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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

$11,000

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 White 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 @ $4 =  $2,000

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

 

1/3:

100 boards  @ $125

3/17:

  50 boards @ $130

5/9:

246 boards @ $140

7/3:

400 boards @ $150

10/23:

 74 boards  @ $160

 

Wave Riders sold 710 boards at an average price of $250 per board. The company uses a periodic inventory system.

 

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. Betsy Ross Enterprises purchased a delivery van for $30,000 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 $1,000, 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 20 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.

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