Measuring and Reporting Inventories Practice Problems

Complete the practice problems. Check your answers after you finish.

Demonstration problem

Solution to demonstration problems

Solution to demonstration problem A

a. The ending inventory is 5,000 units, calculated as follows:

	Units
Beginning inventory	6,250
Purchases	23,750
Goods available	30,000
Sales	25,000
Ending inventory	5,000

Ending inventory under specific identification:

Purchased

Units

Unit Cost

Total Cost

November 20

2,500

$3.72

$9,300

August 12

2,500

3.48

8,700

$18,000

Ending inventory under FIFO:

Perpetual:

	Purchased			Sold			Balance
Date	Units	Unit Total Cost	Units	Unit Cost	Total Cost	Units	Unit
Beg. inv.						6,250	$3.00	$18,750
Feb. 3			5,250	$3.00	$15,750	1,000	3.00	3,000
Mar. 15	5,000	$3.12	$15,600			1,000	3.00	3,000
						5,000	3.12	15,600
May 4			1,000	3.00	3,000	1,500	3.12	4,680
			3,500	3.12	10,920
May 10	8,750	3.30 28,875				1,500	3.12	4,680
						8,750	3.3	28,875
Aug. 12	6,250	3.48 21,750				1,500	3.12	4,680
						8,750	3.30	28,875
						6,250	3.48	21,750
Sept. 16			1,500	3.12	4,680	2,250	3.30	7,425
			6,500	3.30	21,450	6,250	3.48	21,750
Oct. 9			2,250	3.30	7,425	1,250	3.48	4,350
			5,000	3.48	17,400
Nov. 20	3,750	3.72	13,950			1,250	3.48	4,350
	3,750	3.72						13,950
Ending inventory = (1,250 X $3.48) + (3,750 X $3.72) = $18,300

(b) Periodic:

Purchased	Units	Unit Cost	Total Cost
November 20	3750	$3.72	$13,950
August 12	1250	3.48	4350
	5000		$18,300 *

*Note that the cost of ending inventory is the same as under perpetual.

Ending inventory under LIFO:

(a) Perpetual:

	Purchased			Sold			Balance
Date	Units	Unit Cost	Total Cost	Units	Unit Cost	Total Cost	Units	Unit Cost	Total Cost
Beg. inv.						6,250		$3.00	$18,750
Feb. 3				5,250	$3.00	$15,750	1,000	3.00	3,000
Mar. 15	5,000	$3.12	$15,600				1,000	3.00	3,000
							5,000	3.12	15,600
May 04				4,500	3.12	14,040	1,000	3.00	3,000
							500	3.12	1,560
	8,750	3.3	28,875				1,000	3.00	3,000
May 10							500	3.12	1,560
							8,750	3.30	28,875
Aug. 12	6,250	3.48	21,750				1,000	3.00	3,000
							500	3.12	1,560
							8,750	3.30	28,875
							6,250	3.48	21,750
Sept. 16				6,250	3.48	21,750	1,000	3.00	3,000
				1,750	3.3	5,775	500	3.12	1,560
							7,000	3.30	23,100
Oct. 9				7,000	3.3	23,100	1,000	3.00	3,000
				250	3.12	780	250	3.12	780
Nov. 20	3,750	3.72	13,950				1,000	3.00	3,000
							250	3.12	780
							3,750	3.72	13,950

Ending inventory = (1,000 X $3.00) + (250 X $3.12) + (3,750 X $3.72) = $17,730

(b) Periodic:

	Units	Unit Cost	Cost Cost
Merchandise Inventory, January 1	5,000	$3.00	$15,000

Ending inventory under weighted-average:

(a) Perpetual:

	Purchased			Sold			Balance
Date	Units	Unit Cost	Total Cost	Units	Unit Cost	Total Cost	Units	Unit Cost	Total Cost
Beg. inv.							6,250	$3.0000	$ 18,750
Feb. 3				5,250	$3.00	$15,750	1,000	3.0000	3,000
Mar. 15	5,000	$3.12	$15,600				6,000	3.1000 a	18,600
38108				4,500	3.10	13950	1,500	3.1000	4,650
40299	8,750	3.30	28,875				10,250	3.2707 b	33,525
Aug.12	6,250	3.48	21,750				16,500	3.3500 c	55,275
Sept. 16				8,000	3.35	26,800	8,500	3.3500	28,475 *
Oct. 9				7,250	3.35	24,288	1,250	3.3500	4,187 *
Nov. 20	3,750	3.72	13,950				5.000	3.6274 d	18,137

Ending inventory = (5,000 X $3.6274) = $18,137

^a$18,600 = $3.100 ^b$33,525 = $3.2707 ^c$55,275 = $3.3500 ^d$18,137 = $3.6274

6,000 10,250 16,500 5,000

* Rounding difference.

Purchased	Units	Unit Cost	Total Cost
Merchandise Inventory, January 1	6,250	$3.00	$18,750
March 15	5,000	3.12	15,600
May 10	8,750	3.3	28,875
August 12	6,250	3.48	21,750
November 20	3,750	3.72	13,950
	30,000		98,926

Weighted-average unit cost = $98,925/30,000 = $3.2975
Ending inventory cost = $3.2975 x 5,000 = $16,488*
*Rounding difference

Journal entries under LIFO perpetual:

Feb.	3 Cost of Goods Sold (-SE)	15,750	15,750
	Merchandise Inventory (-A)
	To record cost of $3 on 5,200 units sold
Mar.	15 Merchandise Inventory (+A)	15,600	15,600
	Accounts Payable (+L)
	To record purchase of 5,000 units at $3.12 on Account.
May	4 Cost of Goods Sold (-SE)	14,040	14,040
	Merchandise Inventory (-A)
	To record cost of $3.12 on 4,500 units sold.
	10 Merchandise Inventory (+A)	28,875	28,875
	Accounts Payable (+L)
	To record purchase of 8,750 units at $3.30 on account.
Aug.	12 Merchandise Inventory (+A)	21,750	21,750
	Accounts Payable (+L)
	To record purchase of 6,250 units at $3.48 on account
Sept.	16 Cost of Goods Sold (-SE)	27,525	27,525
	Merchandise Inventory (-A)
	To record costs of $3.48 and $3.30 on 6,250 units at 1,750 units sold, respectively.
Oct.	9 Cost of Goods Sold (-SE)	23,880	23,880
	Merchandise Inventory (-A)
	To record costs of $3.30 and $3.12 on 7,000 units and 250 units sold, respectively.
Nov.	20 Merchandise Inventory (+A)	13,950	13,950
	Accounts Payable (+L)
	To record purchase of 3,750 units at $3.72 on account.

Solution to demonstration problem B

a. Corrected net income:

	2007	2008	2009	Total
Net income as reported	$ 27,200	28,400	24000	$ 79,600
Adjustments
(1)	880
(2)		(880)
(3)		(920)	920
Corrected net income	$ 28,080	26600	24,920	$ 79,600

(1) Ending inventory understated ($5,680 - $4,800 = $880)
(2) Beginning inventory understated (5,680 – 4,800 = 880)
Ending inventory overstated (5,600 – 4,680 = 920)
(3) Beginning inventory overstated (5,600 – 4,680 = 920)

(b) Computation of inventory:

Merchandise Inventory, January 1		$40,000
Net cost of purchases		200,000
Cost of goods available for sale		$
Less estimated cost of goods sold:		240,000
Net Sales	$300,000
Gross margin ($300,000 X 0.30)	90,000
Estimated cost of goods sold		210,000
Inventory at cost, estimated by gross margin method.		$30,000

	Cost	Retail
Merchandise Inventory, January 1	$17,600	$25,000
Purchases	68,000	100,000
Transportation-in	1,900	-
Goods available for sale $	$87,500	$125,000
Cost/retail price ratio:
$87,500/$125,000 = 70%
Sales		101,000
Ending inventory at retail price		$24,000
Times cost/retail price ratio		X 70%
Ending inventory at cost, December 31.	$16,800