CHAPTER 6

PROBLEMS: SET B
P6-1B Weber Limited is trying to determine the value of its ending inventory at February 28, Determine items and
2017, the company’s year-end. The accountant counted everything that was in the warehouse amounts to be recorded in
as of February 28, which resulted in an ending inventory valuation of $48,000. However, she inventory.
didn’t know how to treat the following transactions so she didn’t record them. (LO 1)
(a) On February 26, Weber shipped to a customer goods costing $800. The goods were
shipped FOB shipping point, and the receiving report indicates that the customer
received the goods on March 2.
(b) On February 26, Gretel Inc. shipped goods to Weber FOB destination. The invoice
price was $350. The receiving report indicates that the goods were received by Weber
on March 2.
(c) Weber had $500 of inventory at a customer’s warehouse “on approval.” The customer
was going to let Weber know whether it wanted the merchandise by the end of the
week, March 4.
(d) Weber also had $400 of inventory on consignment at a Roslyn craft shop.
(e) On February 26, Weber ordered goods costing $750. The goods were shipped FOB
shipping point on February 27. Weber received the goods on March 1.
(f) On February 28, Weber packaged goods and had them ready for shipping to a customer
FOB destination. The invoice price was $350; the cost of the items was $250. The receiv-
ing report indicates that the goods were received by the customer on March 2.
(g) Weber had damaged goods set aside in the warehouse because they are no longer
saleable. These goods cost $400 and Weber originally expected to sell these items for
$600.
Instructions
For each of the above transactions, specify whether the item in question should be included
in ending inventory and, if so, at what amount. For each item that is not included in
ending inventory, indicate who owns it and in what account, if any, it should have been
recorded.

P6-2B Xinxin Distribution markets CDs of the performing artist Carly. At the beginning of Determine cost of goods sold
March, Xinxin had in beginning inventory 1,500 Carly CDs with a unit cost of $7. During and ending inventory using
March Xinxin made the following purchases of Carly CDs. FIFO, LIFO, and average-cost
with analysis.
March 5 3,000 @ $8 March 21 4,000 @ $10
(LO 2)
March 13 4,500 @ $9 March 26 2,500 @ $11
During March, 12,000 units were sold. Xinxin uses a periodic inventory system.
Instructions
(a) Determine the cost of goods available for sale.
(b) Determine (1) the ending inventory and (2) the cost of goods sold under each of the (b)(2) Cost of goods sold:
assumed cost flow methods (FIFO, LIFO, and average-cost). Prove the accuracy of the FIFO $105,000
cost of goods sold under the FIFO and LIFO methods. LIFO $116,000
(c) Which cost flow method results in (1) the highest inventory amount for the balance Average $110,321
sheet and (2) the highest cost of goods sold for the income statement?

P6-3B Walz Company had a beginning inventory of 400 units of Product Ribo at a cost of Determine cost of goods sold
$8 per unit. During the year, purchases were: and ending inventory using
FIFO, LIFO, and average-cost
Feb. 20 600 units at $9 Aug. 12 300 units at $11 with analysis.
May 5 500 units at $10 Dec. 8 200 units at $12
(LO 2)
Walz Company uses a periodic inventory system. Sales totaled 1,500 units.
Instructions
(a) Determine the cost of goods available for sale.
(b) Determine (1) the ending inventory and (2) the cost of goods sold under each of the (b) Cost of goods sold:
assumed cost flow methods (FIFO, LIFO, and average-cost). Prove the accuracy of the FIFO $13,600
cost of goods sold under the FIFO and LIFO methods. LIFO $15,200
(c) Which cost flow method results in (1) the lowest inventory amount for the balance Average $14,475
sheet, and (2) the lowest cost of goods sold for the income statement?
2 6 Inventories

Compute ending inventory, P6-4B The management of Patel Co. is reevaluating the appropriateness of using its pres-
prepare income statements, ent inventory cost flow method, which is average-cost. They request your help in deter-
and answer questions using mining the results of operations for 2017 if either the FIFO method or the LIFO method
FIFO and LIFO.
had been used. For 2017, the accounting records show the following data.
(LO 2)
Inventories Purchases and Sales
Beginning (15,000 units) $32,000 Total net sales (217,000 units) $865,000
Ending (28,000 units) Total cost of goods purchased
(230,000 units) 600,000
Purchases were made quarterly as follows.
Quarter Units Unit Cost Total Cost
1 60,000 $2.40 $144,000
2 50,000 2.50 125,000
3 50,000 2.70 135,000
4 70,000 2.80 196,000
230,000 $600,000

Operating expenses were $147,000, and the company’s income tax rate is 34%.
Instructions
(a) Net income
(a) Prepare comparative condensed income statements for 2017 under FIFO and LIFO.
FIFO $108,504
(Show computations of ending inventory.)
LIFO $98,472
(b) Answer the following questions for management.
(1) Which cost flow method (FIFO or LIFO) produces the more meaningful inventory
amount for the balance sheet? Why?
(2) Which cost flow method (FIFO or LIFO) produces the more meaningful net
income? Why?
(3) Which cost flow method (FIFO or LIFO) is more likely to approximate actual
physical flow of the goods? Why?
(b)(4) $5,168 (4) How much additional cash will be available for management under LIFO than
under FIFO? Why?
(5) Will gross profit under the average-cost method be higher or lower than (i) FIFO
and (ii) LIFO? (Note: It is not necessary to quantify your answer.)

Calculate ending inventory, P6-5B You are provided with the following information for Perkins Inc. for the month
cost of goods sold, gross ended October 31, 2017. Perkins uses a periodic method for inventory.
profit, and gross profit rate
under periodic method; Unit Cost or
compare results. Date Description Units Selling Price
(LO 2) October 1 Beginning inventory 60 $25
October 9 Purchase 120 26
October 11 Sale 100 35
October 17 Purchase 70 27
October 22 Sale 60 40
October 25 Purchase 80 28
October 29 Sale 110 40
Instructions
(a)(iii) Gross profit: (a) Calculate (i) ending inventory, (ii) cost of goods sold, (iii) gross profit, and (iv) gross
LIFO $3,050 profit rate under each of the following methods.
FIFO $3,230 (1) LIFO.
Average $3,141 (2) FIFO.
(3) Average-cost.
(b) Compare results for the three cost flow assumptions.

Compare specific P6-6B You have the following information for Princess Diamonds. Princess Diamonds
identification, FIFO and uses the periodic method of accounting for its inventory transactions. Princess only carries
LIFO under periodic method; one brand and size of diamonds—all are identical. Each batch of diamonds purchased is
use cost flow assumption to
carefully coded and marked with its purchase cost.
influence earnings.
March 1 Beginning inventory 150 diamonds at a cost of $300 per diamond.
(LO 2)
March 3 Purchased 200 diamonds at a cost of $360 each.
March 5 Sold 180 diamonds for $600 each.
March 10 Purchased 350 diamonds at a cost of $380 each.
March 25 Sold 400 diamonds for $650 each.
 Problems: Set B 3

Instructions
(a) Assume that Princess Diamonds uses the specific identification cost flow method. (a) Gross profit:
(1) Demonstrate how Princess Diamonds could maximize its gross profit for the (1) Maximum $163,600
month by specifically selecting which diamonds to sell on March 5 and March 25.
(2) Demonstrate how Princess Diamonds could minimize its gross profit for the (2) Minimum $154,000
month by selecting which diamonds to sell on March 5 and March 25.
(b) Assume that Princess Diamonds uses the FIFO cost flow assumption. Calculate cost of
goods sold. How much gross profit would Princess Diamonds report under this cost
flow assumption?
(c) Assume that Princess Diamonds uses the LIFO cost flow assumption. Calculate cost of
goods sold. How much gross profit would the company report under this cost flow
assumption?
(d) Which cost flow method should Princess Diamonds select? Explain.

P6-7B The management of Chelsea Inc. asks your help in determining the comparative Compute ending inventory,
effects of the FIFO and LIFO inventory cost flow methods. For 2017, the accounting prepare income statements,
records provide the following data. and answer questions using
FIFO and LIFO.
Inventory, January 1 (10,000 units) $ 35,000 (LO 2)
Cost of 120,000 units purchased 504,500
Selling price of 100,000 units sold 665,000
Operating expenses 130,000

Units purchased consisted of 35,000 units at $4.00 on May 10; 60,000 units at $4.20 on
August 15; and 25,000 units at $4.50 on November 20. Income taxes are 28%.

Instructions
(a) Prepare comparative condensed income statements for 2017 under FIFO and LIFO. (a) Gross profit:
(Show computations of ending inventory.) FIFO $259,000
(b) Answer the following questions for management in the form of a business letter. LIFO $240,500
(1) Which inventory cost flow method produces the most meaningful inventory
amount for the balance sheet? Why?
(2) Which inventory cost flow method produces the most meaningful net income? Why?
(3) Which inventory cost flow method is most likely to approximate the actual physical
flow of the goods? Why?
(4) How much more cash will be available for management under LIFO than under
FIFO? Why?
(5) How much of the gross profit under FIFO is illusionary in comparison with the
gross profit under LIFO?

*P6-8B Minsoo Ltd. is a retailer operating in Edmonton, Alberta. Minsoo uses the perpet- Calculate cost of goods sold
ual inventory method. All sales returns from customers result in the goods being returned and ending inventory for
to inventory; the inventory is not damaged. Assume that there are no credit transactions; FIFO, moving-average cost,
all amounts are settled in cash. You are provided with the following information for Minsoo and LIFO under the perpetual
system; compare gross profit
Ltd. for the month of January 2017.
under each assumption.
Unit Cost or (LO 5)
Date Description Quantity Selling Price
December 31 Ending inventory 160 $17
January 2 Purchase 100 21
January 6 Sale 150 40
January 9 Sale return 10 40
January 9 Purchase 80 24
January 10 Purchase return 10 24
January 10 Sale 60 45
January 23 Purchase 100 28
January 30 Sale 110 50

Instructions
(a) For each of the following cost flow assumptions, calculate (i) cost of goods sold, (a)(iii) Gross profit:
(ii) ending inventory, and (iii) gross profit. LIFO $6,540
(1) LIFO. (2) FIFO. (3) Moving-average cost. FIFO $7,780
(b) Compare results for the three cost flow assumptions. Average $7,354
4 6 Inventories

Determine ending inventory *P6-9B Buffet Appliance Mart began operations on May 1. It uses a perpetual inventory
under a perpetual inventory system. During May, the company had the following purchases and sales for its Model 25
system. Sureshot camera.
(LO 5)
Purchases
Date Units Unit Cost Sales Units
May 1 7 $150
4 4
8 8 $170
12 5
15 6 $185
20 3
25 4
Instructions
(a) FIFO $925 (a) Determine the ending inventory under a perpetual inventory system using (1) FIFO,
Average $874 (2) moving-average cost, and (3) LIFO.
LIFO $790 (b) Which costing method produces (1) the highest ending inventory valuation and (2) the
lowest ending inventory valuation?

Estimate inventory loss using *P6-10B Liis Company lost 70% of its inventory in a fire on March 25, 2017. The account-
gross profit method. ing records showed the following gross profit data for February and March.
(LO 6) March
February (to 3/25)
Net sales $300,000 $250,000
Net purchases 176,800 139,000
Freight-in 3,900 3,000
Beginning inventory 4,500 20,200
Ending inventory 20,200 ?
Liis Company is fully insured for fire losses but must prepare a report for the insurance
company.

Instructions
(a) Gross profit rate 45% (a) Compute the gross profit rate for the month of February.
(b) Using the gross profit rate for February, determine both the estimated total inventory
and inventory lost in the fire in March.

Compute ending inventory *P6-11B Belden Department Store uses the retail inventory method to estimate its monthly
using retail method. ending inventories. The following information is available for two of its departments at
(LO 6) August 31, 2017.
Sporting Goods Jewelry and Cosmetics
Cost Retail Cost Retail
Net sales $1,000,000 $1,160,000
Purchases $675,000 1,066,000 $741,000 1,158,000
Purchase returns (26,000) (40,000) (12,000) (20,000)
Purchase discounts (12,360) — (2,440) —
Freight-in 9,000 — 14,000 —
Beginning inventory 47,360 74,000 39,440 62,000

At December 31, Belden Department Store takes a physical inventory at retail. The actual
retail values of the inventories in each department are Sporting Goods $95,000 and Jewelry
and Cosmetics $44,000.

Instructions
(a) Determine the estimated cost of the ending inventory for each department on August 31,
2017, using the retail inventory method.
(b) Sporting Goods: End, Inv. (b) Compute the ending inventory at cost for each department at December 31, assuming
$63,000 the cost-to-retail ratios are 60% for Sporting Goods and 64% for Jewelry and Cosmetics.