Chapter 8 - Exercises - Kieso, Intermediate Accounting, 12th Canadian Edition, Volume 1, Wiley, 2019, PDF

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Kieso, Intermediate Accounting, 12th Canadian Edition, Volume 1, Wiley, 2019, ISBN: 978-1-119-49633-5 (E-Pub); 978-1-119-49649-6 (LLPC)...

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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

CHAPTER 8 INVENTORY ASSIGNMENT CLASSIFICATION TABLE Topics

Brief Exercise

Exercise

Problem

1.

Definitions, recognition and inventory categories

1, 2, 3, 4, 5

2.

Physical goods included

6, 7, 8, 9, 10

1, 2, 3, 4, 5, 6, 7

1, 3, 7, 11

3.

Inventory errors

11

2, 3, 4, 8, 9, 10, 11, 12

4, 7

4.

Components of inventory cost

10, 12, 13, 14

1, 4, 5, 13

1, 2, 5

5.

Perpetual vs. Periodic systems

9, 15, 16

1, 14, 15, 16, 17, 18, 19, 20

9

6.

GAAP cost formula options

15, 17

15, 16, 17, 18, 19

1, 6, 8, 15, 16

7.

LC&NRV and other values

16, 18, 19, 20, 21,

6, 11, 21, 22, 23,

4, 9, 11, 12

8.

Gross profit method

22, 23

12, 24

10

9.

Presentation and disclosure

24

10.

Analysis

25

11, 18, 20, 25, 26

3, 7, 8

11.

IFRS and ASPE comparison

2, 10, 18, 20, 21, 23

4, 5, 7, 11, 23

2, 11

12.

Retail method

26,

27, 28

13, 14

13.

Primary GAAP sources

27, 28

11

Solutions Manual 8-1 Chapter 8 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Item E8-1

Time

Level of Difficulty Moderate

(Minutes)

Moderate Moderate Moderate

20-25 15-20 15-20

E8-2 E8-3 E8-4

Description Purchases recorded gross and net, periodic system. Inventoriable costs - perpetual Inventoriable costs-error adjustments Inventoriable costs

E8-5 E8-6 E8-7 E8-8 E8-9

Inventoriable costs. Cost allocation and LC&NRV. Purchase commitments. Inventory errors. Inventory errors.

Moderate Moderate Simple Simple Moderate

20-25 20-25 25-30 15-25 15-20

E8-10 E8-11

Inventory errors Lower of cost and NRV—error effect and analysis. Gross profit method.

Complex Simple

20-25 15-20

Simple Simple

15-20 15-20

15-20

E8-12 E8-13

Relative sales value method.

E8-14 E8-15

Determining merchandise amounts. Periodic versus perpetual entries.

Simple Moderate

10-20 20-25

E8-16

Moderate

15-20

Moderate Moderate

15-20 20-25

Complex

40-45

E8-20 E8-21

Calculate FIFO, moving average cost— perpetual and periodic. SI, FIFO and weighted average. Calculate FIFO, weighted average cost— periodic Calculate FIFO, moving average cost— perpetual. Lower of cost and NRV—journal entries. Lower of cost and NRV – journal entries

Simple Simple

10-15 10-15

E8-22 E8-23 E8-24 E8-25 E8-26 *E8-27

Lower of cost and NRV—valuation account. Biological inventory assets Gross profit method. Inventory trend analysis and ratios. Trend analysis and ratios. Retail inventory method.

Moderate Simple Moderate Moderate Complex Simple

20-25 20-25 15-20 20-25 20-25 20-25

E8-28

Primary sources of GAAP

Simple

10-15

E8-17 E8-18 E8-19

Solutions Manual 8-2 Chapter 8 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item

Description

Level of Difficulty

Time (minutes)

P8-1 P8-2 P8-3 P8-4 P8-5 P8-6 P8-7

Various inventory issues. Vendor rebates. Inventory adjustments. Reducing Inventory to Market Purchases recorded gross and net. FIFO Weighted average – periodic. Inventory and other errors – effect on ratios.

Moderate Moderate Moderate Moderate Simple Moderate Complex

25-30 25-30 30-40 20-25 20-25 20-25 30-40

P8-8

Calculate FIFO and weighted average cost income and ratios.

Moderate

30-40

P8-9

Entries for lower of cost and NRV—direct and allowance. Gross profit method. Statement and note disclosure, LC&NRV, and purchase commitment. LC&NRV and effect on ratios Retail inventory method. Retail inventory method. Calculate FIFO, moving average cost— perpetual. Calculate FIFO, LIFO, Av Cost –perpetual

Moderate

20-25

Moderate

30-35

Complex

40-50

Moderate Moderate Moderate Moderate

30-35 20-30 20-30 20-30

Moderate

40-45

P8-10 P8-11 P8-12 *P8-13 *P8-14 P8-15 P8-16

Solutions Manual 8-3 Chapter 8 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 8-1 Benefits of a just in time system include reduced inventory holding costs, such as warehouse space and storage, insurance, obsolete inventory, theft, the investment cost, etc. The risks of a tight inventory management system generally result from stock outs. If the goods are not available in the store, the company loses a potential sale and creates an unhappy customer. The use of a just in time system helps manage key ratios because less inventory is stored for long periods of time and therefore inventory turnover is improved. Also average days to sell inventory is better managed because inventory is not stored for long periods of time and goods manufactured are based on customer orders. Working capital is improved because less money is tied up in inventory. The current ratio is also better managed because lower levels in inventory means total current assets are lower and the settlement of accounts payable may be able to be deferred based on the terms of the payment, for example, net 30 days. Companies may want to maintain a higher current ratio but not at the expense of having inventory stored for long periods of time because this could result in obsolete inventory and higher investment and storage costs.

Solutions Manual 8-4 Chapter 8 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 8-2 Raw Materials Inventory

Work in Process Inventory

Finished Goods Inventory

(a)Engine

(e)Direct Labour: (h) Ford – F-150 (d)Standby Wages paid to ready to be equipment assembly line shipped to (fixed asset) employees the dealer

(b)Nuts and (f)Manufacturing Bolts (or Overhead: Factory Rent materials and supplies inventory) (g)Manufacturing Overhead: Wages paid to supervisors

Other

(i)Manufacturing plant (fixed asset)

(c) Spare parts

The response would remain unchanged under ASPE.

BRIEF EXERCISE 8-3 Users of the financial statements will be interested in knowing the total investment made in inventories, the various types or categories of inventory, how the inventory costs are calculated, (cost formula), that the inventory has been reported at the lower of cost and net realizable value, whether the inventories have been pledged as collateral on any loans, and the amount by which inventories have been written down due to a decline in value, or any recoveries. As well the amount of the cost of goods sold must be disclosed.

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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 8-4 The primary use of the airplanes should determine their treatment on the balance sheet. Since the airplanes are held primarily for sale, and chartering is only a temporary use, the airplanes should be classified as current assets. Amortization would not be appropriate if the planes are considered inventory. If their market value declines below cost, however, a write-down to net realisable value would be required.

BRIEF EXERCISE 8-5 a)

Yes, as raw materials inventory

b)

Yes, in retail inventory

c)

Yes, in work in progress

d)

Yes, a form of raw materials inventory

e)

No, this would be included in capital assets as it is equipment, not intended for sale.

f)

Yes, as a contract in progress

g)

Yes, as miscellaneous supplies inventory

BRIEF EXERCISE 8-6 The transaction is a product financing arrangement and should be reported by the company as inventory with a related liability. The substance of the transaction is that inventory has been purchased and the fact that a trust is established to purchase the goods has no economic significance. Given that the company agrees to buy the coal over a certain period of time at specific prices, it appears clear that the company, not the trust, has the liability. The trust would likely be consolidated assuming that the criteria for consolidation was met.

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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 8-7 Section 3031 of the CPA Canada Handbook and IAS 2 under IFRS indicate that the cost of inventory includes “all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.” (a) To the extent that warehousing is a necessary function of importing merchandise before it can be sold, certain elements of warehousing cost might be considered an appropriate cost of inventory in the warehouse. For example, if goods must be brought into the warehouse before they can be made ready for sale, the cost of bringing such goods into the warehouse would be considered a cost of inventory. Similarly, if goods must be handled in the warehouse for assembly or for removal of foreign packaging, etc., it would be appropriate to include such costs in inventory. However, some costs are not considered product costs and should not be included in the cost of inventory. These include costs involved in storing the goods (unless storage is necessary e.g. the product must be held before next stage of production), abnormal spoilage of materials, labour or other production costs, and interest costs if inventory is purchased on delayed payment terms. Any costs of delivering the goods from the warehouse to customers would be a selling expense, and should not be allocated to goods that are still in the warehouse. (b) It is correct to conclude that obsolete items should be excluded from inventory. Cost attributable to such items is “non-useful” and “non-recoverable” cost (except for possible scrap value) and should be written off. If the cost of obsolete items were simply excluded from ending inventory, the resultant cost of goods sold would be overstated by the amount of these costs. The cost of obsolete items, if immaterial, should be included with cost of goods sold. If material, these costs should be separately disclosed.

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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 8-8 December 31 inventory per physical count $4,000 Less: inventory on consignment for Woods Corporation (1,000) Add: Goods-in-transit purchased f.o.b. shipping point 800 Goods-in-transit sold f.o.b. destination 400 December 31 inventory $4,200

BRIEF EXERCISE 8-9 (a) Perpetual Inventory System Inventory (200 X $100) ................................. Accounts Payable ...............................

20,000 20,000

Accounts Payable (6 X $100) ...................... Inventory..............................................

600

Accounts Receivable (150 X $200) ............. Sales Revenue ....................................

30,000

Cost of Goods Sold (150 X $100) ................ Inventory..............................................

15,000

(b) Periodic Inventory System Purchases (200 X $100) ............................... Accounts Payable ...............................

600 30,000

15,000 20,000 20,000

Accounts Payable (6 X $100) ...................... Purchase Returns and Allowances ...

600

Accounts Receivable (150 X $200) ............. Sales Revenue ....................................

30,000

600

30,000

Solutions Manual 8-8 Chapter 8 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 8-9 (CONTINUED) (c) Balance of 94 units is calculated as follows: Unit

Beg. Inventory Purchases Less: Purchase Returns Cost of Goods Sold Ending balance

Total @$100 50 $ 5,000 200 20,000 (6) (600) (150) (15,000) 94 $ 9,400

Inventory (ending, per count) ................... Cost of Goods Sold .................................... Purchase Returns and Allowances ........... Purchases ........................................... Inventory (beginning) ........................

9,400 15,000 600 20,000 5,000

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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 8-10 (a) Loss on Purchase Contracts ............................ Liability for Onerous Contracts ...............

50,000 50,000

This assumes that the company expects it will incur a loss equal to the excess price it will have to pay above the market rate. (b) Raw Materials Inventory ....................... Liability for Onerous Contracts............ Loss on Purchase Contracts ................ Cash ................................................

920,000 50,000 30,000 1,000,000

The entry in part (a) in effect recognized the loss on the commitment (lower of cost and NRV) at December 31. The entry in (b) recognizes the inventory at its revised “cost”. Any of this inventory that is sold in the period (and the cost of goods sold) will be based on this “cost” and a gross profit or loss will result. Any of the inventory remaining at the next balance sheet date will be reviewed for the lower of cost and net realizable value at that date and it will be adjusted accordingly. (c) Under IFRS, if the unavoidable costs to complete a contract are higher than the benefits expected from receiving the goods under the contract, a loss provision is recognized as an onerous contract. Although ASPE does not have a similar requirement, practice in Canada has been to record the loss and liability as well. In essence, the accounting is the same.

Solutions Manual 8-10 Chapter 8 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 8-11 Cost of goods sold as reported Overstatement of 12/31/16 inventory Overstatement of 12/31/17 inventory Corrected cost of goods sold

$2,500,000 (150,000) 50,000 $2,400,000

12/31/17 Retained Earnings as reported Overstatement of 12/31/17 inventory Corrected 12/31/17 retained earnings

$4,000,000 (50,000) $3,950,000

BRIEF EXERCISE 8-12

Group

Number of CDs

Sales Price

1 2 3

100 800 100

$ 5 $10 $15

Total Sales Price

Relative Sales Price

500 8,000 1,500 $10,000

5/100 80/100 15/100

$

Total Cost $7,500 $7,500 $7,500

Cost Allocated

Cost per CD

$ 375 6,000 1,125 $7,500

$3.75 $7.50 $11.25

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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 8-13 (a) Inventory .................................................... Interest Payable ...................................

1,000 1,000

Since the interest is capitalized, it is recorded as part of the cost of the inventory of wine. (b) Under ASPE, companies can choose to either capitalize or expense the interest. If a company chooses to expense the interest: Interest Expense ........................................ Interest payable ...................................

1,000 1,000

If a company chooses to capitalize the interest, the entry will be the same as shown in part (a). (c) Grape vines used to produce grapes are considered to be bearer plants. Under IFRS bearer plants are accounted for in accordance with the standards for PPE. The standard allows the option of accounting for the bearer plants at cost or using a revaluation method. (d) ASPE does not provide any specific guidance for accounting for bearer plants such as the grape vines. The vineyards could be accounted for at cost less accumulated depreciation.

Solutions Manual 8-12 Chapter 8 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 8-14 (a)

Vendor rebates are recorded as a reduction to the cost of inventory when the rebate is “realizable”. Under the conceptual framework, the definition of an ‘asset’ and the rec...