Exam 8: Cost-Based Inventories and Cost of Sales

Items bought under repurchase agreements are recorded as liabilities by the purchasing company.

A company buys large recreational vehicles ("RVS") and sells them on credit. The company uses a perpetual inventory system and always pays for purchases within the discount period by borrowing. Information about the latest purchase of an RV is: Purchase price \ 60,000 Delivery charges 2,500 Terms, on credit, 5/30,/90 Insurance premium paid 3,000 Cleaning and making ready for sale 250 Interest on purchase loan 7,200 Cost of permanent shed built to display the RV pending sale 3,750 The cost that should be assigned to the RV for inventory purposes is:

The gross profit method may be used to estimate inventory during interim periods when a full physical count cannot be performed, or to test the reasonableness of a physical count.

An independent accounting firm has been engaged to audit the 2014 financial statements of a corporation which has never undergone an audit. During the audit, it is concluded that the 2014 ending inventory presented by management is in error. The inventory cannot be counted because much of it has been sold as of the time of the audit. Therefore, a "test of reasonableness" of the inventory is performed by using the following data from the 2014 income statement prepared by the client. (a) Sales revenue, $182,000; return sales, $2,000 (b) Purchases, $100,000, purchase returns, $1,000 (c) Freight-in, $2,000 (d) Beginning inventory, $26,000; ending inventory, $60,000 Estimated gross margin rate, 45 percent on sales. Required: The approximate 2014 ending inventory is, $_______________ Computations:

Borrowing costs incurred on items routinely purchased for resale may be capitalized or expensed.

Which of the following note disclosure are NOT required under ASPE with respect to inventories?

When a periodic inventory system is used:

During 2014, XYZ Furniture Villa sold an inventory item for $200 that cost $130. At date of sale, $60 was collected and the balance was to be paid in seven equal instalments. After making two payments, the customer defaulted (in the year following the sale). The item was repossessed in damaged condition; estimates at that date were: Cost to repair, $22; resale costs, $12, and resale value after repair, $80. Give the entry to record the repossession, assuming a perpetual inventory system is used.

The records of Weight Unlimited showed the following for June: Sales 2,100 units at \ 100 each Purchases 2,000 units at \ 75 each Beginning inventory 3,000 units at \ 56 each Assuming the periodic inventory system is used complete the following tabulation. FIFO Weighted Average (1) Sales \ \ (2) Cost of goods sold \ \ (3) Gross margin \ \ (4) Ending inventory \ \

The difference between the gross margin percentage and cost ratio is usually called the mark-up rate.

Food Depot Ltd. assembled the following information at the end of the current reporting period: Sales revenue \ 56,400 Beginning inventory 21,250 Purchases 9,000 Purchase returns 600 Freight-in 950 Selling expense 15,750 Mark-up on cost (estimated) 25 percent If the gross margin method is used to estimate ending inventory, what amount should be reported as pre-tax income or loss?

When a perpetual inventory system is used, the inventory account is usually a control account maintained in the general ledger.

At the end of the first year of a firm's operations, the total inventory at cost was $200 and the market value (for purposes of Lower of Cost or NRV valuation) was $220. The corresponding values at the end of years 2 and 3 are as follows: Year 2 Year 3 Cost \ 400 \ 600 Market 340 640 Required: provide the adjusting entries at the end of years 2 and 3 to record inventory at Lower of Cost or NRV using: (a) the direct reduction method, and (b) the inventory allowance method. For both methods, use the cost of goods sold account when recording ending inventory (periodic system).

Between January 1 and April 30, a company's sales amounted to $140,000 and its purchases amounted to $120,000. The January 1 inventory was $34,000. Using the gross margin method, what is a reliable estimate of the April 30 inventory if the prior period's gross margin has been: (a) 40 percent based on cost? April ending inventory is $_____________. (b) 40 percent based on selling prices? April ending inventory is $_____________.

When the moving-average inventory costing method is used, how long does the unit cost of any individual item of inventory remain in the average? Explain in terms of how the method calculates each moving average M1, M2 and so forth.

The records of Dollars 2 Donuts Ltd. showed the following for June: Sales 4,200 units at \ 200 each Purchase 4,000 units at \ 150 each Beginning Inventory 6,000 units at \ 100 each Assuming the periodic inventory system is used complete the following tabulation. FIFO Weighted Average (1) Sales \ \ (2) Cost of goods sold \ \ (3) Gross margin \ \ (4) Ending inventory \ \

ABC Inc. had net sales of $120,000 during 2013. Its finished goods inventories were valued at $20,000 on January 1^st, 2013. During the year, $60,000 of goods was purchased for resale. The company has a gross profit percentage of 40%. What was the company's estimated inventory at December 31^st, 2013 under the Gross Profit method?

Data summarizing the inventory activity during 2013 for a merchandising company are (000's): Cost Retail Beginning inventory \ 110 \ 216 Net purchases 618 880 Net mark-ups 24 Net markdowns (80) Goods available for sale \ 728 \ 1,040 Net sales (880) Ending inventory at retail \ 160 The company uses the retail method of valuing inventory, at average, lower-of-cost-or-market. The 2013 inventory valuation is:

On December 31 (end of the accounting period) a company completed an inventory count and included some merchandise that had been received but was not unpacked. No purchase had been recorded. The error causes an:

Items purchased for resale with a right of return must be presented separately from other inventories.