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. Cash $35,000 Sales $35,000 Woods goods 11,000 Woods Inventory 11,000
Moon Goods 4,000 Moon Inventory 4,000 Total cost of goods $15,000 b. gross profit. Sales Revenue $35,000 minus Cost of Goods $15,000 = $20,000 (Gross profit) c. ending inventory. $21,800 (Sunset) + $31,200 (Earth) = $53,000 (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. 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 | 1,800 units 82,800 1,800 units 82,800 1,800 units 82,800 00 units 20,000 400 units 12,400 400 units @ 46 = 64,400 1,400 units 62,800 1,400 units 70,400 1,400 units $18,400 (42,200) (34,600) got confused here 3. 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 following. * Purchases on account: 500 units @ $4 = $2,000 * Sales on account: 300 of the above units = $2,550 * Returns on account: 75 of the above unsold units
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 prepared on the computer printout. Inventory 2,000 AP 2,000 AR 2,550 Sales 2,550 Goods Sold 1,200 Inventory 1,200 30 units @ 4 AP 300 Inventory 300 75 units @ 4 b. Calculate the balance in the firm’s Inventory account. 2,000 – 1,200 – 300 = $500 c. Briefly explain the absence of the Purchases account to the company president. The reason for the missing purchase account is because the perpetual inventory system does not use it. . 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
Goods sold 100 @ $125 + 50 @ $130 + 246 @ $140 + 314 @ $150 = $100,540 Ending inventory 86 @ $150 + 74 @ $160 = $24,740 Gross profit 710 @ $250 – $100,540 = $76,960 * Last-in, first-out Goods 74 @ $160 + 400 @ $150 + 236 @ $140 = $104,880 Ending inventory 10 @ $140 + 50 @ $130 + 100 @ 125 = $20,400 Gross profit 710 @ $250 – $104,880 = $72,620 * Weighted average 100 @ $125 + 50 @ $130 + 246 @ $140 + 400 @ $150 + 74 @ $160 / 870 = $144 goods 710 @ $144 = $102,240 Ending inventory 160 @ $144 = $23,040 Gross profit 710 @ $250 – $102,240 = $75,260 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? FIFO would be used because units purchased first would be sold first, keeping the inventory current (2) approximate the physical flow of a sand and gravel dealer? LIFO would be used seeing how newer units placed in front, which are then sold in that order last in is the first to leave (3) report low earnings (for tax purposes) for a separate electronics company that has been experiencing declining purchase prices?
FIFO would be used since the older units are priced higher 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 Cost $30,000 – Residual Value / 20,000*5, 100,000 = $0. 24 depreciation rate Miles 17,000 * 0. 4 / 1 = $4,080 depreciation expense b. Straight-line Cost $30,000 – Residual Value $6,000 / 5 years = $4,800 depreciation expense Depreciation expense for 20X8 is $4,800 c. Double-declining-balance 20% * 2 = 40% $30,000 * 40% = $12,000 30,000-12,000 =18,000*40% = $7,200 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 Cost $1,000 – Residual Value $100 / Estimated Service 4 = $225 depreciation Book Value on 12/31/X5 = $1000 – 675 which is the3 years that have lapsed = $325 book value as of 12/31/X5 b. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500. 20X4 depreciation expense. Cost $1,000 – Residual Value $100/Washing cycles 1,800 = $0. 50 Cycles 500 *$0. 50 = $250 depreciation expense c.
Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method. Double Declining Balance 50% SL is ? = 25% $1000 * 50% = $500 $500 * 50% = $250 depreciation expense $250 * 50% = $125 depreciation expense Accumulated depreciation on 12/31/X5 is $500+$250+$125 = $875 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. Units of Output: $50,000 – $5,000 / 5 =$9,000 depreciation expense per year 20X3 – 20X7 $50,000 -$5,000/25,000 (operating hours) = $1. 8 (hours of use) X3 is 5100 hours * $1. 80 = $9,180 depreciation expense X4 is 4800 hours * $1. 80 = $8,640 depreciation expense X5 is 3200 hours * $1. 0 = $5,760 depreciation expense X6 is 6000 hours * $1. 80 = $10,800 depreciation expense X4 is 5900 hours * $1. 80 = $10,620 depreciation expense Double-declining balance X3 is $20,000 depreciation expense X4 carried value $50,000 – $20,000 = $30,000 * 40% = $12,000 Depreciation expense X5 carried value $50,000 – $20,000 – $12,000 = $18,000 * 40% = $7,200 Depreciation expense X6 carried value $50,000 – $20,000 -$12,000 – $7,200= $10,800 * 40% = $4,320 Depreciation expense X7 carried value $50,000 – $20,000 – $12,000 – $7,200 -$4,320 = $6,480 * 40% = $1,480 Depreciation xpense 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. $9,000 depreciation per year 01/01/X5 carried value $50,000 – $9,000 – $9,000 = $32,000 $32,000 – $5,000 = $27,000 /20 = $1,350 12 * $1,350 = $16,200 depreciation expense for X5 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. I do not believe anything should be done differently as the total still amounts to $50,000 because the freight paid to have the equipment delivered and set-up fees are included within capital expenditures (PPE). The insurance expense is not included as it does not relate to the asset.
