4. Exclude the items from Kananaskis’ inventory.

5. Title of the goods does not transfer to Kananaskis until March 2.

Exclude this amount from the February 28 inventory.

6. The sale will be recorded on February 26. The goods should be excluded from Kananaskis’ inventory at the end of February.

PROBLEM 6-2A

ONLY A PARTIAL ANSWER GUIDE ******* for this question….

(a)

GENERAL JOURNAL J1

Date Account Titles and Explanation Debit Credit

Apr. 5 Purchases ... 1,600

Accounts Payable ... 1,600

7 Freight In ... 80

Cash ... 80

9 Accounts Payable ... 100

Purchase Returns and Allowances... 100