MASTERING INVENTORY

HOMEWORK EXERCISES

Section 1–INTRODUCTION TO ACCOUNTING FOR INVENTORY

1. Your calendar year company places the following orders on December 27. Indicate which of
the orders will be reflected on this year’s financial statements.
a. Goods shipped December 28, FOB shipping point and received January 2.
b. Goods shipped December 27, FOB destination and received January 4.
c. Goods shipped January 2, FOB shipping point and received January 3.
d. Goods shipped FOB destination December 28 and received December 30.

2. Your company places the following orders on September 25. Indicate which orders will be
reflected on the balance sheet for the year ended September 30.
a. Goods are shipped FOB destination September 28 and received September 30.
b. Goods are shipped FOB destination September 27 and received October 2.
c. Goods are shipped FOB shipping point September 28 and received October 2.
d. Goods are shipped FOB shipping point October 1 and received October 3.

3. XYZ orders goods costing $5,000 from ABC. A trucker charges $300 for shipping. What
amount will XYZ record as the purchase cost in each of the following cases?
a. FOB destination with freight paid in advance by ABC.
5,000
b. FOB shipping point with the freight cost added to ABC’s invoice.
5,300
c. FOB shipping point with XYZ paying the shipping cost upon delivery.
5,300

4. Fill in the missing data in the following table:

A B C D E
Beginning inventory $10,000 14,000 $12,000 $8,000 5,000
Purchases $20,000 $16,000 19,000 22,000 $16,000
Goods available for sale 30,000 $30,000 $31,000 30,000 21,000
Ending inventory $5,000 5,000 $7,000 $13,000 $9,000
Cost of goods sold 25,000 $25,000 24,000 $17,000 $12,000

Homework Solutions 1
Mastering Inventory

© American Institute of Professional Bookkeepers, 2010

Homework Exercises 2
Mastering Inventory

Section 2–INVENTORY RECORDKEEPING USING THE PERPETUAL METHOD

1. On July 13, Ainsley Co. orders inventory with an invoice price of $20,000, FOB destination.
On July 17, the goods and invoice are received. On July 21, Ainsley pays the invoice in full.
On July 30, the inventory is sold on account for $30,000. Prepare the journal entries to
record each transaction under the perpetual method

Jul.17 Inventory 20,000

Account Payable 20,000

July.21 Account Payable 20,000

Cash 20,000

July.30 Account Receivable 30,000

Sale 30,000

July.30 Cost of Goods Sold 20,000

Inventory 20,000

2. Cooke Enterprises orders inventory from Advantage Systems, FOB shipping point. The units
list for $10,000, but Cooke gets a 5% trade discount. Freight is $150, which Cooke pays the
trucker upon delivery. Before paying the invoice, Cooke notices that goods were damaged and
returns the entire shipment. Prepare the journal entries to record each transaction under the
perpetual method.

3. Wasatch Tech purchases goods with an invoice price of $4,200 and terms of 3/10, n/30 and
pays the net amount after 8 days. Prepare the journal entries to record the purchase and
payment if Wasatch books cash discounts:
a. at gross.
Purchase 4,200
Account payable 4,200

b. at net. ( 4,200 x 3%=126)

Account Payable 4,200
Cash Discount 126
Cash 4,074

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4. Good Thymes Produce purchases goods with an invoice price of $6,300 and terms of 2/10
n/30. It pays the full amount after 15 days. Prepare the journal entries to record the purchase
and payment if Good Thymes records cash discounts:
a. at gross.
b. at net.

5. GemStone sells 500 units of inventory for $12,000 on account. The units cost $10 each. The
customer returns 50 units before paying the invoice. Prepare the journal entries to record each
transaction under the perpetual method.

Account Receivable 12,000

Sale 12,000

Cost of Goods Sold 5,000

Inventory 5,000

Sale Return 12,000

Account Receivable 12,000

Inventory 500

Cost of Goods Sold 500

Cash 10,800

Account Receivable 10,800

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Section 3–INVENTORY RECORDKEEPING USING THE PERIODIC METHOD

1. On April 10, MDC orders inventory with an invoice price of $18,000, FOB destination.
MDC receives the goods and invoice on April 13 and pays the invoice in full on April 20.
On April 30, the inventory is sold for $25,000 cash. Prepare the journal entries to record
each transaction under the periodic method.

Purchase 18,000

Account Payable 18,000

Account Payable 18,000

Cash 18,000

Cash 25,000

Sale 25,000

2. McClain Enterprises orders inventory that lists for $4,000, including $100 for shipping, and is
offered a 10% trade discount. Terms are FOB shipping point. McClain receives the shipment,
but before paying the invoice, McClain sees that half the units are damaged and returns them.
Prepare the journal entries to record each transaction under the periodic method.

3. SusCo, which uses the periodic method, purchases goods with an invoice price of $1,200 and
terms of 2/10, n/30 and pays the net amount after 6 days. Prepare the journal entries to record
the purchase and payment if Summit records cash discounts:
a. at gross.
Purchase 1,200
Account Payable 1,200
Account Payable 1,200
Purchase discount 24
Cash 1,176
b. at net.
Purchase 1,176
Account Payable 1,176
Account payable 1,176
Cash 1,176

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4. StarrCo, which uses the periodic method, purchases goods with an invoice price of $3,100 and
terms of 2/10, n/30 and pays the full amount after 15 days. Prepare the journal entries to record the
purchase and payment if StarrCo records cash discounts:
a. at gross.
b. at net.

5. Timpany Products sells 400 units of inventory for $16,000 on account. The goods cost
Timpany $18 per unit. Before Timpany receives payment, the customer returns 100 units.
Prepare the journal entries to record each transaction under the periodic method.
Account Receivable 16,000
Sale revenue 16,000
Sale Return and allowances 4,000
Account Receivable 4,000

Homework Exercises 6
Mastering Inventory

Section 4–INVENTORY COSTING THE WEIGHTED-AVG. AND MOVING-AVG. METHODS

1. FlipCo, which uses the periodic method and weighted average costing, begins operations in
20X8. On January 15, FlipCo purchases 20 units at $6 each; on March 21, 30 units at $7.00
each, on June 1, 450 units at $5.25 each, and on November 12, 50 units at $6.25 each.
a. What is FlipCo’s cost per unit? $5.46364
b. If ending inventory is 125 units, what is FlipCo’s 20X8 ending inventory and COGS?
Ending Inventory=125 x 5.46364= 682.96
COGS= (20+30+450+50-125)x5.46364=2,322.05

2. CommerceCo. provides you with the following information:

December 31, 20X8 Ending inventory of 600 units $ 8,800

January 28, 20X9 Purchase of 700 units @ $23 16,100
January 28, 20X9 Freight for purchase 500
October 5, 20X9 Purchase of 900 units @ $25 22,500
October 9, 20X9 Return of 200 units @ $25 5,000
On December 31, 20X9, there are 1,200 units on hand. Using the weighted average method,
what is cost of goods sold on CommerceCo’s 20X9 income statement?
Beginning Inventory(600units) 8,800
700 units +freight 500 (16,100 +500) 16,600
900 units 22,500
Total: 47,900
Less: units return (5,000)
Units available for sale 42,900
Less: 1,200 Units ending (25,740)
COGS 17,160

3. RichCo starts up in 20X9. The company makes the following purchases:

Purchase date Units purchased Unit cost Total cost
January 15 700 $16 $ 11,200
April 12 2,600 $17 44,200
June 7 3,300 $19 62,700
August 25 1,300 $22 28,600
September 5 5,100 $24 122,400
December 11 900 $27 24,300

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RichCo’s 20X9 year-end physical count finds 2,600 units on hand. If RichCo uses weighted-average
costing, what is 20X9 goods available for sale, ending inventory, and COGS?

4. PrimeCo started operations in July and uses moving-average costing under the perpetual
method. Transactions from July through October are:
Purchases Sales
July 21 2,000 @ $ 8
August 2 800 @ $10
August 21 900 @ $11
September 11 1,000 @ $ 9
October 11 400 @ $14
October 15 100 @ $15
Prepare the journal entries that should be recorded for the three sales.

5. Pendulum Inc. uses moving-average costing. Its 20X8 ending inventory is 900 units that have
an average cost of $12.20 each. Transactions during 20X9 are:
Purchases Sales
February 23, 20X9 1,200 @ $13 =15,600
March 1, 20X9 1,500 @ $22 = 33,000
May 15, 20X9 300 @ $14 =4,200
June 23, 20X9 400 @ $25 =10,000
November 21, 20X9 500 @ $11 =5,500
December 24, 20X9 600 @ $35 =21,000
900x12.20= 10,980
a. Prepare the journal entries that should be recorded for the three sales.
Mar 1 Account Receivable 33,000
Sale Revenue 33,000
Cost of Goods Sold 18,990
Inventory 18,990
(10,980 +15,600 = 26,580)
26,580/2100 units = 12.66
12.66 x 1,500 = 18,990

Jun 23 Account Receivable 10,000

Sale Revenue 10,000
COGS 5,240
Inventory 5,240

600 Units ( 26,580 – 18,990) 7,590

300 units on May 15 4,200

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Total 11,790
11,790/900 =13.10
13.10x400 = 5,240
Dec.24 Account Receivable 21,000
Sale Revenue 21,000
COGS 7,230
Inventory 7,230

600 units x 35 = 21,000 sale revenue

500 units (11,790 – 5,240 ) 6,550
500 units purchase 11/21 5,500
1,00 units 12,050

12,050/ 1,000= 12.05

12.05x600=7,230

b. What does Pendulum report as ending inventory on its balance sheet?

Ending inventory = 4,820

12.50 x 400 units = 4,820

6. On January 1, MacFarland Inc., which sells clocks, had units on hand that cost $14 each. It’s
20X9 transactions are as follows:
Date Purchases Sales Units on hand
January 1 40
February 2 60 units @ $15 each
March 3 70 units @ $25 each
May 12 90 units @ $17 each
June 22 55 units @ $29 each
Sept. 13 75 units @ $18
November 24 60 units @ $28 each
What is MacFarland’s ending inventory and COGS under:
a. the periodic method and weighted-average costing?

Homework Exercises 9
Mastering Inventory

Beginning of inventory is (40x$14). $560

Purchased on2/2 900
Purchased on 5/12 1,530
Purchased in 9/13 1,350
265 Units available for sale 4,340
COGS 3,030 (4,340/265=16.38) Avg Cost per unit
(16.38x185)
Ending Inventory 1,310 (16.38x(265-185))

b. the perpetual method and moving-average costing?

Beginning inventory is $560
60 Units purchases on 2/2 $900
100 units available for sale $1,460
COGS $1,022 (70 units x 14.60)

30 units (1,460-1,0220 $438

90 Units purchases on 5/12 1,530
120 units available for sale $1,968
Avg Cost $16.40 ( 1,958/120)
COGS $920 (55 units x 16.40)

65 units ( 1,968 – 902) 1,066

75 units purchases 9/13 1,350
140 units available for sale 2,416

Homework Exercises 10
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Homework Exercises 11
Mastering Inventory

Section 5–INVENTORY COSTING USING THE FIFO METHOD

1. RathCo starts up in 20X8 and decides to use FIFO costing under the periodic method. During
20X9 it makes the following purchases:
Purchase date Units purchased Unit cost Total cost
January 15 600 $16 $ 9,600
April 12 2,400 $17 40,800
June 7 3,000 $19 57,000
August 25 1,300 $22 28,600
September 5 5,000 $25 125,000
December 11 900 $27 24,300
Total 13,200 $285,300
RathCo’s 20X8 year-end physical count shows 4,000 units that cost $60,000. Its 20X9 physical
count shows 2,600 units.
a. What is RathCo’s 20X9 ending inventory?
b. COGS?

2. KelCo uses FIFO under the periodic method. Its inventory records are:
Units Cost
Beginning inventory 120 $10
2/1 Purchase 300 $12
5/2 Purchase 200 $13
8/2 Purchase 300 $14
11/20 Purchase 250 $15
At year-end 20X9, a physical count of inventory shows 450 units on hand.
a. What is KelCo’s goods available for sale:
1. in units?
Beginning Inventory 120
Purchase(5/2-11/20) 1,050
Good available for sale 1,170
2. in dollars?
Beginning $1,200
Purchase(5/2-11/20) 14,150
Good available for sale 15,350

b. What is KelCo’s:
1. ending inventory?
250 units (purchased on 11/20) $3,750
200 units (purchased on 8/2) $2,800
Ending inventory $6,550

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2. cost of goods sold?

COGS $8,800. (15,350 – 6,550)

3. In 20X9, KBH Corp. sells 6,800 units $70 each. It began the year with an inventory of 750
units at $22 each and made the following purchases:
March 17 Purchase 2,600 units @ $24 per unit
June 15 Purchase 300 units @ $26 per unit
Sept. 4Purchase 1,500 units @ $28 per unit
Dec. 23 Purchase 2,200 units @ $30 per unit
If KBH uses the periodic method and FIFO costing, what is KBH’s:
a. ending inventory?
b. cost of goods sold?

4. ApCo uses the perpetual method and FIFO. Here are its 20X9 inventory records as of Dec. 31:
Units Unit cost Total cost
January 1 Beginning inventory 800 $50.00 $40,000
March 12 Purchase 1,000 52.50 52,500
May 25 Sells 900 units
August 23 Purchase 1,000 55.00 55,000
October 15 Sells 1,500 units
November 16 Purchase 1,500 56.00 84,000
December 11 Sells 1,000 units
Total 4,300 $231,500
Present the journal entry for each sale’s cost of goods sold.

3/25 COGS 45,250

Inventory 45,250

10/15 COGS 80,250

Inventory 80,250

12/11 COGS 55,600

Inventory 55,600

Section 6–INVENTORY COSTING USING THE LIFO METHOD

1. ShaCo, a 20X8 startup, uses the periodic method and LIFO costing. ShaCo makes the following
purchases during its first year:

Homework Exercises 13
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Purchase date Units purchased Unit cost Total cost

January 15 600 $16 $ 9,600
April 12 2,400 $17 40,800
June 7 3,000 $19 57,000
August 25 1,300 $22 28,600
September 5 5,000 $25 125,000
December 11 900 $27 24,300
Total 13,200 $285,300
The year-end physical count is 4,000 units. Compute 20X8 ending inventory and COGS.

Ending inventory $69,400

Ending unit 20x8 600 units
600 units purchased on 1/15 $9,600 (600x 16)
2,400 units purchased on 4/12 $40,800 (2,400x17)
1,000 units purchased on 6/7 19,000 (1,000x19)
$69,400

COGS 215,900 ( 285,300 – 69,400 )

Inventory 215,900
2. UpCo, which started in 20X7, purchases inventory quarterly and uses LIFO costing under the
periodic method. Its 20X7–20X9 inventory records are:
Purchase date Units Unit cost Total cost Ending inv. (units)
20X7
January 2,600 $17 $44,200
April 700 $16 11,200
July 3,300 $19 62,700
October 1,300 $22 28,600
Ending inventory 900
20X8
January 1,300 $22 $28,600
April 1,500 $23 34,500
July 1,000 $24 24,000
October 2,000 $25 50,000
Ending inventory 1,400
20X9
January 1,000 $25 $25,000
April 1,300 $25 32,500
July 1,300 $26 33,800

Homework Exercises 14
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October 1,800 $27 48,600

Ending inventory 1,700
Calculate UpCo’s cost of goods sold and ending inventory for 20X7, 20X8 and 20X9.
3. Agile Supply Company provides you with the following information:
Units Cost
20X6 Ending inventory 600 $7,800
20X7 LIFO Layer 700 9,800
20X8 LIFO Layer 400 6,400
In 20X9, Agile purchases 7,000 units at $119,000, and sells 7,500 units. Calculate Agile’s
20X9 ending inventory and cost of goods sold.

20X6 LIFO $7,800

20X7 LIFO 9,800
20X8 LIFO 6,400
20X9 purchases 119,000
Goods available for sale 143,000
20X9 ending inventory (16,200). (9,800/700 x 600)
COGS 20X9 $126,800

4. Ajaz Mercantile, a 20X8 start-up, shows the following inventory data for 20X8:
Units Cost/Unit Cost
January 12 1,200 $22 $26,400
April 14 1,500 $24 36,000
July 17 1,000 $25 25,000
October 21 2,000 $26 52,000
Ending inventory 3,000
In 20X9, Ajaz purchases an additional 5,000 units for $150,000. If 20X9 sales are 6,000 units,
what does Ajaz report for 20X9 ending inventory and cost of goods sold?
1,200 units purchased on 1/12 26,400
1,500 units purchased on 74/14 36,000
300 units purchased on 7/17 7,500
$69,900
Cost per Unit 23.30 (69,900/3000)
AJAZ Liquidates 1,000 units 46,600 (2,000 x 23.30) (Ending Inventory)
Goods Available for sale 219,900. (69,900 + 150,000)
COGS 173,300 (219,900 – 46,600)

Homework Exercises 15
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5. Crossover Bass Co., which began business in 20X7 and uses LIFO costing under the periodic
method, made the following inventory purchases:
Unit Total
Purchase date Units cost Cost
20X7
February 5 2,200 $20 $44,000
April 12 1,900 $21 39,900
August 3 3,000 $22 66,000

20X8
January 21 1,000 $24 $24,000
March 6 1,300 $24 31,200
July 22 1,300 $26 33,800
December 12 1,800 $25 45,000
Sales for Crossover Bass Co. were as follows: in 20X7, 4,400 units; and in 20X8, 7,600 units.
Calculate ending inventory and cost of goods sold for:
a. 20X7.
b. 20X8.

Homework Exercises 16
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Section 7–INVENTORY COSTING USING THE LOWER OF COST OR MARKET RULE

1. Use the following information to calculate inventory applying LCM by item:

Normal
Recorded Replacement Expected Disposal profit
cost cost sales price costs margin
Item A $12 $13 $16 $2 $3
Item B $22 $20 $24 $5 $2
Item C $17 $16 $19 $2 $2
Item D $42 $38 $60 $6 $8
Item E $32 $30 $40 $6 $3
Item F $18 $20 $24 $7 $2

Net Realizable value (NRV)

Item A:

NRV 16 – 2 = 14

Cost: 12

NRV: 14

LCNRV: 12

Item B:

NRV 24 - 5 = 19

Cost: 22

NRV: 19

LCNRV: 19

Item C:

NRV 19 – 2 = 17

Cost: 17

NRV: 17

LCNRV: 17

Homework Exercises 17
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Item D:

NRV 60 – 6 = 54

Cost: 42

NRV: 54

LCNRV: 42

Item E:

NRV 40 – 6 = 34

Cost: 32

NRV: 34

LCNRV: 32

Item F:

NRV 24 – 7 = 17

Cost: 18

NRV: 17

LCNRV: 17

2.At year-end 20X8, Ancho Canned Chile has 8,000 units on hand at a weighted-average cost
of $13 per item. At year end, Ancho learns that the purchase price has fallen to $11. Sales for
the year were at $16 per item. Resellers cost Ancho an average $4 per unit. Ancho’s normal
profit margin is $3 per unit.
a. What is Ancho’s ending inventory applying LCM by item?
NRV: 16 – 4 = 12
Cost: 13

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NRV: 12
LCNRV: 12

c. If the loss is not significant enough to warrant disclosure on the income statement, what
year-end journal entry does Ancho record?
COGS 8,000
Allowance to reduce inventory to market 8,000

d. If the market value of the inventory increases in the following year, can Ancho recognize
the recovery?
When inventory increases in value after a recorded loss, the Lower of Cost or Net
Realizable Value (LCNRV) rule generally prevents recognizing this gain.
However, if an Allowance account was used for the write-down, it's possible to
acknowledge the recovery up to the initial loss amount.

2. Deuce Hardware presents the following inventory:

Units Cost
on hand per unit Market
1. Electric
a. Light Fixture 35 $70 $ 65
b. Bulbs (cases) 12 10 11
c. GFCI Outlets 20 100 99
2. Hardware
a. Screws 20 $13 $ 12
b. Spacers 2 10 13
c. Nails 8 12 15
3. Plumbing
a. Traps 22 $ 14 $ 11
b. Faucets 15 125 115
c. Toilets 4 200 210

a. What is Deuce's ending inventory, applying LCM by item?

b. What is Deuce's ending inventory, applying LCM by group?

c. What is Deuce's ending inventory, applying LCM to the entire inventory?

3. A physical inventory of Nuvo VCR taken on December 31 reveals the following:

Units Cost Market
on hand per unit per unit
Games
Xbox 300 $26 $24
Wii 150 23 24
Video
DVDs 200 $7 $6

Homework Exercises 19
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Blu Ray 100 11 12

a. Calculate ending inventory, applying LCM to the entire inventory.

Xbox 7,800 7,200

Wii 3,450 3,600

DVDs 1,400 1,200

Blu Ray 1,100 1,200

$13,750$13,200

LCNRV as a whole $13,200

b. Calculate ending inventory, applying LCM by group.

GAMES

Xbox 7,800 7,200

Wii 3,450 3,600

$11,250 $10,80010,800

VIDEO

DVDs 1,400 1,200

Blu Ray 1,100 1,200

$2,500 $2,400 2,400

LCNRV BY GROUP $13,200

c. Calculate ending inventory, applying LCM by item.

4. On October 1, 20X8, your company signs a $10,000 purchase commitment for goods to be
delivered on March 5, 20X9. At year-end 20X8, the estimated value of the goods on order is
$8,000.
a. Present the journal entries to reflect the purchase commitment at year-end 20X8.

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b. If, on March 5, 20X9, the market value of the goods is $7,000, present the journal entry to
record this change.

5. On November 1, 20X8, your company signs a $10,000 purchase commitment for goods to be
delivered on February 15, 20X9. At year-end 20X8, the estimated value of the goods on order
is $7,500.
a. What is the journal entry to record to record the impact of the change in market value at
year-end 20X8?
Loss on Purchase Commitment 2,500
Liability on Purchase Commitment 2,500
b.
Inventory 500
Liability on Purchase Commitment 500

Homework Exercises 21