This is “End-of-Chapter Exercises”, section 8.6 from the book Business Accounting (v. 2.0).
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Arne Company buys inventory for $400. The seller sends this merchandise to the company FOB destination. The transportation charge was $13. Arne received a discount of $9 for paying quickly. The inventory is sold to a customer for $670. Arne paid another $17 to have the item delivered to the customer’s home. What did Arne report as cost of goods sold?
On February 13, NC Sofa Company purchases three sofas from a manufacturer for $300 each. The terms of the sale are 2/10, n/45. NC Sofa pays the invoice on February 21. How much did the company pay?
Crayson Inc. started the year with $490,000 in inventory. During the year, Crayson purchased an additional $1,060,000 in inventory and paid transportation costs of $30,000 to get this merchandise. At the end of the year, Crayson employees performed a physical count and determined that ending inventory amounted to $450,000. What was Crayson’s cost of goods sold for the year?
The following account balances were found in the general ledger of the Applewhite Corporation: Purchases = $232,000, Sales = $458,000, Transportation-in = $15,000, Cash Discounts on Purchases = $23,000, Advertising Expense = $30,000. On January 1, a count of inventory showed $90,000, whereas on December 31, a count of inventory showed $123,000. What was cost of goods sold for the period?
Raceway Corporation manufactures miniature cars and racetracks for collectors and enthusiasts. Raceway placed an order for new auto supplies and other parts from Delta Inc. on December 1. The sales staff at Delta informed Raceway that the supplies would not be available to ship out until December 22. Raceway accepted this arrangement. The supplies actually shipped, FOB shipping point, on December 26 and arrived at Raceway’s receiving dock on January 2. On which date should Raceway include the supplies in its inventory?
The Morning Company buys inventory and pays an additional $700 to have those goods shipped to its warehouse. How is the journal entry for this $700 cost recorded?
A company makes all of its purchases and sales using FOB shipping point. At the end of the year, the company had the following two transactions that were correctly recorded:
If this company had chosen to make these transactions FOB destination rather than FOB shipping point, how would that decision have impacted the reported amount of inventory on the year-end balance sheet?
The Charlotte Company made a $9,000 purchase near the end of the current year. The company also made a sale for $11,000 of inventory costing $6,000. Charlotte did not include either the inventory purchased or the inventory sold in its year-end inventory. Ending inventory was reported as $100,000. The purchase was FOB destination and shipped on December 29, Year One, and received by Charlotte on January 3, Year Two. The sale was FOB destination. It was shipped on December 30, Year One, and received by the customer on January 4, Year Two. What was the correct amount of inventory that Charlotte should have reported at the end of Year One?
At year-end, the Commonwealth Corporation holds 500 pieces of XY inventory costing $9 each and 700 pieces of AB inventory costing $11 each. XY inventory has flooded the market, and Commonwealth can now buy these same units for $6 each. AB inventory has not proven to be as popular as anticipated, and a unit can only be sold for $12 even after spending $2 extra on painting it a different color. In applying lower of cost or market, what should be reported for inventory by Commonwealth?
Which of the following concerning the “lower of cost or market” rule is not true?
Romulus Company sells maps. At the end of the current year, Romulus’s inventory records indicated that it had 2,900 maps of Italy on hand that had originally cost $30 each but were being sold for $52 each. An inventory count showed that only 2,875 were actually present in ending inventory. What journal entry should Romulus make if management believes the discrepancy is due to errors in the accounting process?
Real South Products holds $400,000 worth of inventory on January 1. Between January and March 13, Real South purchased an additional $190,000 in inventory. During that period, sales of $530,000 were made. On March 13, Real South’s warehouse flooded and all but $15,000 worth of inventory was ruined. Historical records show that Real South has an average gross profit percentage of 25 percent. What was the approximate value of the inventory destroyed in the flood?
Professor Joe Hoyle discusses the answers to these two problems at the links that are indicated. After formulating your answers, watch each video to see how Professor Hoyle answers these questions.
Your roommate is an English major. The roommate’s parents own a chain of ice cream shops throughout Florida. One day, while driving over to the car wash, your roommate poses this question: “My parents are having a problem with their insurance company. As you know, we recently had a hurricane come through the Florida area. It knocked out the electricity at one of their stores for several hours. It was very hot that day, and all the ice cream at that store melted. Luckily, each store is insured. However, they are having a dispute with the insurance company as to the amount of ice cream that was destroyed. It all melted and ran down the drain so there is no proof. The insurance company argues that only half as much ice cream was destroyed as my parents claim. For a big store, that is a lot of money. How will they ever be able to sort out this mess? My parents only want a fair amount.” How would you respond?
Your uncle and two friends started a small office supply store several years ago. The company has expanded and now has several large locations. Your uncle knows that you are taking a financial accounting class and asks you the following question: “When we first started, we did not spend much money on monitoring inventory. The stores were small, and a good manager could walk through and see where we needed to buy more goods. Now, however, every year we seem to have to spend more money in order to upgrade our inventory systems. Is this cost really worth what we continue to spend?” How would you respond?
Here are several T-account balances that the Absalom Company has in its ledger at the end of the current year before a physical inventory count is to be taken.
The Darth Corporation starts Year Two with 8,000 units of inventory. All inventory costs $1.00 per unit with an additional cost of $0.12 each for transportations costs. These costs continue to be consistent throughout Year Two. Inventory on January 1, Year Two, was reported as 8,000 units times $1.12 or $8,960.
After these 8,000 units were sold, Darth Corporation buys an additional 20,000 units in Year Two. During that year, Darth sells 22,000 units for $2.00 each. No inventory was lost or stolen. During Year Two, the company accountant accidentally expensed all transportation costs incurred that period.
Overland Inc. starts buying and selling widgets this year. A box of 100 widgets can be bought for $600 on credit. Transportation to receive each box of widgets costs an additional $50 in cash. Overland uses a perpetual inventory system. Make journal entries for the following transactions.
ConnecTech bought 400 computers in Year Two for $300 each on account. It paid $260 to have them delivered to its store. During January of Year Three, ConnecTech sold 220 of the computers for cash of $550 each. ConnecTech uses a perpetual inventory system.
Montez Muffins and More (MM&M) is a bakery located in New York City. MM&M purchases a great deal of flour in bulk from a wholesaler. The wholesaler offers purchase discounts for fast payment. MM&M purchased 600 pounds of flour for $0.20 per pound on May 1, under terms 2/10, n/30. Determine the amount MM&M should pay under the following scenarios.
Racer’s ATVs sells many makes and models of all-terrain vehicles at its store in Indianapolis, Indiana. Racer’s uses a periodic inventory system because its entire inventory is located in one large room and all employees know what is on hand and what new inventory is needed. On January 1, Racer’s had beginning inventory costing $48,600. On January 14, Racer’s received a new shipment of vehicles with a purchase price of $34,700 and additional transportation costs of $1,200. On May 19, Racers received a second shipment of vehicles with a purchase price of $36,900 and transportation costs of $950. On November 1, Racers received its pre-Christmas shipment of vehicles with a purchase price of $67,800 and transportation costs of $1,750. The company buys vehicles on account but pays cash for transportation.
Ace Company counts inventory at the end of the current year and arrives at a cost of $300,000. Assume that each of the following four situations is independent of the others. In each case, assume that the inventory in question was not included in the count that was taken at the end of the year.
Magic Carpets Inc. sells a full line of area rugs, from top quality to bargain basement. Economic conditions have hit the textile industry, and the accountant for Magic Carpets is concerned that the rug inventory might not be worth the amount Magic paid. The following is information about three lines of rugs.
Costello Corporation uses a perpetual inventory system. At the end of the year, the inventory balance reported by its system is $45,270. Costello performs an inventory count and determines that the actual ending inventory is $39,780.
Fabulous Fay’s is a boutique clothing store in San Diego, California. Fay’s uses a perpetual inventory system. In March, Fay’s purchased a type of swimwear designed to be slimming to the wearer. The company purchased twenty suits of varying sizes for $40 each and priced them at $120 each. They sold out almost immediately, so Fay purchased forty more suits in April for $40 each and sold thirty-eight of them for $130 each. Again in July, Fay made one more purchase of twenty suits at $40 each and sold fifteen of them for $130 each. Fay decided not to put the rest of this inventory on sale at the end of the summer, but to hold onto the items until cruise season started the following winter. She believed she could sell the remainder of this merchandise without having to mark the items down.
Nakatobi Company has an inventory warehouse in Fargo, North Dakota. The company utilizes a periodic inventory system. At the beginning of the year, the warehouse contained $369,000 worth of inventory. During the first quarter of the year, Nakatobi purchased another $218,000 worth of inventory and made sales of $450,000. On April 1, a flood hit Fargo and destroyed 70 percent of the inventory housed in the warehouse. Nakatobi must estimate the cost of the destroyed inventory for insurance purposes. According to records kept for the past several years, Nakatobi has typically reported its cost of goods sold at 55 percent of sales.
This problem will carry through over several chapters to enable students to build their accounting skills using knowledge gained in previous chapters.
In Chapter 7 "In Financial Reporting, What Information Is Conveyed about Receivables?", financial statements were prepared for Webworks for July 31 and the month then ended. Those financial statements are included here as a starting point for the financial reporting for August.
Here are Webworks financial statements as of July 31.
The following events occur during August:
Webworks pays taxes of $475 in cash.
Webworks performs a count of ending inventory and determines that $1,900 in keyboards and $1,100 in flash drives remain. Cost of goods sold for the month should be recorded.
Assume that you take a job as a summer employee for an investment advisory service. One of the partners for that firm is currently looking at the possibility of investing in Sears Holdings Corporations. The partner is a bit concerned about the impact of the recession on this company. The partner is especially interested in what has happened to the company’s ability to sell the merchandise inventory that it elects to buy. The partner asks you to look at the 2010 financial statements for Sears by following this path: