Inventory

Question 1

the following information applied to Fenn Inc for y2:
merchandise purchased for resale 400k
freightin 10k
freight-out 5k
purchase returns 2k
Fenn’s y2 inventoriable cost was:
404k
413k
408k
400k

Answer 1

inventoriable costs include all costs necessary to prepare goods for sale. For a merchandising cocern theses costs include the purchase price of the goods, freinght-in, insurance, warehousing, and any costs necessary to get the goods to the point of sale (except interest on loans obtained to purchase the goods). In this problem, inventoriable costs total 408k.
purchase price less returns (400k -2k) 398k
freight-in 10k
408k
note the freight-out is a selling price, not an inventoriable cost,

Question 2

on dec 28, y2, Kerr Manufacturing Co purchased goods costing 50k. the terms were FOB destination. some of the costs incurred in connection with the sale and delivery of goods were as follows:
packaing for shipment 1000
shipping 1500
special handling charges 2000
these goods were received on dec 31, y2. in Kerr’s dec 31, y2 balance sheet, what amount of cost for these goods should be included in inventory?
53k5
54k5
52k
50k

Answer 2

when the shipping terms are FOB destination, the seller bears all costs of transporting the goods to buyer. therefore, the seller is responsible for payment of packaging costs (1k) shipping cost (1k5) and special handling charges (2k). the only amount to be included as buyer’s cost of inventory purchased is purchase price (50k)

Question 3

on june 1, y2, Pitt Corp sold merchandise with a list price of 5k to Burr on account. Pitt allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made FOB shipping point. Pitt prepaid 200 of delivery cost for Burr as an accommodation. on june 12, y2, Pitt received from Burr a remittance in full payment amounting to:
2944
3140
2940
2744

Answer 3

purchases are always recorded net of trade discounts. when more than one trade discount is applied to a list price, it is called a chain disocunt. chain discounts are applied in steps; each discount applies to the previously discounted price. The cost, net of trade discounts, is 2k8 [5k - (30% * 5k) = 3k5 and 3k5 - (20%*3k5) = 2k8. payment was made within the disocunt period, so net purchase price is 2k744 (2k8 - 2%). remittance from Burr would also include 200 delivery cost

Question 4

the following info was taken from COdy Co accounting records for year ended Dec 31, y2:
decrease in raw materials inventory 15k
increase in finished goods inventotr 35k
raw material purchased 430k
direct labor payroll 200k
factory overhead 300k
freight-out 45k
there was no work in process inventory at beginning or end of the yaer. Cody’ year 2 cost of good sold is
910k
895k
955k
950k

Answer 4

3 computations must be performed: raw materials used, cost of goods manufactureed, and cost of goods sold

Question 5

according to net method, which of the following itesm should be included in the cost of inventory>
freight costs purchase discounts not takne
yes no
no no
no yes
yes yes

Answer 5

under net purchase method, purchase discounts not taken are recored in Purchase Discount Lost account. When this method is used, purchase discount lost are considered a financial exp, and are thus excluded from cost of inventory.

Question 6

when allocating costs to inventory produced for a preiod, fixed overhead should be based upon:
normal capacity of production facilities
actual amounts of goods produced during period
highest production levels in last 3 periods
lowest productiong levels i last 3

Answer 6

fixed overhead is allocated based on normal capacity of production facility. normal capacity is production expected to be achieved over a number of periods or season under normal circumstances, taking into acocunt the loss of capacity resluting from planned maintenance.

Question 7

per the Codification, what is considered normal capacity of production facilities?
actual production per period
actual production per period plus loss of capacity for planned maintenance
a range that may vary based on business and industry-specific factors
average production over previous 5 year period

Answer 7

the Codification does not specify a formula for calculating normal capacity.

Question 8

when manufacutring inventory, what is accounting treament for abnormal freight-in costs?
charge to raw materials inventory
charge to finished goods inventory
charge to exp for period
allcate to raw materials, work in progress, and finished goods

Answer 8

any abnormal costs for freight, handling costs, and wasted material are required to be treated as current period charges, and not part of inventory cost

Question 9

Bach Co adopted dollar value LIFO inventory method as Jan 1 y2. a single inventory pool and an internally computed price index are used to compute Bach’s LIFO inventory layers. Information about Bach’s dollar value inventory follows:
inventory
date at base year cost at dollar value LIFO
1/1/y1 90k 90k
y1 layer 20k 30k
y2 layer 40k 80k
what was the price index used to compute Bach’s y2 dollar value LIFO inventory layer?
1.33
1.09
1.25
2.00

Answer 9

ending invenotry at dollar value LIFO is calculated as the base year inventory times teh index. therefore, the index used can be calculated as 2.00 = 80k /40k

Question 10

Nest Co recoreded the following inventory information during the month of January:
units unit cost total cost units on hand
bal 1/1 2k $1 2k 2k
purchas1/8 1k2 3 3k6 3k2
sold 1/23 1k8 1k4
purcha 1/28 800 5 4k 2k2
Nest uses the LIFO method to cost invenotry. what amount should Nest report as inventory on January 31 under each of the following methods of recording inventory?
perpetual periodic
2k6 2k6
2k6 5k4
5k4 2k6
5k4 5k4

Answer 10

the inventory valuations are calculated as follows:
valuations of ending inventory under LIFO perpetual
1k4 units at $1 1k4
800 units at 5 4k
total 5k4

value of ending inventory under LIFO periodic
2k at 1 2k
200 at 3 600
total 2k6

Question 11

the weighted average for the year inventory cost flow method is applicable to which of the following inventory systems?
periodic perpetual
yes no
no yes
no no
yes yes

Answer 11

the weighted average method computes a weighted average unit cost of inventory for the enture period and is used with periodic records. the moving average method requires that a new unit of cost be computed each time new goods are purchased and is used with perpetual records.

Question 12

during jan y2, Metro Co, which maintains a perpertual inventory system, recorded the following information pertaining to its inventory:
units unit cost total cost units on hand
bal 1/1/y2 1k 1 1k 1k
purch 1/7/y2 600 3 1k8 1k6
sold 1/20/y2 900 700
pur 1/25/y2 400 5 2k 1k1
under the moving average method, what amount should Metro report as inventory at Jan 31, y2?
3k3
3k225
3k9
2k640

Answer 12

the moving average method requires that a new unit cost be computed each time goods are purchased. the new unit cost is used to cost all sales of inventory unitl the next purchase. after 1/7/y2 purchase, Metro owns 1k6 units at total cost of 2k8. therefore, moving average unit cost at this time 2k8/1k6. after sale of 900 units, Metro owns 700 units at 1.75 = 1,225. 1/25 purchse of 2k cost increase to bal of 3,225

Question 13

based on a physical inventory taken on Dec 31, y2, CHewy CO determined its chocolate inventory on a FIFO basis at 26k with a replacement cost of 20k. Chewy estimated that, after further processing costs of 12k, the chocolate could be sold as finished candy bars for 40k. Chewy normal profit margin is 10% of sales. under lower of cost or market rule, what amount should Chewy report as chocolate inventory in its Dec 31, y2 balance sheet?
24k
20k
26k
28k

Answer 13

the lower of cost or market (LCM) is used for financial reporting of inventories. THe market value of inventory is defined as the replacement cost (RC), as long as it is less than the ceiling (net realizable value, or NRV) and more than the floor (NRV less a normal profit, or NRV - NP). In this case, the amounts are:
Ceiling: NRV = 40k est. sell. price - 12k cost = 28k
Floor: NRV - NP = 28k - (10% * 40k) = 24k
RC: 20k
Since RC falls below the floor, the floor (NRV - NP) is the designated market value. Once market value is designated, LCM can be determined by simply determining the lower of cost (26k) or market (24k). THerefore, inventory is reported at 24k

Question 14

Reporting inventory at lower of cost or market is a departure from the accounting principle of
consistency
conservatism
full disclosure
historical cost

Answer 14

reporting inventory at lower of cost or market is a departure from the historical cost principle as the inventory could potentially be carried at market value if lower.

Question 15

On January 1, y2, Card Corp signed a 3 year non-cancelable purchase contract, which allows Card to purchase up to 500,000 units of a computer part annually from Hart Supply Co. at $.10 per unit and guarantees a minimum annual purchase of 100,000 units. During year 2, the part unexpectedly became obsolete. Card had 250,000 units of this inventory at December 31, year 2, and believes these parts can be sold as scrap for $.02 per unit. What amount of probable loss from the purchase commitment should Card report in its year 2 income statement?
20,000
16,000
8,000
24,000

Answer 15

The requirement is to determine the amount of probable loss from the purchase commitment that Card should report in its year 2 income statement. When there is a decline in market value below the contract price at the balance sheet date and the contract is noncancelable, an unrealizable loss should be recorded in the period of decline and reported in the income statement. In this case, Card has a contract to purchase a minimum of 100,000 units both in year 3 and year 4 at $.10 per unit. The $20,000 loss (200,000 * $.10) on these obsolete units should be reduced by the amount Card believes is realizable from the sale of these units. Therefore, the loss on PURCHASE COMMITMENT is $16,000 [$20,000 - (200,000 * .02)]. Additionally, Card Corp. would need to record a loss of $20,000 ($.08 * 250,000) from INVENTORY OBSOLESCENCE

Question 16

Thread Co. is selecting its inventory system in preparation for its first year of operations. Thread intends to use either the periodic weighted-average method or the perpetual moving-average method, and to apply the lower of cost or market rule either to individual items or to the total inventory. Inventory prices are expected to generally increase throughout year 2, although a few individual prices will decrease. What inventory system should Thread select if it wants to maximize the inventory carrying amount at December 31, year 2?
inventory method cost or market application
perpetual total
periodic total
perpetual individual
periodic individual

Answer 16

To maximize its inventory carrying amount at December 31, year 2, Thread should use the perpetual moving-average method with the lower of cost or market rule applied to the total inventory. First, when using the perpetual moving average method, the cost of sales throughout the year are determined using the average cost of purchases up to the time of the sale. On the other hand, under the periodic weighted-average method, the cost of each item is the weighted-average of ALL units purchased during the year. During a period of rising prices, the perpetual moving-average method results in a lower cost of goods sold and a higher ending inventory because the cost of items sold throughout the year is the average of the earlier, lower prices. Second, the application of the lower of cost of market rule to the total inventory will result in a higher ending inventory because market values lower than cost are offset against market values higher than cost.

Question 17

Drew Co. uses the average cost inventory method for internal reporting purposes and LIFO for financial statement and income tax reporting. At December 31, year 2, the inventory was $375,000 using average cost and $320,000 using LIFO. The unadjusted credit balance in the LIFO Reserve account on December 31, year 2, was $35,000. What adjusting entry should Drew record to adjust from average cost to LIFO at December 31, year 2?
debit credit
cost of goods sold 55k
LIFO reserve 55k
cost of goods sold 20k
LIFO reserve 20k
cost of goods sold 55k
inventory 55k
cost of goods sold 20k
inventory 20k

Answer 17

When a company uses LIFO for external reporting purposes and another inventory method for internal purposes, a LIFO RESERVE account is used to reduce inventory from the internal valuation to the LIFO valuation. LIFO reserve is a contra account to inventory, and is adjusted up or down at year-end with a corresponding increase or decrease to COST OF GOODS SOLD. In this case, the LIFO Reserve account must be adjusted from a balance of $35,000 to a balance of $55,000 ($375,000 -$320,000). Therefore, LIFO Reserve is credited for $20,000 ($55,000 - $35,000) with a corresponding debit to Cost of Goods Sold

Question 18

On January 1, year 1, Poe Company adopted the dollar-value LIFO inventory method. Poe’s entire inventory constitutes a single pool. Inventory data for year 1 and year 2 are as follows:
Date Inventory at Current Year Inventory at Base Year Relevant Price Index
1/1/y1 $150,000 $150,000 1.00
12/31/y1 220,000 200,000 1.10
12/31/y2 276,000 230,000 1.20
Poe’s LIFO inventory value at December 31, year 2, is
236,000
241,000
246,000
230,000

Answer 18

When using dollar-value LIFO, the ending inventory at current year cost must first be converted to base year cost. This amount is given. THe next step is to determine the incremental LIFO layers at base year cost. year 1 layer is 150,000, year 1 incremental layer is (200,000-150,000 = 50,000). the same for year 2: 30,000. Finally, the LIFO layers are restated using the price index in effect at the time each layer was added.
base year layer 150,000 * 1.00 = 150,000
year 1 layer 50,000 * 1.10 = 55,000
year 2 layer 30,000 * 1.2 = 36,000
total = 241,000

Question 19

On July 1, year 2, Casa Development Co. purchased a tract of land for $1,200,000. Casa incurred additional cost of $300,000 during the remainder of year 2 in preparing the land for sale. The tract was subdivided into residential lots as follows:
Lot class number of lots sales price per lot
A 100 $24,000
B 100 16,000
C 200 10,000
Using the relative sales value method, what amount of costs should be allocated to the Class A lots?
375,000
300,000
720,000
600,000

Answer 19

The total cost of acquiring the land and preparing it for sale ($1,200,000 + $300,000 = $1,500,000) should be allocated to the residential lots based on their relative sales value, as computed below
A 100 * 24,000 = 2,400,000
B 100 * 16,000 = 1,600,000
C 200 * 10,000 = 2,000,000
total = 6,000,000

total cost fraction allocated to Class A Allocated cost
1,500,000 $2,400/6,000 600,000

Question 20

Lewis Company’s usual sales terms are net sixty days, FOB shipping point. Sales, net of returns and allowances, totaled $2,300,000 for the year ended December 31, year 2, before year-end adjustments. Additional data are as follows:
- On December 27, year 2, Lewis authorized a customer to return, for full credit, goods shipped and billed at $50,000 on December 15, year 2. The returned goods were received by Lewis on January 4, year 3, and a $50,000 credit memo was issued and recorded on the same date.
- Goods with an invoice amount of $80,000 were billed and recorded on January 3, year 3. The goods were shipped on December 30, year 2.
- Goods with an invoice amount of $100,000 were billed and recorded on December 30, year 2. The goods were shipped on January 3, year 3.
Lewis’ adjusted net sales for year 2 should be:
2,250,000
2,280,000
2,230,000
2,330,000

Answer 20

Net sales is $2,300,000 subject to 3 possible adjustments. -50 + 80 - 100. THe goods shipped on 1/3/y3 should not be recorded as a sale until year 3. Since the sale was recorded in year 2, year 2 sales must be adjusted downward.

Question 21

On October 20, year 2, Grimm Co. consigned forty freezers to Holden Co. for sale at $1,000 each and paid $800 in transportation costs. On December 30, year 2, Holden reported the sale of ten freezers and remitted $8,500. The remittance was net of the agreed 15% commission. What amount should Grimm recognize as consignment sales revenue for year 2?
8,500
10,000
9,800
7,700

Answer 21

A consignor recognizes sales revenue from consignment when the consignee sells the consigned goods to the ultimate customer. Sales commissions earned by the consignee (10,000 *15% = 1,500) are reported as a selling expense by the consignor and are NOT netted against sales revenue. Therefore, sales revenue is reported at the total selling price of $10,000. Note that transportation cost does not affect sales either.

Question 22

Southgate Co. paid the in-transit insurance premium for consignment goods shipped to Hendon Co., the consignee. In addition, Southgate advanced part of the commissions that will be due when Hendon sells the goods. Should Southgate include the in-transit insurance premium and the advanced commissions in inventory costs?
Insurance premium Advanced commissions
No Yes
Yes Yes
Yes No
No No

Answer 22

Inventoriable costs include all costs necessary to prepare goods for sale. The in-transit insurance premium would therefore be included in inventory costs.

Question 23

Heath Co. 's current ratio is 4:1. Which of the following transactions would normally increase its current ratio?
selling inventory on account
collecting an account receivable
purchasing machinery for cash
purchasing inventory on account

Answer 23

current ratio = current assets/current liabilities
selling inventory on account
Since the selling price (increase to AR) is normally higher than the cost of the merchandise sold (decrease to merchandise inventory) the sale would normally cause a net increase in current assets.
When an account receivable is collected, cash (a current asset) is increased by the same amount that accounts receivable (another current asset) is decreased.

Question 24

During year 2, Rand Co. purchased $960,000 of inventory. The cost of goods sold for year 2 was $900,000, and the ending inventory at December 31, year 2, was $180,000. What was the inventory turnover for year 2?

5. 3
6. 0
7. 0
8. 4

Answer 24

The formula for inventory turnover is: cost of goods sold/average inventory
Average inventory is equal to beginning inventory plus ending inventory, divided by two. Since beginning inventory is not given, it must be computed using the cost of goods sold relationship
average inventory is 120,000+180,000 /2 = 150,000.
and inventory turnover is 6.0 times

Question 25

Average days’ sales in inventory ?

Answer 25

measures the number of days inventory is held before sale; it reflects on efficiency of inventory policies. It is computed using the following formula:
365/ Inventory turnover

Question 26

Cord Builders, Inc. has consistently used the percentage of completion method of accounting for construction-type contracts. During year 1 Cord started work on a $9,000,000 fixed price construction contract that was completed in year 3. Cord’s accounting records disclosed the following:
December 31
Year 1 Year 2
cumulative contract costs incurred $3,900,000 $6,300,000
estimated total cost at completion 7,800,000 8,100,000
How much income would Cord have recognized on this contract for the year ended December 31, year 2?
300,000
100,000
900,000
600,000

Answer 26

The total expected income on contract at 12/31/y2 is 900,000. The formula for recognizing profit under the percentage of completion method is
cost to date/total expected costs * expected profit = profit recognized to date
Total profit on contract in year 1 and year 2 = 700,000
Income recognized in year 1 was 600,000
year 2 income = 100,000

Question 27

State Co. recognizes construction revenue and expenses using the percentage of completion method. During year 1, a single long-term project was begun, which continued through year 2. Information on the project follows:
Year 1 Year 2
Accounts receivable from $100,000 $300,000
construction contract
Construction expenses 105,000 192,000
Construction in progress 122,000 364,000
Partial billings on contract 100,000 420,000

Profit recognized from the long-term construction contract in year 2 should be:
108,000
128,000
50,000
228,000

Answer 27

Since only construction expenses and profit are debited to the construction in progress, year 1 profit must be 17,000 (122,000 - 105,000)
cumulative profit recognized by end of year 2 must be 67,000 [ 364,000 - 105,000 - 192,000]
Therefore, year 2 profit was 50,000

Question 28

Hansen Construction, Inc. has consistently used the percentage of completion method of recognizing income. During year 2, Hansen started work on a $3,000,000 fixed price construction contract. The accounting records disclosed the following data for the year ended December 31, year 2:
Costs incurred $930,000
Estimated cost to complete 2,170,000
Progress billings 1,100,000
Collections 700,000
How much loss should Hansen have recognized in year 2?
100,000
30,000
230,000
0

Answer 28

ESTIMATED COST TO COMPLETE 2,170,000 + costs incurred = loss of 100,000

Question 29

The following data pertaining to Pell Co. ‘s construction jobs, which commenced during year 2:
Project 1 Project 2
Contract price $420,000 $300,000
Costs incurred during year 2 240,000 280,000
Estimated costs to complete 120,000 40,000
Billed to customers during year 2 150,000 270,000
Received from customers during 90,000 250,000
year 2
If Pell used the completed contract method, what amount of gross profit (loss) would Pell report in its year 2 income statement?
0
(20,000)
340,000
420,000

Answer 29

The expected income on project 1 is not recognized until the project is completed under the completed contract method. However, under the completed contract method, an expected loss on a contract must be recognized in full in the period in which it is discovered. (20,000)

Question 30

In accounting for a long-term construction contract using the percentage of completion method, the progress billings on contracts account is a 
revenue account
contra current asset account
contra non current asset account
non-current liability account

Answer 30

The predominant practice is to classify all contract-related assets and liabilities as current. On the balance sheet, the Construction in Progress (CIP) is netted with a contra account, progress billings.

Question 31

A company determined the following values for its inventory as of the end of its fiscal year:
Historical cost $100,000
Current replacement cost 70,000
Net realizable value 90,000
Net realizable value less a normal profit margin 85,000
Fair value 95,000
Under IFRS, what amount should the company report as inventory on its balance sheet?
70,000
90,000
95,000
85,000

Answer 31

under IFRS inventory is reported at the lower of cost or net realizable value. Therefore, amount is $90,000, which is lower of $100,000 cost or $90,000 net realizable value

Question 32

Under IFRS, the specific identification method of accounting for inventory is required for:
inventory items which are interchangeable
all inventory items
inventory items that are not interchangeable and goods that are produced and segregated for specific projects
biological inventories

Answer 32

Specific identification method is required for inventory items that are not interchangeable and goods that are produced and segregated for specific projects

Question 33

Which of the following methods of accounting for inventory is NOT allowed under IFRS?
Specific identification
FIFO
LIFO
weighted-average

Answer 33

LIFO method is not allowed under IFRS. All of the other methods are allowed.