Chapter 8: Question 7Q (page 421)
Define “cost” as applied to the valuation of inventories.
In valuing inventory, product costs are attached to the inventory.
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Question:In your audit of Jose Oliva Company, you find that a physical inventory on December 31, 2017, showed merchandise with a cost of \(441,000 was on hand at that date. You also discover the followingitems were all excluded from the \)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 customerwas expected to receive the merchandise on January 6, 2018.
3. Merchandise costing \(46,000 which was shipped by Oliva f.o.b. shipping point to a customer on December 29, 2017. Thecustomer was scheduled to receive the merchandise on January 2, 2018.
4. Merchandise costing \)83,000 shipped by a vendor f.o.b. destination on December 30, 2017, and received by Oliva on January4, 2018.
5. Merchandise costing $51,000 shipped by a vendor f.o.b. shipping point on December 31, 2017, and received by Oliva onJanuary 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.
Trout Company uses the LIFO method for financial reporting purposes but FIFO for internal reporting purposes. At January 1, 2017, the LIFO reserve has a credit balance of \(1,300,000. At December 31, 2017, Trout’s internal reports indicatedthat the FIFO inventory balance was \)2,900,000 and for external reporting purposes the LIFO inventory balance was $1,500,000.What is the amount of the LIFO reserve and the LIFO effect related to 2017? What is the journal entry needed to record the LIFOeffect at December 31, 2017?
In what ways are the inventory accounts of a retailing company different from those of a manufacturing company?
Some of the transactions of Torres Company during August are listed below. Torres uses the periodic inventory method.
August 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 invo
ice 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.
(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.
(c) Which of the two methods do you prefer and why?
FIFO, average-cost, and LIFO methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determination of income and asset valuation.
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