Question

The following independent situations relate to inventory accounting.

1. Kim Co. purchased goods with a list price of \(175,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. How much should Kim Co. record as the cost of these goods?

2. Keillor Company’s inventory of \)1,100,000 at December 31, 2017, was based on a physical count of goods priced at cost and before any year-end adjustments relating to the following items.

(a) Goods shipped from a vendor f.o.b. shipping point on December 24, 2017, at an invoice cost of \(69,000 to Keillor Company were received on January 4, 2018.

(b) The physical count included \)29,000 of goods billed to Sakic Corp. f.o.b. shipping point on December 31, 2017. The carrier picked up these goods on January 3, 2018.

What amount should Keillor report as inventory on its balance sheet?

3. Zimmerman Corp. had 1,500 units of part M.O. on hand May 1, 2017, costing \(21 each. Purchases of part M.O. during May were as follows.

Units Unit Cost

May 9 2,000 \)22.00

17 3,500 23.00

26 1,000 24.00

A physical count on May 31, 2017, shows 2,000 units of part M.O. on hand. Using the FIFO method, what is the cost of part M.O. inventory at May 31, 2017? Using the LIFO method, what is the inventory cost? Using the average-cost method, what is the inventory cost?

4. Ashbrook Company adopted the dollar-value LIFO method on January 1, 2017 (using internal price indexes and multiple pools). The following data are available for inventory pool A for the 2 years following adoption of LIFO.

At Base- At Current-

Inventory Year Cost Year Cost

1/1/17 \(200,000 \)200,000

12/31/17 240,000 264,000

12/31/18 256,000 286,720

Computing an internal price index and using the dollar-value LIFO method, at what amount should the inventory be reported at December 31, 2018?

5. Donovan Inc., a retail store chain, had the following information in its general ledger for the year 2018.

Merchandise purchased for resale $909,400

Interest on notes payable to vendors 8,700

Purchase returns 16,500

Freight-in 22,000

Freight-out (delivery expense) 17,100

Cash discounts on purchases 6,800

What is Donovan’s inventoriable cost for 2018?

Instructions

Answer each of the preceding questions about inventories, and explain your answers.

Short answer

1. Cost of goods are $126,000
2. Inventory amount recorded in balance sheet is $1,140,000.
3. Value of ending inventory under FIFO, LIFO, and average cost are $47,000, $42,500, and $45,000 respectively.
4. Amount reported is $261,920
5. Inventoriable cost for 2018 amounts to $908,100.

Step-by-step solution

Cost of goods purchased

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{purchase}& =& \mathrm{List}\mathrm{price}\times \left(100\%-\mathrm{Trade}\mathrm{discount}\mathrm{first}\right)\times \left(100\%-\mathrm{Trade}\mathrm{discount}\mathrm{second}\right)\\ & =& \$175,000\times \left(\frac{80}{100}\right)\times \left(\frac{90}{100}\right)\\ & =& \$126,000\end{array}$

The cost of goods should be recorded at $126,000.

Goods cost to be included in the inventory

a) Goods shipped from a vendor based on f.o.b. shipping point should be included in inventory irrespective of the receiving date.

b) Goods shipped to customer based on f.o.b. shipping point should be deducted from inventory irrespective of the delivery date.

Based on the above criteria, the Inventory to be recorded on Dec 31, 2017 will be as follows –

$\begin{array}{rcl}\mathrm{Adjusted}\mathrm{inventory}\left(\mathrm{on}\mathrm{Dec}31,2017\right)& =& \mathrm{Current}\mathrm{inventory}+\mathrm{Purchase}\mathrm{on}\mathrm{f}.\mathrm{o}.\mathrm{b}\mathrm{shipping}-\mathrm{Sale}\mathrm{on}\mathrm{f}.\mathrm{o}.\mathrm{b}\mathrm{shipping}\\ & =& \$1,100,000+\$69,000-\$29,000\\ & =& \$1,140,000\end{array}$

Inventory should be recorded $1,140,000 on Dec 31, 2017.

Inventory valuation under periodic inventory

Inventory valuation in the periodic system under FIFO, LIFO, and average method will be as follows - $\begin{array}{rcl}\mathrm{Value}\mathrm{of}\mathrm{ending}\mathrm{inventory}\left(\mathrm{under}\mathrm{FIFO}\right)& =& 1,000\mathrm{units}\mathrm{purchased}\mathrm{on}26\mathrm{May}+1,000\mathrm{units}\mathrm{purchased}\mathrm{on}17\mathrm{May}\\ & =& \left(1000\times \$24\right)+\left(1000\times \$23\right)\\ & =& \$24,000+\$23,000\\ & =& \$47,000\\ & & \\ \mathrm{Value}\mathrm{of}\mathrm{ending}\mathrm{inventory}\left(\mathrm{under}\mathrm{LIFO}\right)& =& 1,500\mathrm{units}\mathrm{of}\mathrm{beginning}+500\mathrm{units}\mathrm{purchased}\mathrm{on}9\mathrm{May}\\ & =& \left(1500\times \$21\right)+\left(500\times \$22\right)\\ & =& \$31,500+\$11,000\\ & =& \$42,500\\ & & \\ \mathrm{Average}\mathrm{cost}\mathrm{of}\mathrm{inventory}\left(\mathrm{on}\mathrm{Dec}31\right)& =& \frac{\mathrm{Total}\mathrm{beginning}\mathrm{inventory}\mathrm{value}+\mathrm{Total}\mathrm{purchase}\mathrm{value}}{\mathrm{Total}\mathrm{inventory}\mathrm{available}\mathrm{for}\mathrm{sale}}\\ & =& \frac{\left(1500\times \$21\right)+\left(2000\times \$22+3500\times \$23+1000\times \$24\right)}{\left(1500+2000+3500+1000\right)}\\ & =& \frac{\$180,000}{8,000}\\ & =& \$22.5\\ & & \\ \mathrm{Value}\mathrm{of}\mathrm{ending}\mathrm{inventory}\left(\mathrm{under}\mathrm{Average}\mathrm{cost}\right)& =& 2000\mathrm{ending}\mathrm{units}\times \mathrm{Average}\mathrm{cost}\\ & =& 2000\times \$22.5\\ & =& \$45,000\end{array}$

Value of ending inventory under FIFO, LIFO, and average cost are $47,000, $42,500, and $45,000 respectively.

Dollar value LIFO

The price index for any year is the ratio between the inventory value at the current price and the inventory value at the base year price.

Date	Inventory value at current year cost	/	Inventory value at base year cost	=	Price index
Jan 1, 2017	$200,000	/	$200,000	=	1 or 100
Dec 31, 2017	$264,000	/	$240,000	=	1.1 or 110
Dec 31, 2018	$286,720	/	$256,000	=	1.12 or 112

Inventory at dollar value LIFO

Date	Layer (difference between ending base value and beginning base value)	X	Price Index	=	Dollar Value LIFO
Jan 1, 2017	$200,000	X	100	=	$200,000
Dec 31, 2017	$40,000	X	110	=	$44,000
Dec 31, 2018	$16,000	X	112	=	$17,920
Total	$256,000				$261,920

Inventoriable cost

$\begin{array}{rcl}\mathrm{Inventoriable}\mathrm{cost}& =& \mathrm{Purchase}-\mathrm{Purchase}\mathrm{return}-\mathrm{Discount}+\mathrm{Freight}\mathrm{in}\\ & =& \$909,400-\$16,500-\$6,800+\$22,000\\ & =& \$908,100\end{array}$

Inventoriable cost for 2018 amounts to $908,100.