Dollar-value LIFO method

Part A:
Gant Company has a beginning inventory in year one of $300,000 and an ending inventory of $363,000. The price level has increased from 100 at the beginning of the year to 110 at the end of year one. Calculate the ending inventory under the dollar-value LIFO method.

Part B
At the end of year two, Gant's inventory is $437,000 in terms of a price level of 115 which exists at the end of year two. Calculate the inventory at the end of year two continuing the use of the dollar-value LIFO method.

Solutions

Inventory loss due to fire

The inventory of Charlie Angel Company had destroyed when a fire swept through the company's warehouse. Fortunately, the accounting records were locked in a fireproof safe and were not damaged. The following information for the period up to the date of the fire was taken from the accounting records:

Insturction

(1) Assuming that the gross profit has averaged 25 percent of selling price, what is the estimated value of the inventory destroyed in the fire? Show all calculations in good form.

(2) Assuming that the markup percentage on cost is 28 percent, what is the estimated value of the inventory destroyed in the fire? Show all calculations in good form.

Solutions

Analysis of gross profit

During 2007, Henry Sam Company experienced a significant increase in the rate of gross profit on sales, compared with the rate it has averaged in recent years. You are asked to determine the most likely reason for this improvement. Support your answer.

The following data are from the records of the company:

• 2007 sales (at an average price of $40 a unit) were $1,800,000.
• 2007 purchases (at an average cost of $24 a unit) were $960,000.
• The company uses the LIFO inventory method and has used it since 1982.

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Lower of cost or market

ABC Company began its operations in early 2008. The company carries five different types of inventory which are listed below along with other relevant data. The company values its inventory at the lower of cost or market. At December 31, 2008, ABC Company has exactly one unit of each item in ending inventory.



1. Complete the following information using the lower-of-cost-or-market method as of December 31, 2008.



2. Compute the inventory loss, if any, 49ers should show in 2008 using the lower-of-cost-or-market method applied on an individual items basis.

3. Prepare the adjusting entry, if any, required as of December 31, 2008, assuming all such entries are made directly to the inventory account.

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Perpetual LIFO and Periodic FIFO

Shanty Co. sells item A as part of its product line. Information as to balances on hand, purchases, and sales of item A are given in the following table for the first six months of 2007.

Instructions
(a) Compute the ending inventory at June 30 under the perpetual LIFO inventory pricing method.
(b) Compute the cost of goods sold for the first six months under the periodic FIFO inventory pricing method.

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Correcting net income relating to inventory #2

Backer Company reported the following net income amounts:

• 2006, $42,000
• 2007, $67,000
• 2008, $78,000

In 2009, the company discovered errors that had been made in computing the ending inventories for 2006 and 2007, as follows:

• 2006, Ending inventory overstated by $9,000.
• 2007, Ending inventory understated by $6,000.

Compute the correct net incomes for (1) 2006, (2) 2007, and (3) 2008.

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Inventory costing using LIFO/perpetual system

A record of transactions for the month of May was as follows:

Purchases

• May 01, 400 @ $4.20 (balance)
• May 04, 1,300 @ $4.10
• May 08, 800 @ $4.30
• May 14, 700 @ $4.40
• May 22, 1,200 @ $4.50
• May 29, 500 @ $4.55

Sales

• May 03, 300 @ $7.00
• May 06, 1,000 @ 7.00
• May 12, 900 @ 7.50
• May 18, 400 @ 7.50
• May 25, 1,400 @ 8.00
  

Assuming that perpetual inventory records are kept in dollars, determine the inventory using LIFO.

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Estimating loss due to theft of inventory

On May 17, it was discovered that a material amount of inventory had been stolen. A physical count discloses that $55,000 of merchandise was on hand as of May 17. The following additional data is available from the accounting records:

Records indicate that the company's gross profit has averaged 40 percent of selling prices.

Required
Estimate the amount of loss due to theft.

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FIFO and LIFO periodic inventory methods

The Pine Shop shows the following data related to an item of inventory:

• January 01, Balance, 100 units @ $5.00
• January 09, Purchase, 300 units @ $5.40
• January 19, Purchase, 70 units @ $6.00
• January 31, Balance, 120 units

Instructions

1. What value should be assigned to the ending inventory using FIFO?
2. What value should be assigned to cost of goods sold using LIFO?

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Correcting net income relating to inventory

Kingston Company reported the following net income amounts:

In 2009, the company discovered errors that been made in computing the ending inventories for 2006 and 2007, as follows:

• 2006: Ending inventory understated by $4,000.
• 2007: Ending inventory understated by $8,000.

Compute the correct net incomes for (1) 2006, (2) 2007, and (3) 2008.

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FIFO and LIFO inventory methods

During June, the following changes in inventory item 27 took place:


Perpetual inventories are maintained.

Instructions
What is the cost of the ending inventory for item 27 under the following methods? (Show calculations.)
(a) FIFO.
(b) LIFO.

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Estimating ending inventory

Nancy Corporation was founded on January 1, 2007. On December 31, 2008, the company lost most of its inventory in a warehouse fire just before the year-end count of inventory was to take place. Data from the records disclosed the following:



On January 1, 2005, Nancy's pricing policy was changed so that the gross profit rate would be 3 percentage points higher than the one earned in 2007.

Salvaged undamaged merchandise was marked to sell at $24,000, while damaged merchandise marked to sell at $16,000 had an estimated net realizable value of $3,600.

Determine the company's inventory loss due to the fire that occurred on December 31, 2008.

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Recording purchases of inventory at net amounts - periodic system

Alex Co. records purchases at net amounts and uses periodic syatem. Prepare entries for the following:

• June 11: Purchased merchandise on account, $5,000, terms 2/10, n/30.
• June 15: Returned part of June 11 purchase, $800, and received credit on account.
• June 30: Prepared the adjusting entry required for financial statements.

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Estimating cost of ending inventory

The following data relate to the records of Pearson Inc. for the month of September:



Using these data, estimate the cost of ending inventory for each situation below:
(1) Markup is 50 percent on cost.
(2) Markup is 60 percent on sales.
(3) Markup is 25 percent on cost.
(4) Markup is 40 percent on sales.

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Recording purchases of inventory at net amounts - perpetual system

Collins Co. recognizes purchase discounts lost and uses perpetual syatem. Prepare journal entries in general journal form for the following:

(a) Purchased merchandise inventory costing $900 with terms 2/10, n/30.
(b) Payment was made thirty days after the purchase.

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