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BE8-11
Estimated Selling Price 2100 4900 4625 4210 Estimated Disposal Costs 100 100 200 100
NRV
LCM
BE8-12
BE8-12 Cost NRV a) DIRECT METHOD Ending Inventory Loss (if any) is charged to CGS 31-Dec-09 Dr. COGS Cr. Inventory 31-Dec-10 Dr. COGS Cr. Inventory 31-Dec-11 No entry b) INDIRECT METHOD Balance of "Inventory" account -) Balance of "Allowance" account (Cr.) (plug) Ending Inventory reported on B/S Loss accrued during the year (plug) 31-Dec-09 Dr. Loss due to decline in NRV of inventory Cr. Allowance to reduce inventory to NRV 31-Dec-10 Dr. Loss due to decline in NRV of inventory Cr. Allowance to reduce inventory to NRV 31-Dec-11 Dr. Allowance to reduce inventory to NRV Cr: Gain due to recovery in NRV of inventory 2009 55,600 54,000 2010 68,700 61,625 2011 60,000 60,900
BE8-12
INDIRECT METHOD
Calculate Balances in T accounts
Inventory
Allowance
E8-8 - error 1
Scenario 1: Ending inventory is overstated by $1,020, but purchases are recorded correctly. Current year Beginning Inventory +PURCHASES =GOODS AVAILABLE Less: Ending Inventory = COGS Net Income Opening Retained Earnings Ending Retained Earnings Inventory Accounts payable Solution Working capital: Current Assets - Current liabilities Current ration: current assets / current liabilities Retained earnings Net income No error overstated by $1,020 Next year
If you adjusted for the error in current year Dr. COGS Cr. Inventory If you adjust for the error next year Dr. Retained earnings Cr. COGS
E8-8 error 2
Scenario 2: Both ending inventory and a purchase on account are understated by the same amount. (Assume this purchase of $1,500 was recorded in the following year) Current year Beginning Inventory +PURCHASES =GOODS AVAILABLE Less: Ending Inventory = COGS Net Income Opening Retained Earnings Ending Retained Earnings Inventory Accounts payable Solution Working capital: Current Assets - Current liabilities Current ratio: current assets / current liabilities (assuming the ratio >1)
1
Retained earnings Net income If you adjusted for the error in current year Dr. Inventory Cr. Accounts Payable If you adjust for the error next year fully disclose a description of the error. financial statement comparative figures would need adjustment for inventory increased by $1,500 and increase a/p by $1,500
E8-8 - error 3
Scenario 3: Ending inventory is correct, but a purchase on account was recorded. (Assume this purchase of $850 was recorded in the following year) Current year Beginning Inventory +PURCHASES =GOODS AVAILABLE Less: Ending Inventory = COGS Net Income Opening Retained Earnings Ending Retained Earnings Inventory Accounts Payable Solution Working capital: Current Assets - Current liabilities Current ratio: current assets / current liabilities (assuming the ratio >1) 1 Retained earnings Net income If you adjusted for the error in current year Dr. COGS Cr. Accounts Payable If you adjust for the error next year Dr. Retained Earnings Cr. Accounts payable Next year
no error
Both ending inventory and a purchase on account are understated by the same amount. (Assume this purchase of $1,500 was recorded in the following year) Current year Next year Beginning Inventory +PURCHASES =GOODS AVAILABLE Less: Ending Inventory = COGS Net Income Opening Retained Earnings Ending Retained Earnings Inventory Accounts payable If you adjusted for the error in current year Dr. Inventory Cr. Accounts Payable If you adjust for the error next year
LCM BE8-11
Cost
$1,820 5000 4290 3,200 $14,310 Can this be done a total basis?
BE8-12 - Class
Indirect method
indirect:
Both ending inventory is overstated by $1,020, but purchases are recorded correctly. Current year Beginning Inventory +PURCHASES =GOODS AVAILABLE Less: Ending Inventory = COGS Net Income Opening Retained Earnings Ending Retained Earnings Inventory Accounts payable If you adjusted for the error in current year Next year
Ending inventory is correct, but a purchase on account was recorded. (Assume this purchase of $850 was recorded in the following year) Current year Next year Beginning Inventory +PURCHASES =GOODS AVAILABLE Less: Ending Inventory = COGS Net Income Opening Retained Earnings Ending Retained Earnings Inventory
If you adjusted for the error in current year Dr. COGS Cr. Accounts Payable If you adjust for the error next year Dr. Retained Earnings Cr. Accounts payable
E8-20 - class
E8-20 Non-cancellable purchase commitment for 45,500 litres of raw material Situation 1: Market price on December 31, 2010 Situation 2: Market price on December 31, 2010 Situation 1: per litre $3.25 $3.55 $2.60
Situation 2:
Part d) J/E on Jan 15, 2011 if Situation 2 existed at December 31st. At market price on Jan 15 is still 2.60
E8-20
E8-20 Non-cancellable purchase commitment for 45,500 litres of raw material Situation 1: Market price on December 31, 2010 Situation 2: Market price on December 31, 2010 Situation 1: No J/E - just disclose the commitment Situation 2: Loss on purchase Contracts Accrued Liability on purchase contracts per litre $3.25 $3.55 $2.60
29,575 29575
(3.25-2.60)*45,500
Part d) J/E on Jan 15, 2011 if Situation 2 existed at December 31st and market price is still 2.60 Raw materials Accrued liability on purchase contracts Accounts payable 118300 29,575 147,875 (=3.25x45,500)
E8-21- class
E8-21 Part a) Inventory Purchases Less Purchase discounts Freight-in =GAFS Less COGS = Ending inventory
0 0
Part b) Inventory Purchases Less Purchase discounts Freight-in =GAFS Less COGS = Ending inventory
Sales Less: Sales returns Net sales Gross profit (25% of sales COGS is sales less Gross profit
Sales Less: Sales returns Net sales Gross profit = Sales less cost GP = 1,130,000 less 1,130,000/1.25 Cost of goods sold
E8-21
E8-21 Part a) Inventory Purchases Less Purchase discounts Freight-in =GAFS Less COGS = Ending inventory
Part b) Inventory Purchases Less Purchase discounts Freight-in =GAFS Less COGS = Ending inventory
Sales Less: Sales returns Net sales Gross profit (25% of sales COGS is sales less Gross profit
Sales Less: Sales returns Net sales Gross profit = Sales less cost GP = 1,130,000 less 1,130,000/1.25 Cost of goods sold SOLVE FOR COST Selling price = Cost + Cost* 25% 1,130,000 = Cost(1.25) 1130000/1.25 = Cost Cost =
904000