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Week Three Exercise Assignment

 

Inventory

 

 

 

1. Specific identification method. Boston Galleries uses the specific identification method for inventory valuation. Inventory information for several oil paintings follows.

 

Painting		Cost
1/2 Beginning inventory	Woods		$21,000
4/19 Purchase	Sunset		21,800
6/7 Purchase	Earth		31,200
12/16 Purchase	Moon		4,000

 

 

 

Woods and Moon were sold during the year for a total of $35,000. Determine the firm’s

 

a. cost of goods sold.

 

b. gross profit.

 

c. ending inventory.

 

2.  Inventory valuation methods: basic computations. The January beginning inven­tory of the Gilette Company consisted of 300 units costing $40 each. During the first quarter, the company purchased two batches of goods: 700 Units at $44 on February 21 and 800 units at $50 on March 28. Sales during the first quarter were 1,400 units at $75 per unit. The White Company uses a periodic inventory system. Using the White Company data, fill in the following chart to compare the results obtained under the FIFO, LIFO, and weighted average inventory methods.

 

 

 

FIFO		LIFO		Weighted Average
Goods available for sale	$		$		$
Ending inventory, March 31
Cost of goods sold

 

 

 

 

 

3. Perpetual inventory system: journal entries. At the beginning of 20X3, Beehler Company implemented a computerized perpetual inventory system. The first transactions that occurred during 20X3 follow:

 

·         1/2/20X3 Purchases on account: 500 units @$6 =  $3,000

 

·         1/15/20X3 Sales on account: 300 units @ $8.50 = $2,550

 

·         1/20/20X3 Purchases on Account: 200 units @ 5 = $1,000

 

·         1/25/20X3   Sales on Account: 300 units @ $8.50 = $2,550

 

The company president examined the computer generated journal entries for these transactions and was confused by the absence of a Purchases account.

 

a. Duplicate the journal entries that would have appeared on the computer printout under FIFO & LIFO

 

b. Calculate the balance in the firm’s Inventory account under each method.

 

c. Briefly explain the absence of the Purchases account to the company president.

 

 

 

 

 

4. Inventory valuation methods: computations and concepts.

 

 

 

Wild Riders Surfboard Company began business on January 1 of the current year. Purchases of surfboards were as follows:

 

 

 

Date	Quantity	Unit Cost	Total Cost
1/3	100	$125	$12,500
4/3	200	$135	$27,000
6/3	100	$145	$14,500
7/3	100	$155	$15,500
Total	500		$69,500

 

 

 

 

 

Wild Riders sold 400 boards at $250 per board on the dates listed below.  The company uses a perpetual inventory system.

 

 

 

Date	Quantity Sold	Unit Price	Total Sales
3/17	50	$250	$12,500
5/17	75	$250	$18,750
8/10	275	$250	$68,750
Total	400		$100,000

 

Instructions

 

a.       Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods:

 

·         First in, first out

 

·         Last in, first out

 

·         Weighted average

 

 

 

b. Which of the three methods would be chosen if management’s goal is to

 

(1) produce an up to date inventory valuation on the balance sheet?

 

(2) show the lowest net income for tax purposes?

 

 

 

5. Depreciation methods. Mike Davis Enterprises purchased a delivery van for $40,000 in January 20X7. The van was estimated to have a service life of 5 years and a resid­ual value of $6,000. The company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by using each of the following methods:

 

a. Units of output, assuming 17,000 miles were driven during 20X8

 

b. Straight line

 

c. Double declining balance

 

6. Depreciation computations. Alpha Alpha Alpha, a college fraternity, purchased a new heavy duty washing machine on January 1, 20X3. The machine, which cost $2,000, had an estimated residual value of $100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following:

 

a. The machine’s book value on December 31, 20X5, assuming use of the straight line depreciation method

 

b. Depreciation expense for 20X4, assuming use of the units of output depreciation method. Actual washing cycles in 20X4 totaled 500.

 

c. Accumulated depreciation on December 31, 20X5, assuming use of the double declining balance depreciation method.

 

 

 

7. Depreciation computations: change in estimate. Aussie Imports purchased a specialized piece of machinery for $50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of $5,000. During the 5 years of operations (20X3 20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.

 

Instructions

 

a. Compute depreciation for 20X3 20X7 by using the following methods: straight line, units of output, and double declining balance.

 

b. On January 1, 20X5, management shortened the remaining service life of the machine to 15 months. Assuming use of the straight line method, compute the company’s depreciation expense for 20X5.

c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800 for the machinery rather than $50,000 In addition, assume that the company incurred $800 of freight charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use.