E8-2 (L02) Inventoriable Goods and Costs

In your audit of Jose Oliva Company, you find that a physical inventory on December 31,
2017, showed merchandise with a cost of $441,000 was on hand at that date. You also
discover the following items were all excluded from the $441,000.

1. Merchandise of $61,000 which is held by Oliva on consignment. The consignor is the

Max Suzuki Company.
2. Merchandise costing $38,000 which was shipped by Oliva f.o.b. destination to a
customer on December 31, 2017. The customer was expected to receive the
merchandise on January 6, 2018.
3. Merchandise costing $46,000 which was shipped by Oliva f.o.b. shipping point to a
customer on December 29, 2017. The customer was scheduled to receive the
merchandise on January 2, 2018.
4. Merchandise costing $83,000 shipped by a vendor f.o.b. destination on December 30,
2017, and received by Oliva on January 4, 2018.
5. Merchandise costing $51,000 shipped by a vendor f.o.b. shipping point on December
31, 2017, and received by Oliva on January 5, 2018.

Instructions
Based on the above information, calculate the amount that should appear on Oliva’s
balance sheet at December 31, 2017, for inventory.

Inventory per physical count

Solution: E8-2 (L02) Inventoriable Goods and Costs
In your audit of Jose Oliva Company, you find that a physical inventory on December 31,
2017, showed merchandise with a cost of $441,000 was on hand at that date. You also
discover the following items were all excluded from the $441,000.

1. Merchandise of $61,000 which is held by Oliva on consignment. The consignor is the

Max Suzuki Company.
2. Merchandise costing $38,000 which was shipped by Oliva f.o.b. destination to a
customer on December 31, 2017. The customer was expected to receive the
merchandise on January 6, 2018.
3. Merchandise costing $46,000 which was shipped by Oliva f.o.b. shipping point to a
customer on December 29, 2017. The customer was scheduled to receive the
merchandise on January 2, 2018.
4. Merchandise costing $83,000 shipped by a vendor f.o.b. destination on December 30,
2017, and received by Oliva on January 4, 2018.
5. Merchandise costing $51,000 shipped by a vendor f.o.b. shipping point on December
31, 2017, and received by Oliva on January 5, 2018.

Instructions
Based on the above information, calculate the amount that should appear on Oliva’s
balance sheet at December 31, 2017, for inventory.

Inventory per physical count $ 441,000

Goods in transit to customer, f.o.b. destination 38,000
Goods in transit from vendor, f.o.b. shipping point 51,000
Inventory to be reported on balance sheet $ 530,000

The consigned goods of $61,000 are not owned by Jose Oliva and were properly excluded.

The goods in transit to a customer of $46,000, shipped f.o.b. shipping point, are properly
excluded from the inventory because the title to the goods passed when they left the seller
(Oliva) and therefore a sale and related cost of goods sold should be recorded in 2017.

The goods in transit from a vendor of $83,000, shipped f.o.b. destination, are properly
excluded from the inventory because the title to the goods does not pass to Oliva until the
buyer (Oliva) receives them.
E8-9 (L03) Periodic versus Perpetual Entries
Fong Sai-Yuk Company sells one product. Presented below is information for January for
Fong Sai-Yuk Company.

Dates Transaction
Jan. 1 Inventory 100 units at $5 each
4 Sale 80 units at $8 each
11 Purchase 150 units at $6 each
13 Sale 120 units at $8.75 each
20 Purchase 160 units at $7 each
27 Sale 100 units at $9 each

Fong Sai-Yuk uses the FIFO cost flow assumption. All purchases and sales are on account.

Instructions
(a) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries,
including the end-of-month closing entry to record cost of goods sold. A physical count
indicates that the ending inventory for January is 110 units.

Date Accounts Debit Credit

(b) Compute gross profit using the periodic system.

(c) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.

Date Accounts Debit Credit

(d) Compute gross profit using the perpetual system.
Solution: E8-9 (L03) Periodic versus Perpetual Entries
Fong Sai-Yuk Company sells one product. Presented below is information for January for
Fong Sai-Yuk Company.

Transaction
Jan. 1 Inventory 100 units at $5 each
4 Sale 80 units at $8 each
11 Purchase 150 units at $6 each
13 Sale 120 units at $8.75 each
20 Purchase 160 units at $7 each
27 Sale 100 units at $9 each

Fong Sai-Yuk uses the FIFO cost flow assumption. All purchases and sales are on account.

Instructions
(a) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries,
including the end-of-month closing entry to record cost of goods sold. A physical count
indicates that the ending inventory for January is 110 units.

Date Accounts Debit Credit

Jan. 4 Accounts Receivable 640
Sales Revenue (80 × $8) 640

Jan. 11 Purchases ($150 × $6) 900

Accounts Payable 900

Jan. 13 Accounts Receivable 1,050

Sales Revenue (120 × $8.75) 1,050

Jan. 20 Purchases (160 × $7) 1,120

Accounts Payable 1,120

Jan. 27 Accounts Receivable 900

Sales Revenue (100 × $9) 900

Jan. 31 Inventory ($7 × 110) 770

Cost of Goods Sold 1,750
Purchases ($900 + $1,120) 2,020
Inventory (100 × $5) 500

(b) Compute gross profit using the periodic system.

Sales revenue ($640 + $1,050 + $900) $ 2,590

Cost of goods sold 1,750
Gross profit $ 840
(c) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.

Date Accounts Debit Credit

Jan. 4 Accounts Receivable 640
Sales Revenue (80 × $8) 640

Cost of Goods Sold 400

Inventory (80 × $5) 400

Jan. 11 Inventory 900

Accounts Payable (150 × $6) 900

Jan. 13 Accounts Receivable 1,050

Sales Revenue (120 × $8.75) 1,050

Cost of Goods Sold 700

Inventory ([(20 × $5)+(100 × $6)] 700

Jan. 20 Inventory 1,120

Accounts Payable (160 × $7) 1,120

Jan. 27 Accounts Receivable 900

Sales Revenue (100 × $9) 900

Cost of Goods Sold 650

Inventory [(50 × $6) + (50 × $7)] 650

(d) Compute gross profit using the perpetual system.

Sales revenue $ 2,590

Cost of goods sold ($400 + $700 + $650) 1,750
Gross profit $ 840
P8-3 (L02) Purchases Recorded Gross and Net
Some of the transactions of Torres Company during August are listed below. Torres uses the
periodic inventory method.

Date Transaction
Aug. 10 Purchased merchandise on account, $12,000, terms 2/10, n/30.
13 Returned part of the purchase of August 10, $1,200, and received credit on
account.
15 Purchased merchandise on account, $16,000, terms 1/10, n/60.
25 Purchased merchandise on account, $20,000, terms 2/10, n/30.
28 Paid invoice of August 15 in full.

Instructions
(a) Assuming that purchases are recorded at gross amounts and that discounts are to be
recorded when taken:
(1) Prepare general journal entries to record the transactions.
(2) Describe how the various items would be shown in the financial statements.

(1) Date Accounts Debit Credit

(2)
(b) Assuming that purchases are recorded at net amounts and that discounts lost are
treated as financial expenses:
(1) Prepare general journal entries to enter the transactions.
(2) Prepare the adjusting entry necessary on August 31 if financial statements are
to be prepared at that time.
(3) Describe how the various items would be shown in the financial statements.

(1) Date Accounts Debit Credit

(2)

(3)
(c) Which of the two methods do you prefer and why?
Solution: P8-3 (L02) Purchases Recorded Gross and Net
Some of the transactions of Torres Company during August are listed below. Torres uses the
periodic inventory method.

Date Transaction
Aug. 10 Purchased merchandise on account, $12,000, terms 2/10, n/30.
13 Returned part of the purchase of August 10, $1,200, and received credit on
account.
15 Purchased merchandise on account, $16,000, terms 1/10, n/60.
25 Purchased merchandise on account, $20,000, terms 2/10, n/30.
28 Paid invoice of August 15 in full.

Instructions
(a) Assuming that purchases are recorded at gross amounts and that discounts are to be
recorded when taken:
(1) Prepare general journal entries to record the transactions.
(2) Describe how the various items would be shown in the financial statements.

(1) Date Accounts Debit Credit

8/10 Purchases 12,000
Accounts Payable 12,000

8/13 Accounts Payable 1,200

Purchase Returns and Allowances 1,200

8/15 Purchases 16,000

Accounts Payable 16,000

8/25 Purchases 20,000

Accounts Payable 20,000

8/28 Accounts Payable 16,000

Cash 16,000

(2) Purchases—addition to beginning inventory in cost of goods sold section of income

statement.
Purchase returns and allowances—deduction from purchases in cost of goods sold
section of the income statement.
Accounts payable—current liability in the current liabilities section of the balance sheet.
(b) Assuming that purchases are recorded at net amounts and that discounts lost are
treated as financial expenses:
(1) Prepare general journal entries to enter the transactions.
(2) Prepare the adjusting entry necessary on August 31 if financial statements are
to be prepared at that time.
(3) Describe how the various items would be shown in the financial statements.

(1) Date Accounts Debit Credit

8/10 Purchases 11,760
Accounts Payable 11,760

8/13 Accounts Payable 1,176

Purchase Returns and Allowances 1,176

8/15 Purchases 15,840

Accounts Payable 15,840

8/25 Purchases 19,600

Accounts Payable 19,600

8/28 Accounts Payable 15,840

Purchase Discounts Lost 160
Cash 16,000

(2) 8/31 Purchase Discounts Lost 216

Accounts Payable 216

(3) Purchases—addition to beginning inventory in cost of goods sold section of income

statement.
Purchase returns and allowances—deduction from purchases in cost of goods sold
section of the income statement.
Accounts payable—current liability in the current liabilities section of the balance sheet.
Purchase discounts lost--treat as financial expense in income statement.

(c) Which of the two methods do you prefer and why?

The second method is better theoretically because it results in the inventory being
carried net of purchase discounts, and purchase discounts not taken are shown as an
expense. The first method is normally used, however, for practical reasons.
P8-4 (L03) Compute FIFO, LIFO, and Average-Cost
Hull Company’s record of transactions concerning part X for the month of April was as follows.

Purchases - Units and Unit Costs Sales - Total Units

April 1 Balance 100 @ $ 5.00 April 5 300
4 400 @ 5.10 12 200
11 300 @ 5.30 27 800
18 200 @ 5.35 28 150
26 600 @ 5.60
30 200 @ 5.80

Instructions
(a) Compute the inventory at April 30 on each of the following bases. Assume that perpetual
inventory records are kept in units only. Carry unit costs to the nearest cent.
(1) First-in, first-out (FIFO)
(2) Last-in, first-out (LIFO)
(3) Average-cost

(a) Purchases - Units Sales - Total Units

April 1 Balance 100 April 5 300

Assume costs are not computed for each withdrawal:

1. First-in, first-out
Date of Invoice No. Units Unit Cost Total Cost

Inventory, April 30 =
2. Last-in, first-out
Date of Invoice No. Units Unit Cost Total Cost

Inventory, April 30 =

3. Average-cost
Date of Invoice No. Units Unit Cost Total Cost
April 1 100

Inventory, April 30 =

(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each
withdrawal, what amount would be shown as ending inventory in (1), (2), and (3) above?
(Carry average unit costs to four decimal places.)

Assume costs are computed for each withdrawal.

1. First-in, first-out
2. Last-in, first-out
Purchased Sold Balance
No. of Unit No. of No. of
Date units cost units Unit cost units Unit cost Amount
Inventory, April 30 =
3. Average-cost
Purchased Sold Balance
No. of Unit No. of No. of
Date units cost units Unit cost units Unit cost Amount
Apr. 1

Apr. 4

Apr. 5

Apr. 11

Apr. 12

Apr. 18

Apr. 26

Apr. 27

Apr. 28

Apr. 30

Inventory, April 30 =
Solution: P8-4 (L03) Compute FIFO, LIFO, and Average-Cost
Hull Company’s record of transactions concerning part X for the month of April was as follows.

Purchases - Units and Unit Costs Sales - Total Units

April 1 Balance 100 @ $ 5.00 April 5 300
4 400 @ 5.10 12 200
11 300 @ 5.30 27 800
18 200 @ 5.35 28 150
26 600 @ 5.60
30 200 @ 5.80

Instructions
(a) Compute the inventory at April 30 on each of the following bases. Assume that perpetual
inventory records are kept in units only. Carry unit costs to the nearest cent.
(1) First-in, first-out (FIFO)
(2) Last-in, first-out (LIFO)
(3) Average-cost

Purchases - Units Sales - Total Units

April 1 Balance 100 April 5 300
4 400 12 200
11 300 27 800
18 200 28 150
26 600 Units sold 1,450
30 200
Total units 1,800
Total units sold 1,450
Units in ending inventory 350

Assuming costs are not computed for each withdrawal:

1. First-in, first-out
Date of Invoice No. Units Unit Cost Total Cost
April 30 200 $ 5.80 $ 1,160
April 26 150 5.60 840
$ 2,000

2. Last-in, first-out
Date of Invoice No. Units Unit Cost Total Cost
April 1 100 $ 5.00 $ 500
April 4 250 5.10 1,275
$ 1,775
3. Average-cost
Date of Invoice No. Units Unit Cost Total Cost
April 1 100 $ 5.00 $ 500
April 4 400 5.10 2,040
April 11 300 5.30 1,590
April 18 200 5.35 1,070
April 26 600 5.60 3,360
April 30 200 5.80 1,160
Total available 1,800 $ 9,720

Average cost per unit = $9,720 ÷ 1,800 = $ 5.40

Inventory, April 30 = 350 × $5.40 = $ 1,890

(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each
withdrawal, what amount would be shown as ending inventory in (1), (2), and (3) above? (Carry
average unit costs to four decimal places.)

Assuming costs are computed for each withdrawal

1. First-in, first-out
The inventory would be the same in amount as in part (a), $2,000.
2. Last-in, first-out
Purchased Sold Balance
No. of Unit No. of
Date units cost units Unit cost No. of units Unit cost Amount
Apr. 1 100 $ 5.00 100 $ 5.00 $ 500
Apr. 4 400 5.10 100 5.00
400 5.10 2,540
Apr. 5 300 $ 5.10 100 5.00
100 5.10 1,010
Apr. 11 300 5.30 100 5.00
100 5.10
300 5.30 2,600
Apr. 12 200 5.30 100 5.00
100 5.10
100 5.30 1,540
Apr. 18 200 5.35 100 5.00
100 5.10
100 5.30
200 5.35 2,610
Apr. 26 600 5.60 100 5.00
100 5.10
100 5.30
200 5.35
600 5.60 5,970
Apr. 27 600 5.60
200 5.35
100 5.00
100 5.10
100 5.30 1,540
Apr. 28 100 5.30 100 5.00
50 5.10 50 5.10 755
Apr. 30 200 5.80 100 5.00
50 5.10
200 5.80 $ 1,915

Inventory, April 30 is $1,915.

*The balance on hand is listed in detail after each transaction.
3. Average-cost
NOTE: Due to precise rounding in Excel, some answers may differ by a few cents.

Purchased Sold Balance

No. of Unit No. of
Date units cost units Unit cost No. of units Unit cost Amount
Apr. 1 100 $ 5.00 100 $ 5.0000 $ 500.00
Apr. 4 400 5.10 500 5.0800 2,540.00
Apr. 5 300 $ 5.0800 200 5.0800 1,016.00
Apr. 11 300 5.30 500 5.2120 2,606.00
Apr. 12 200 5.2120 300 5.2120 1,563.60
Apr. 18 200 5.35 500 5.2672 2,633.60
Apr. 26 600 5.60 1,100 5.4487 5,993.60
Apr. 27 800 5.4487 300 5.4487 1,634.62
Apr. 28 150 5.4487 150 5.4487 817.30
Apr. 30 200 5.80 350 5.6495 1,977.32

Inventory, April 30 is $1,977.32