M 6-16 (20 minutes) a.

FIFO cost of goods sold = 1,000 @ $100 + 700 @ $150 = $205,000 FIFO ending inventories = $400,000 - $205,000 = $195,000 b. LIFO cost of goods sold = 1,700 @ $150 = $255,000 LIFO ending inventories = $400,000 - $255,000 = $145,000

c. AC cost of goods sold = 1,700 @ $400,000 / 3,000 = $226,667 AC ending inventories = $400,000 $226,667 = $173,333

M 6-17 (10 minutes) a. FIFO cost of goods sold = 400 @ $10 + 200 @ $12 = $6,400 FIFO ending inventories = $12,400 - $6,400 = $6,000

b. LIFO cost of goods sold = 600 @ $12 = $7,200 LIFO ending inventories = $12,400 - $7,200 = $5,200

c. AC cost of goods sold = 600 @ $12,400 / 1,100 = $6,764 AC ending inventories = $12,400 $6,764 = $5,636

Solutions Manual, Module 6

Cambridge Business Publishers, 2008 6-5

M 6-18 (20 minutes) a. Inventory Turnover rates for 2006 ANF................................................ $933 / [($211 + $363) / 2] = 3.25 TJX ................................................$12,295 / [($2,352+$2,366) / 2] = 5.21 b. TJX inventory turnover rate is higher than ANFs. TJX concentrates on the value-priced end of the clothing spectrum. Thus, it realizes a lower profit margin that must be offset with higher turnover in order to yield an acceptable return on net operating assets (see discussion of profitability and turnover in Module 4). c. Inventory turnover improves as the volume of goods sold increases relative to the dollar value of goods on hand. Retailers must balance the cost savings from inventory reductions against the marketing implications of lower inventory levels on hand. Companies can lower inventory levels by reducing the depth and breadth of product lines carried (e.g., not carrying every style, size and color), eliminating slowmoving product lines, working with suppliers to arrange for delivery when needed, and marking down goods for sale at the end of product seasons.

M 6-19 (15 minutes) a. Straight-line: ($18,000 - $1,500) / 5 years = $3,300 for both 2007 and 2008. b. Double-declining-balance: Twice straight-line rate = 2 x 1/5 = 40% 2007: $18,000 x 0.40 = $7,200 2008: ($18,000 - $7,200) x 0.40 = $4,320 Notice that, over the first two years, the company reports $6,600 of depreciation expense under the straight-line method and $11,520 of depreciation expense under the double-declining balance method.

Cambridge Business Publishers, 2008 6-6

Financial Accounting for MBAs, 3rd Edition

EXERCISES
E 6-22 (20 minutes) a. 2007 bad debts expense computation $90,000 1% 20,000 2% 11,000 5% 6,000 10% 4,000 25%

= = = = =

Less: Unused balance before adjustment Bad debt expense for 2007 b. Balance Sheet
Transaction
BDE 2,930 AU 2,930
BDE 2,930 AU 2,930

$ 900 400 550 600 1,000 $3,450 520 $2,930

Income Statement
Revenues Expenses = Net Income

Cash + Asset

Noncash Assets -2,930

LiabilContrib. Earned = + + ities Capital Capital

2007: Record bad debt expense

Allowance for = Uncollectible Accounts

-2,930
Retained Earnings

+2,930 Bad Debt =

Expense

-2,930

c. Accounts receivable, net = $131,000 - $3,450 = $127,550 Reported in the balance sheet as follows: Accounts receivable, net of allowance of $3,450 ....................... $127,550

Cambridge Business Publishers, 2008 6-8

Financial Accounting for MBAs, 3rd Edition

E6-27 (30 minutes) Units Beginning Inventory 1,000 Purchases: #1 1,800 #2 800 #3 1,200 Goods available for sale 4,800 Cost $ 20,000 39,600 20,800 34,800 $115,200

Units in ending inventory = 4,800 2,800 = 2,000

a.

First-in, first-out Units 1,200 800 2,000 @ @ Cost $29 $26 = = Total $34,800 20,800 $55,600

Ending Inventory

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$115,200 55,600 $ 59,600 Income Statement

Revenues Expenses = Net Income

Balance Sheet
Transaction
COGS 59,600 INV 59,600
COGS 59,600 INV 59,600

Cash Noncash Liabil- Contrib. Earned + = + + Asset Assets ities Capital Capital

Record FIFO cost of goods sold

-59,600
Inventory

-59,600 =
Retained Earnings

+59,600
Cost of Sales

-59,600

b.

Last-in, first-out Units 1,000 1,000 2,000 @ @ Cost $20 $22 Total = $20,000 = 22,000 $42,000

Ending inventory

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$115,200 42,000 $ 73,200

Cambridge Business Publishers, 2008 6-12

Financial Accounting for MBAs, 3rd Edition

E6-32 (25 minutes) a. 1. Cumulative depreciation expense to date of sale: [($800,000-$80,000) / 10 years] x 6 years = $432,000 2. Net book value of the plane at date of sale: $800,000 - $432,000 = $368,000 b. 1. There is no gain or loss if the cash proceeds are equal to the net book value. 2. Loss on sale of: $195,000 - $368,000 = $173,000 3. Gain on sale of: $600,000 - $368,000 = $232,000

E6-33 (20 minutes) a. Straight-line 2007 and 2008 ($218,700-$23,400)/6 years = $32,550 b. Double-declining-balance Twice straight-line rate = 2 x (100%/6) = 33 % 2007 2008 $218,700 x 33% = $72,900

($218,700 - $ 72,900) x 33% = $48,600

E6-34 (20 minutes) a. Depreciation expense to date of sale is [($27,200-$2,000) / 6] per year x 3 years =$12,600. The net book value of the van is, therefore, $27,200-$12,600=$14,600. b. 1.There is no gain or loss if the cash proceeds are equal to the net book value. 2. $400 gain ($15,000 - $14,600) 3. $2,600 loss ($12,000 - $14,600)
Cambridge Business Publishers, 2008 6-18

Financial Accounting for MBAs, 3rd Edition