Chapter 7 Homework Solutions PDF

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CHAPTER 7 Reporting and Analyzing Inventory and Receivables BRIEF EXERCISE 7.1 (Required) (a) Ownership of the goods belongs to the owner (Peete). Thus, these goods should be included in Peete’s inventory. (b) The goods in transit should not be included in the inventory count because ownership by Peete does not occur until the goods reach the buyer. (c) The goods being held belong to the customer. They should not be included in Peete’s inventory. (d) Ownership of these goods rests with the other company (the owner). Thus, these goods should not be included in the physical inventory.

BRIEF EXERCISE 7.2 Physical inventory Add: Goods purchased from Pelzer Goods sold to Alvarez Stallman ending Inventory

$200,000 25,000 22,000 $247,000

The goods purchased from Pelzer of $25,000 are included in ending inventory because the terms are F.O.B. shipping point which means Stallman takes title at the time the goods are shipped. Goods sold to Alvarez. F.O.B. destination means that the goods are still Stallman’s until delivered. BRIEF EXERCISE 7.3 (Required) (a) The ending inventory under FIFO consists of 200 units at $9 for a total allocation of $1,800. (b) The ending inventory under LIFO consists of 200 units at $6 for a total allocation of $1,200.

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7-1

BRIEF EXERCISE 7.4 (Required) Average unit cost is $8.00 computed as follows: 300 400 600 1,300

x $6 = $1,800 x $8 = 3,200 x $9 = 5,400 $10,400

$10,400 ÷ 1,300 = $8.00 The cost of the ending inventory is $1,600 (200 x $8.00). BRIEF EXERCISE 7.5 (Required) FIFO Beginning inventory (10 x $11) .................................. Purchases May 5 (30 x $16) ................................................. Jul. 16 (15 x $19) ................................................. Dec. 7 (20 x $23) .................................................. Cost of goods available for sale ................................ Less: Ending inventory (20 x $23) + (5 x $19).......... Cost of goods sold......................................................

$ 110 $480 285 460

LIFO Cost of goods available for sale ................................ Less: Ending inventory (10 x $11) + (15 x $16)......... Cost of goods sold......................................................

1,225 1,335 555 $780

$1,335 350 $985

AVERAGE-COST $1,335 ÷ 75 = $17.80 weighted-average unit cost Cost of goods available for sale................................. Less: Ending inventory (25 x $17.80)......................... Cost of goods sold......................................................

7-2

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$1,335 445 $890

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BRIEF EXERCISE 7.6 (a) FIFO would result in the highest net income. (b) FIFO would result in the highest ending inventory. (c) LIFO would result in the lowest income tax expense (because it would result in the lowest taxable income). (d) Average cost would result in the most stable income over a number of years because it averages out any big changes in the cost of inventory. BRIEF EXERCISE 7.10 Assets

=

Liabilities

+

Accts. Cash (a) Jul. 1 (b)

8

(c )

11

+ $20,600

+

Rec.

Stockholders' Equity Common

=

+

Stock

Retained Earnings +

Rev.

+ $23,000

+ $23,000

-2,400

-2,400

-

Exp. Sales revenue Sales returns & allowanc

-20,600

(Cash received = Sales − Sales returns & allowances) ($23,000 − $2,400)

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7-3

BRIEF EXERCISE 7.11 (Required) (a)

Assets = Liabilities + Allow. For Accts. Doubtful Rec. Accts = + Beg. Bal. $700,000 -$25,000 -4,300 4,300 Adj. Bal. 695,700 -20,700

(b) Accounts receivable Less: Allowance for doubtful accounts Cash realizable value

Stockholders' Equity Common Stock

(1) Before Write-Off $700,000

+

Retained Earnings Rev. Exp.

(2) After Write-Off $695,700

25,000 $675,000

20,700 $675,000

BRIEF EXERCISE 7.12 (Required) Inventory turnover = Cost of Goods Sold/(Avg Inventory) Inventory turnover = Cost of Goods Sold/[(Beg Inv + End Inv)/2] Inventory turnover: Days in inventory:

7-4

$349, 114 $349, 114 = =2. 54 t i mes ( $119, 035+$155, 377)÷2 $137, 206

36 5 =1 44day s 2. 5 4

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SOLUTIONS TO DO IT! EXERCISES DO IT! 7.1 Inventory per physical count................................................... Inventory out on consignment................................................ Inventory sold, in transit at year-end...................................... Inventory purchases, in transit at year-end........................... Correct December 31 inventory...............................................

$300,000 28,000 0 13,000 $341,000

DO IT! 7.2 Cost of goods available for sale = (3,000 x $5) + (7,000 x $7) = $64,000 Ending inventory = 3,000 + 7,000 – 8,400 = 1,600 units (a) FIFO: $64,000 – (1,600 x $7) = $52,800 (b) LIFO: $64,000 – (1,600 x $5) = $56,000 (c) Average-cost: $64,000/10,000 = $6.40 per unit 8,400 x $6.40 = $53,760

DO IT! 7.3 (Required) Assets

=

Liabilities

+

Stockholders' Equity

Allow. For Accts. Rec. Beg. Bal. Adj.

$310,000

Doubtful -

Accts.

Common =

+

Stock

Retained Earnings +

Rev.

-

Exp.

-$5,700 -16,000

-$16,000

Bad debt expense

[Bad debt exp. = (Accts. rec. x Uncoll. percent.) − Unadj. bal in allow. for doubtful. accts.] [($310,000 x .07) − $5,700]= $21,700 - $5,700 = $16,000

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7-5

DO IT! 7.4 2021 Inventory turnover

Days in inventory

$1,200,000 ($170,000 + $210,000)/2 = 6.3

365 ÷ 6.3 = 57.9 days

2022 $1,425,000 ($210,000 + $90,000)/2

= 9.5

365 ÷ 9.5 = 38.4 days

The company experienced a very significant decline in its ending inventory as a result of the just-in-time inventory. This decline improved its inventory turnover ratio and its days in inventory. Also, its sales increased by 19%. It is possible that this increase is the result of a more focused inventory policy. It appears that this change is a win-win situation for Fedor Company.

SOLUTIONS TO EXERCISES EXERCISE 7.1 Ending inventory physical count.................................................. $275,000 1. No effecttitle passes to purchaser upon shipment when terms are FOB shipping point................................ 0 2. No effecttitle does not transfer to Pohl until goods are received........................................................... 0 3. Add to inventory: Title passed to Pohl when goods were shipped.......................................................... 25,000 4. Add to inventory: Title remains with Pohl until purchaser receives goods................................................ 51,000 5. Subtract from inventory: The goods did not arrive prior to year-end. The goods, therefore, cannot be included in the inventory...................................................................... (42,000) Correct inventory............................................................................. $309,000 (Legal title determines of an item should be included in inventory)

7-6

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EXERCISE 7.3 (Required) (a) Do not include—Gato does not own items held on consignment. (b) Include in inventory—Gato still owns the items as they were only shipped on consignment. (c) Include in inventory—Shipping terms FOB destination means that Gato owns the items until they reach the customer. (d) Do not include in inventory—Because the shipping terms are FOB shipping point, ownership has transferred to the customer. Gato should record this amount as a sale on the income statement. (e) Do not include in inventory—Because the shipping terms are FOB destination, Gato does not own the goods until they arrive at Gato’s premises. (f) Include in inventory—Shipping terms FOB shipping point means that ownership transferred at the time of shipping and therefore, Gato owns the goods in transit. (g) Do not include in inventory. Record as Supplies on the balance sheet.

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7-7

EXERCISE 7.4 FIFO Beginning inventory (15 x $100).................................... Purchases Sept. 12 (45 x $102)................................................. Sept. 19 (50 x $104)................................................. Sept. 26 (20 x $105)................................................. Cost of goods available for sale.................................... Less: Ending inventory (20 x $105) + (5 x $104)........ Cost of goods sold......................................................... Date 9/1 9/12 9/19

$ 1,500 $4,590 5,200 2,100

PROOF OF COST OF GOODS SOLD Units Unit Cost 15 $100 45 102 45 104 105

LIFO Cost of goods available for sale............................................ Less: Ending inventory (15 x $100) + (10 x $102)............. Cost of goods sold................................................................. Date 9/26 9/19 9/12

PROOF OF COST OF GOODS SOLD Units Unit Cost 20 $105 50 104 35 102 105

11,890 13,390 2,620 $10,770 Total Cost $ 1,500 4,590 4,680 $10,770 $13,390 2,520 $10,870 Total Cost $ 2,100 5,200 3,570 $10,870

AVERAGE-COST $13,390 ÷ 130 = $103 weighted-average unit cost Cost of goods available for sale............................................ Less: Ending inventory (25 x $103) ...................................... Cost of goods sold ................................................................ PROOF OF COST OF GOODS SOLD Units Unit Cost 105 $103

7-8

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$13,390 2,575 $10,815 Total Cost $ 10,815

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EXERCISE 7.5 (a) FIFO Beginning inventory (30 x $8)........................................... Purchases May 15 (25 x$11).......................................................... May 24 (45 x $13)......................................................... Cost of goods available for sale (100 units).................... Less: Ending inventory [(100 – 74) x $13]...................... Cost of goods sold............................................................

Date 5/1 5/15 5/24

$240 $275 585

PROOF OF COST OF GOODS SOLD Units Unit Cost 30 $ 8 25 11 19 13 74

860 1,100 338 $762

Total Cost $240 275 247 $762

(b) LIFO Cost of goods available for sale.................................................. Less: Ending inventory (26 x $8)................................................ Cost of goods sold........................................................................

Date 5/24 5/15 5/1

PROOF OF COST OF GOODS SOLD Units Unit Cost 45 $13 25 11 4 8 74

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$1,100 208 $892

Total Cost $585 275 32 $892

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7-9

EXERCISE 7.5 (Continued) (c) AVERAGE-COST $1,100 ÷ 100 = $11.00 weighted-average unit cost Cost of goods available for sale.................................................... Less: Ending inventory (26 x $11.00)............................................ Cost of goods sold......................................................................... PROOF OF COST OF GOODS SOLD Units Unit Cost 74 $11.00

7-10

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$1,100 286 $ 814

Total Cost $814

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EXERCISE 7.9 (Required) Assets

Cash

Kimmel, Survey of Accounting, 2e, Solutions Manual

Beg. Bal. (a) +$763,000 (b) (c) (d)Adj. Bal. (e )

+

Accts. Rec. $200,000 +800,000 -763,000 -7,300 _______ 229,700

= Allow. For Doubtful Accts. = -$9,000

Liabilities

+

Stockholders' Equity Common Stock

+

Retained Earnings Rev. Exp. +$800,000

+7,300 -23,300 -25,000

Accounts receivable Less: Allowance for doubtful accounts Net realizable value

(Bad debt exp. = Est. uncoll. amt. − Unadj. bal. in allow. for dbtful. Accts.) [Bad debt exp. = $25,000 - ($9,000 − $7,300)]

+

Sales revenue

-$23,300 Bad debt expense

$229,700 25,000 $204,700

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7-19

EXERCISE 7.11 (Required) (a)

Accounts Receivable Current 1–30 days past due 31–90 days past due Over 90 days past due

Amount $65,000 12,900 10,100 7,400

% 2 5 30 50

Estimated Uncollectible $1,300 645 3,030 3,700 $8,675

(b) $6,575 ($8,675 – $2,100) Bad Debt Expense takes into account any existing balance in the allowance account) (Est. uncollectible amt. − Unadjusted balance in Allow. for doubtful accounts) ($8,675 − $2,100)

(c) The total balance of receivables increased from 2021 to 2022. However, of concern is the fact that each of the three categories of older accounts increased substantially during 2022. That is, customers are taking longer to pay and bad debts are likely to increase. Management needs to investigate the causes of this change.

7-12

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EXERCISE 7.12 2020 (a) Inventory turnover

$18,038

$20,351

$20,099

($2,290 + $2,522) ÷ 2

($2,522 + $2,618) ÷ 2

$2,108

inventory (c) Gross profit rate

2022

($1,926 + $2,290) ÷ 2 $18,038

(b) Days in

2021

365

$20,351 = 8.6 times

= 42.4 days

8.6

$39,474 – $18,038 = 54.3% $39,474

$2,406

365

= 8.5 times

= 42.9 days

8.5

$43,251 – $20,351 = 52.9% $43,251

$20,099 $2,570 365

= 7.8 times

= 46.8 days

7.8

$43,232 – $20,099 = 53.5% $43,232

(d) The inventory turnover decreased by approximately 10% from 2020 to 2022 while the days in inventory increased by a similar amount (10%) over the same time period. Both of these changes would be considered unfavorable since it’s better to have a higher inventory turnover with a corresponding lower days in inventory. PepsiCo., Inc.’s gross profit rate decreased by 1.5% from 2020 to 2022.

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7-13

EXERCISE 7.13 (a) Inventory Turnover (2022):

Days in Inventory (2022):

$1,552,000 = 2.8 times ($553,000 + $568,000) ÷ 2

365 2.8

130 days

Gross Profit Rate (2022):

($1,948,000  $1,552,000) = 20.3% $1,948,000

Inventory Turnover (2021):

$1, 288, 000 = 2.9 times ($568, 000 + $332, 000) ÷ 2

365 Days in Inventory (2021):

Gross Profit Rate (2021):

2.9

126 days

$1,725,000-$1,288,000 25.3% $1,725,000

(b) In 2022, Zoe’s Activewear experienced a deterioration in liquidity and profitability. The liquidity has been deteriorated due to the increase in time required to turn over its inventory, from 126 days to 130 days. The company has experienced deteriorated profitability due to a significant drop in its gross profit rate from 25.3% to 20.3%.

7-14

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SOLUTIONS TO PROBLEMS PROBLEM 7.2

(a) COST OF GOODS AVAILABLE FOR SALE Date March 1 5 13 21 26

Explanation Units Beginning inventory 2,500 Purchase 3,000 Purchase 3,500 Purchase 5,000 Purchase 2,000 Total 16,000

Unit Cost $ 6 7 8 9 10

Total Cost $ 15,000 21,000 28,000 45,000 20,000 $129,000

(b) FIFO Ending Inventory (2) Cost of Goods Sold Unit Total Cost of goods Date Units Cost Cost available for sale $129,000 March 26 2,000 $10 $20,000 Less: Ending 21 2,000 9 18,000 inventory 38,000 4,000* $38,000 Cost of goods sold $ 91,000

(1)

*16,000 – 12,000 = 4,000 Proof of Cost of Goods Sold Unit Total Date Units Cost Cost March 1 2,500 $6 $15,000 5 3,000 7 21,000 13 3,500 8 28,000 21 3,000 9 27,000 12,000 $91,000

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7-15

PROBLEM 7.2 (Continued) LIFO Ending Inventory (2) Cost of Goods Sold Unit Total Cost of goods Date Units Cost Cost available for sale $129,000 March 1 2,500 $6 $15,000 Less: Ending 5 1,500 7 10,500 inventory 25,500 4,000 $25,500 Cost of goods sold $103,500 (1)

Proof of Cost of Goods Sold Unit Total Date Units Cost Cost March 26 2,000 $ 10 $ 20,000 21 5,000 9 45,000 13 3,500 8 28,000 5 1,500 7 10,500 12,000 $103,500 AVERAGE-COST (2) Cost of Goods Sold Cost of goods $129,000 ÷ 16,000 = $8.06 available for sale $129,000 Less: Ending Unit Total inventory 32,240 Units Cost Cost Cost of goods sold $ 96,760 4,000 $8.06 $32,240

(1)

Ending Inventory

(c) (1) As shown in (b), FIFO produces the highest inventory amount, $38,000. (2) As shown in (b), LIFO produces the highest cost of goods sold, $103,500.

7-16

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PROBLEM 7.3

(a)

COST OF GOODS AVAILABLE FOR SALE Date

Explanation

Units

Unit Cost

Jan. 1 Feb. 20 May 5 Aug. 12 Dec. 8

Beginning inventory Purchase Purchase Purchase Purchase Total

100 600 500 400 200 1,800

$ 7 8 9 10 11

Total Cost $

700 4,800 4,500 4,000 2,200 $16,200

(b) FIFO (1)

Ending Inventory Unit Units Cost

Date Dec. 8 Aug. 12

200 100 300*