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The paper "White Company Inventory" is a great example of a finance and accounting assignment. 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…
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Week Three Exercise Assignment Inventory 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.
$11,000+$4,000= $15,000
b. gross profit.
Sales-Cost of goods sold= Gross Profit
$35,000-$15,000= $20,000
c. ending inventory.
$21,800+$31,200= $53,000
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
82,800
82,800
82,800
Ending Inventory March 31
400 units@50 each= 20,000
300 units @40 and 100 units @44= 16,400
400 units @46= 18,400
Cost of Goods Sold
62,800
66,400
64,400
FIFO
LIFO
Weighted Average
Goods available for sale
$
$
$
Ending inventory, March 31
Cost of goods sold
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.
Account
Debit
Credit
Inventory
Accounts Payable
500 units @ $4 = $2,000
2,000
2,000
Sale
Accounts Receivable
2,550
2,550
Accounts Payable
Inventory
75 units @ $4 = $300
300
300
b. Calculate the balance in the firm’s Inventory account.
125 units @ $4 each= $500
c. Briefly explain the absence of the Purchases account to the company president.
The purchase account is used in periodic inventory system. Inventory account is directly debited when inventory is purchased under perpetual inventory system because inventory account has to be kept updated.
4. 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
Cost of Goods Sold $100,540
Ending Inventory $24,740
Gross Profit $76,960
Last-in, first-out
Cost of Goods Sold $104,880
Ending Inventory $20,400
Gross Profit $72,620
Weighted average
Cost of Goods Sold $102,240 710 @144 per unit cost
Ending Inventory $23,040
Gross Profit $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
(2) approximate the physical flow of a sand and gravel dealer?
Weighted Average
(3) report low earnings (for tax purposes) for a separate electronics company that has been
experiencing declining purchase prices?
FIFO
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
Account
Debit
Credit
Depreciation Expense
Accumulated Depreciation
4,080
4,080
b. Straight-line
Account
Debit
Credit
Depreciation Expense
Accumulated Depreciation
4,800
4,800
d. Double-declining-balance
1/5= 0.2= 20%
Depreciation (double declining balance) = 2 x 20% x 30,000= 12,000
Account
Debit
Credit
Depreciation Expense
Accumulated Depreciation
12,000
12,000
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
Book Value= $325 (after end of 3 years)
b. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500.
500/1800 (1,000-100) = $250
c. Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method.
2003: 2 x 25% x 1,000= 500
2004: 50% x 500= $250
2005: 50% x 250= $125
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.
Straight Line
2003: Depreciation= $9,000
2004: Depreciation= $9,000
2005: Depreciation= $9,000
2006: Depreciation= $9,000
2007: Depreciation= $9,000
Units of Output
2003: 5100/25000 ($50,000-$5,000) = $9,180
2004: 4800/25000 ($50,000-$5,000) = $8,640
2005: 3200/25000 ($50,000-$5,000) = $5,760
2006: 6000/25000 ($50,000-$5,000) = $10,800
2007: 5900/25000 ($50,000-$5,000) = $10,620
Double-Declining-Balance
2003: 40% (50,000) = $20,000
2004: 40% (30,000) = $12,000
2005: 40% (18,000) = $7,200
2006: 40% (10,800) = $4,320
2007: 40% (6,480) = $2,592 but this will lead to a residual value of 3,888 which is less than 5,000
The depreciation of 2007 will be $1,480
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.
2003: Depreciation= $9,000
2004: Depreciation= $9,000
Book value= $50,000-$18,000= $32,000
Depreciation Expense= $16,200 for 2005 ($32,000-$5,000)*12/20
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.
Freight charges and set up costs are included in the cost of the machinery. This will make the cost of the machinery (47,800+300+1400) $50,000 and this is why we will not have to change anything. Insurance is treated separately and has nothing to do with depreciation of an asset.
Reflect for a moment on the LIFO (Last in First Out) and FIFO (First in First Out) inventory methods. If you were starting a small manufacturing company, what inventory method do you believe would provide the most accurate financial statements? Why do you believe this is the case?
For a small manufacturing company, it is much better to use FIFO inventory method as it will provide the most accurate financial statements. This will be the case because inventory should be reflected in terms of recent prices and in the FIFO method it is assumed that inventory that is purchased first is sold first. This means that the inventory that is left unsold is the inventory that was most recently purchased. The inventory of the company is reported at its recent value which is why financial statements are up to date.
Using LIFO method will not produce very accurate financial statements because it will value inventory at older value which might be different from the current value of the inventory.
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