SOLUTIONS TO EXERCISES

Ex. 8.1 a. Cost flow assumption

b. Average-cost method
c. Specific identification
d. LIFO method
e. FIFO method
f. Retail method

Ex. 8.2 a. Cost of Goods Sold …………………………………………………… 137,800

Inventory ……………………………………………. 137,800
To record the cost of 90 Millennium computers sold to Apex
Publishers. Cost determined by the specific identification
method:
62 @ $1,500 …………………………… $93,000
28 @ $1,600 …………………………… 44,800
Cost of goods sold ……………………. $137,800

b. Cost of Goods Sold …………………………………………………… 137,700

Inventory …………………………………………… 137,700
To record the cost of 90 Millennium computers sold to Apex
Publishers. Cost determined by the average-cost method:

90 @ $1,530 ($153,000 / 100 units)

c. Cost of Goods Sold …………………………………………………… 137,000

Inventory ………………………………………….. 137,000
To record the cost of 90 Millennium computers sold to Apex
Publishers. Cost determined by the FIFO flow assumption:

70 @ $1,500 ………………………… $105,000

20 @ $1,600 …………………………… 32,000
Cost of goods sold …………………… $137,000

d. Cost of Goods Sold ………………………………………………… 138,000

Inventory …………………………………………… 138,000
To record the cost of 90 Millennium computers sold to Apex
Publishers. Cost determined by the LIFO flow assumption:

30 @ $1,600 ………………………… $48,000

60 @ $1,500 ………………………… 90,000
Cost of goods sold …………………… $138,000

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Ex. 8.7 a. Average cost $796.00 (200 units @ $3.98). (Average cost = $4,380/1,100 units =
$3.98)

b. FIFO, $990.00 (190 units @ $5.00 + 10 unit @ $4.00).

c. LIFO, $655.00 (90 units @ $3.00 + 110 units @ $3.50).
d. Only the FIFO method results in the same ending inventory valuation under both periodic
and perpetual costing environments. Under the average cost and LIFO methods, periodic and
perpetual systems usually result in different valuations due to the timing of inventory
purchases and sales. Under FIFO, the value assigned to ending inventory is the same using
periodic or perpetual procedures, regardless of when purchases or sales occur during the
period.

Ex. 8.8 a. Compute corrected net income figures:

2018 2017
Net income as reported ……………………………………………….. $ 350,000 $ 250,000
Correction of understatement of inventory at end of 2017 …………… (40,000) 40,000
Net income as corrected …………………………………………….. $ 310,000 $ 290,000
b. Compute gross profit amounts and gross profit percentages
for each year based on corrected data:
For 2017: Adjusted gross profit ($600,000 + $40,000) ………………………. $640,000
Gross profit percentage ($640,000 / $1,500,000) …………………. 42.67%
For 2018: Adjusted gross profit ($750,000 - $40,000) …………………………… $710,000
Gross profit percentage ($710,000 / $2,000,000) …………………… 35.50%
c. Correction of owner's equity:
Owner’s equity at the end of 2017 should be increased by $40,000 to $540,000. At the end of
2018, the owner’s equity of $580,000 requires no correction because the inventory error
counterbalanced, as evidenced by the fact that the combined net income for the two years was
$600,000, both before and after the correction of net income for the individual years.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Ex. 8.9 a. Inventory at time of theft is $89,400, computed as follows:
Beginning inventory, January 1 …………………………………… $ 50,000
Net purchases, January 1–29 ……………………………………… 80,000
Cost of goods available for sale………………………………………… $ 130,000
Less: Estimated cost of goods sold:
Net sales………………………………………………………….. $ 70,000
Cost percentage (100% - 42%)………………………………. 58%
Estimated cost of goods sold……………………………………… 40,600
Estimated ending inventory (at cost):……………………… $ 89,400

b. Potts uses the periodic inventory method. Had the perpetual method been used, Potts
would have had the actual inventory figure at January 29, making it unnecessary to
compute an estimated figure using the gross profit method.

Ex. 8.10 a. Cost ratio during July ($522,000 / $900,000) ………………………………… 58%
Estimated cost of goods sold ($600,000 ´ 58%) ……………………………… $348,000
Estimated ending inventory (at cost):
Cost of goods available for sale during July ………………………………. $522,000
Less: Estimated cost of goods sold (above) ……………………………. 348,000
Estimated ending inventory …………………………………………………. $174,000
b. It appears that the cost of Phillips’ inventory as a percentage of retail sales in July is
lower than it was in June. At June 30, the percentage was 60% ($300,000 / $500,000).
During July, however, the percentage was only 55.5%, based upon Phillips’ purchases
($222,000 / $400,000).

Ex. 8.11 No. A company may use different inventory methods for different types or segments of its
inventory. With respect to inventories, the consistency principle means that the method
used to value a particular type of inventory should not be changed from one year to the
next. Using different inventory methods for various parts of a company's inventory is a
common and generally accepted practice.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
30 Minutes, Strong PROBLEM 8.2A
SPEED WORLD CYCLES: PERPETUAL SYSTEM

a. Cost of goods sold and ending inventory

(1) Average-cost method:

(a) Cost of goods sold on July 28:
Average cost (as of July 22; $24,900 ÷ 5 units) $ 4,980
Cost of goods sold (4 units @ $4,980) $ 19,920

(b) Ending inventory (4 units) at September 30:

Average unit cost following August 3 purchase:
1 unit at July 22 average cost of $4,980 $ 4,980
3 units purchased on August 3 15,300
Total $ 20,280
Average unit cost as of August 3 ($20,280 ÷ 4 units) $ 5,070
Ending inventory, September 30 (4 units @ $5,070) $ 20,280

(2) First-in, first-out (FIFO) method:

(a) Cost of goods sold on July 28:
$ 9,900
2 units from July 22 purchase @ $5,000 10,000
Cost of goods sold (4 units) $ 19,900

(b) Ending inventory (4 units) at September 30:

1 unit from July 22 purchase @$5,000 $ 5,000
3 units from August 3 purchase @ $5,100 15,300
Ending inventory, September 30 $ 20,300

(3) Last-in, first-out (LIFO) method:

(a) Cost of goods sold on July 28:
3 units from purchase of July 22 @ $5,000 $ 15,000
1 unit from purchase of July 1 @ $4,950 4,950
Cost of goods sold (4 units) $ 19,950

(b) Ending inventory (4 units) at September 30:

1 unit from purchase on July 1 @ $4,950 $ 4,950
3 units from purchase on August 3 @ $5,100 15,300
Ending inventory, September 30 $ 20,250

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
 PROBLEM 8.2A
SPEED WORLD CYCLES: PERPETUAL SYSTEM (concluded)

b. (1) The FIFO method will result in the highest net income, as it assigns the oldest (lowest) costs to
the cost of goods sold. FIFO will result in the highest net income whenever the oldest purchase
costs are also the lowest—that is, in the common situation of rising prices.

(2) In this situation, the LIFO method will minimize income taxes, as it assigns the most recent
(and highest) costs to the cost of goods sold. The high cost of goods sold, in turn, minimizes
taxable income. The LIFO method will minimize taxes whenever the most recent purchase
costs are the highest, which, as mentioned above, is the normal situation in an inflationary
environment.

(3) No. Speed World may not use FIFO in its financial statements and LIFO in its income tax
returns. Normally a company may use different accounting methods in its financial statements
and income tax returns. However, tax laws require a taxpayer using LIFO in its income tax
return also to use the LIFO method in its financial statements.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
20 Minutes, Medium PROBLEM 8.3A
SPEED WORLD CYCLES: PERIODIC SYSTEM

a. Cost of goods sold and ending inventory

(1) Average-cost method:

Ending inventory at September 30:
Average cost ($40,200 ÷ 8 units) $ 5,025
Ending inventory (4 units @ $5,025) $ 20,100

Cost of goods sold through September 30:

Cost of goods available for sale $ 40,200
Less: Ending inventory at September 30 (above) 20,100
Cost of goods sold $ 20,100

(2) First-in, first-out (FIFO) method:

Ending inventory (4 units) at September 30:
3 units from purchase on August 3 (@ $5,100) $ 15,300
1 unit from purchase on July 22 (@ $5,000) 5,000
$ 20,300

Cost of goods sold through September 30:

Cost of goods available for sale $ 40,200
Less: Ending inventory at September 30 (above) 20,300
Cost of goods sold $ 19,900

(3) Last-in, first-out (LIFO) method:

Ending inventory at September 30:
2 units from purchase on July 1 (@ $4,950) $ 9,900
2 units from purchase on July 22 (@ $5,000) 10,000
Ending inventory $ 19,900

Cost of goods sold

Cost of goods available for sale $ 40,200
Less: Ending inventory at September 30 (above) 19,900
Cost of goods sold $ 20,300

Note to instructor: Students may point out that ending inventory computed under LIFO is the same figure
as the cost of goods sold computed under FIFO. Likewise, the cost of goods sold figure computed under
LIFO is the same as the ending inventory figure computed under FIFO. The fact that these numbers are
the same is merely a coincidence.

b. Yes. Income tax regulations influence the inventory method used in financial reports only when the
LIFO method is used for income tax purposes. If the company selects the FIFO method for income
tax reporting, it is free to choose another method for financial reporting purposes.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
25 Minutes, Easy PROBLEM 8.5A
CLEAR SOUND AUDIO

Units Unit Cost Total Cost

a. Inventory and cost of goods sold:
(1) FIFO:
Inventory:
Fourth purchase (Dec.18) 17 $ 320 $ 5,440
Third purchase (Oct. 4) 5 315 1,575
Ending inventory, FIFO 22 $ 7,015

Cost of goods sold:

Cost of goods available for sale $ 22,606
Less: Ending inventory, FIFO 7,015
Cost of goods sold, FIFO $ 15,591

(2) LIFO:
Inventory:
Beginning inventory 12 $ 299 $ 3,588
First purchase (May 12) 10 306 3,060
Ending inventory, LIFO 22 $ 6,648

Cost of goods sold:

Cost of goods available for sale $ 22,606
Less: Ending inventory, LIFO 6,648
Cost of goods sold, LIFO $ 15,958

(3) Average cost:

Inventory:
Total goods available for sale 73 $ 309.70 $ 22,606
Average unit cost ($22,606 ÷ 73 units)

Ending inventory, weighted

average of $309.70 per unit 22 $ 309.70 $ 6,813

Cost of goods sold, weighted

average of $309.70 per unit 51 $ 309.70 $ 15,795

b. The FIFO method, by assigning the costs of the most recent purchases to inventory, provides the most
realistic balance sheet amount for inventory in terms of replacement costs. A weakness in the FIFO
method, however, is that the costs assigned to the cost of goods sold are relatively old costs. Because
the replacement costs of the units has been rising throughout the year, the FIFO method tends to
understate the cost of goods sold in terms of the costs actually being incurred by Clear Sound Audio to
replenish its inventory. The LIFO inventory method assigns the more recent costs to the cost of goods
sold and therefore provides a more realistic measure of income, in terms of current replacement costs,
than does the FIFO method.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.