University of Marylan

ECON 103

1)Buckeye Corporation adopted dollar-value LIFO on January 1, 2006, when the inventory value was $500,000 and the cost index was 1.0. On December 31, 2006, the inventory value at year-end costs was $535,000 and the cost index was 1.06. Buckeye would report a LIFO inventory of:

A) $504,717.

B)   $530,000.

C)   $505,000.

D) $533,019.

2. Tiger Inc. adopted dollar-value LIFO on January 1, 2006, when the inventory value was

$360,000 and the cost index was 1.25. On December 31, 2006, the inventory was valued at year-end cost of $395,000 and the cost index was 1.30. Tiger would report a LIFO inventory of:

A) $410,800.

B)   $374,400.

C)   $379,808.

D) $380,600.

Problems

3. Bascomb Company purchased $420,000 in merchandise on account during the month of April, and merchandise costing $350,000 was sold on account for $425,000.

Required:

(a.) Prepare journal entries to record the purchases and sales assuming Bascomb uses a perpetual inventory system.

(b.) Prepare journal entries to record the purchases and sales assuming Bascomb uses a periodic inventory system.

4. Meteor Co. purchased merchandise on March 4, 2006, at a price of $30,000, subject to credit terms of 2/10, n30. Meteor uses the net method for recording purchases and uses a periodic inventory system.

Required:

(a.) Prepare the journal entry to record the purchase.

(b.) Prepare the journal entry to record the appropriate payment if the entire invoice is paid on March 11, 2006.

(c.) Prepare the journal entry to record the appropriate payment if the entire invoice is paid on April 2, 2006.

5. Slinky Company purchased merchandise on June 10, 2006, at a price of $20,000, subject to credit terms of 2/10, n30. Slinky uses the net method for recording purchases and uses a perpetual inventory system.

Required:

(a.) Prepare the journal entry to record the purchase.

(b.) Prepare the journal entry to record the appropriate payment if the entire invoice is paid on June 18, 2006.

(c.) Prepare the journal entry to record the appropriate payment if the entire invoice is paid on July 8, 2006.

6. Bunker Auto Supply purchased merchandise on January 4, 2006, at a price of $70,000, subject to credit terms of 2/10, n30. Bunker uses the gross method for recording purchases and uses a periodic inventory system.

Required:

(a.) Prepare the journal entry to record the purchase.

(b.) Prepare the journal entry to record the payment of one-half the invoice amount on January 11, 2006.

(c.) Prepare the journal entry to record the balance of the amount due on February 2, 2006.

7. Patty's Pet Store purchased merchandise on October 10, 2006, at a price of $35,000, subject to credit terms of 2/10, n30. Patty's uses the gross method for recording purchases and uses perpetual inventory system.

Required:

(a.) Prepare the journal entry to record the purchase.

(b.) Prepare the journal entry to record the payment of one-half the invoice amount on October 18, 2006.

(c.) Prepare the journal entry to record the payment of the balance of the amount due on November 8, 2006.

8. Boston Dollar Store uses the gross method to record purchase discounts, and uses a perpetual inventory system. Boston engaged in the following transactions during April:

4/12           Purchased $15,000 in merchandise subject to terms of 2/10, n30. The goods were shipped f.o.b. shipping point.

4/13           Received a billing from Orange Freight Lines for $300 for the 4/12 purchase. 4/15                    Returned $1,000 of merchandise from the 4/12 purchase.

4/20           Paid balances due from 4/12 purchase.

Required:

Prepare journal entries to record the above transactions.

Use the following to answer questions 09-13:

Shown below is the activity for one of the products of Random Creations: January 1 balance, 80 units @ $50     $4,000

Purchases:

January 18: 40 units @ $51

January 28: 40 units @ $52 Sales:

January 12: 30 units

January 22: 30 units

January 31: 45 units

9. Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses FIFO.

10. Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses LIFO and perpetual inventory system.

11. Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses LIFO and a periodic inventory system.

12. Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses average cost and a periodic inventory system.

13. Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses average cost and a perpetual inventory system.

Use the following to answer questions 14-18:

Shown below is activity for one of the products of Denver Office Equipment: January 1 balance, 500 units @ $55  $27,500

Purchases:

January 10: 500 units @ $60

January 20: 1,000 units @ $63 Sales:

January 12: 800 units

January 28: 750 units

15. Required: Compute the ending inventory and cost of goods sold assuming Denver uses LIFO and a perpetual inventory system.

16. Required: Compute the ending inventory and cost of goods sold assuming Denver uses average cost and a periodic inventory system.

17. Required: Compute the ending inventory and cost of goods sold assuming Denver uses average cost and a perpetual inventory system.

18. Required: Compute the ending inventory and cost of goods sold assuming Denver uses LIFO and a periodic inventory system.

19. Selected financial statement data from Western Colorado Stores is shown below.

Required:

(a.) Compute the gross profit ratio for 2006.

(b.) Compute the inventory turnover ratio for 2006.

20. Appleton Inc. adopted dollar-value LIFO on January 1, 2006, when the inventory value was

$1,200,000. The December 31, 2006, ending inventory at year-end costs was $1,430,000 and the cost index for the year is 1.1.

Required:

Compute the dollar-value LIFO inventory valuation for the December 31, 2006, inventory.

21. Chavez Inc adopted dollar-value LIFO on January 1, 2006, when the inventory value was

$850,000. The December 31, 2006, ending inventory at year-end cost was $950,000 and the cost index for the year is 1.08.

Required:

Compute the dollar-value LIFO inventory valuation for the December 31, 2006, inventory.

22. Liquidated Corporation had a DVL inventory of $800,000 at the beginning of the current year when it adopted DVL. Its year-end inventory at year-end prices was $850,000. The index for the current year was 1.08.

Required:

Compute the DVL inventory to be reported at the end of the year.

Use the following to answer questions:

The following information is taken from the accounting records of Rapid Runner Inc. for the year 2006. Missing information has been left blank.

Required: Compute the missing amounts.

23. 123.

Cost of

Ending

Gross

Sales      Purchase

Beginning

Gross

Purchase

: 3 Use the following to answer questions :

The following information is taken from the accounting records of Madeline Inc. for the year 2006. Missing information has been left blank. Inventory is the only supply that Madeline purchases on credit.

Required: Compute the missing amounts.

32.

Jan. 1 accounts payable

Jan. 1 inventory

Dec. 31 accounts payable

Dec. 31

inventory    Cash paid to

inventory suppliers

Cost of goods sold

Net purchases

80                                                                  72                     606                      583                      621

80                   34                   95                   72                     606                      583                      621

33. The following information comes from the 2004 General Motors (GM) Corporation annual report to shareholders:

Inventories included the following for Automotive and Other Operations (dollars in millions):

December 31,

Inventories are stated generally at cost, which is not in excess of market. The cost of approximately 92% of U.S. inventories is determined by the last-in, first-out (LIFO) method. Footnote 6 to the GM financial statements indicated that the LIFO Allowance (Reserve) decreased by $139 million during 2004. GM's Income from continuing operations before income taxes for 2004 was $2,805 million.

Required:

If GM used only FIFO for its inventories instead of its current policy, what would its Income from continuing operations before income taxes have been for 2004?

.

34. The following information comes from the 2004 Occidental Petroleum Corporation annual report to shareholders:

NOTE 5       INVENTORIES

Inventories of approximately $137 million and $171 million were valued under the LIFO method at December 31, 2004 and 2003, respectively. Inventories (in millions) were:

Also, the footnote indicated that the LIFO Reserve increased from $22 million to $54 million during 2004.

Required:

If Occidental Petroleum did not use LIFO for any of its inventory, but used FIFO instead, How would its 2004 pre-tax income be affected?

35. On January 1, 2005, ECT Co. adopted the dollar-value LIFO method for its one inventory pools. The pool's value on this date was $600 million. The 2005 and 2006 ending inventory valued at year-end costs were $702 million and $840 million, respectively. The appropriate cost indexes are 1.08 for 2005 and 1.20 for 2006.

Required:

Calculate the inventory balance that ECT Co. would report on its year-end balance sheets for 2005 and 2006, using the dollar-value LIFO method.

36. On January 1, 2005, RAY Co. adopted the dollar-value LIFO method for its one inventory pools. The pool's value on this date was $300 million. The 12/31/05 inventory valued at year- end costs were $385 million. The 12/31/05 inventory, using dollar-value LIFO was $355 million.

Required:

Calculate 2005 cost index for RAY's inventory.

Use the following to answer questions 37-38:

A note to the 2005 financial statements for H.T. Horton Inc. reveals the following:

"Substantially all inventories owned by H.T. Horton Inc. and its U.S. subsidiaries are valued at cost on the last-in, first-out (LIFO) method. During the fourth quarter, the company's inventories declined due to a lower level of production. As a result, lower costs which prevailed in prior years were matched against current year's revenues, the effect of which was to increase net income by $42 million or 48 cents per share. If all of the company's inventories had been valued on a current cost basis, which approximates FIFO, inventories at year-end were $3,628 million, compared with $3,712 million at the beginning of the year." The income tax rate is 40%.

Required:

37. The footnote indicates an inventory liquidation during the fourth quarter. By how much did the costs of the older inventories matched against current revenues differ from current costs? Indicate the amount and whether it was larger or smaller.

38. What additional income tax payments did the 2005 liquidation cost Horton?

Essay

Instructions:

The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be.

39. Briefly describe why companies that use perpetual inventory systems must still perform physical inventories.

40. It is the end of the accounting period, and your boss asks you to help determine the inventory balance to place in the company's balance sheet. Explain which physical quantities of inventory that you will include, and which you will exclude.

41. Briefly explain when there would be a tax benefit from electing LIFO rather than FIFO.

42. Briefly explain the advantages of dollar-value LIFO (DVL).

43. Briefly explain how companies that use LIFO can both increase and decrease reported earnings by "managing" ending inventories.