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LCM BE8-11-Class

BE8-11
Estimated Selling Price 2100 4900 4625 4210 Estimated Disposal Costs 100 100 200 100

Item Jokers Kings Queens Jacks

Cost $1,820 5000 4290 3,200

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

Next year overstated by $1,500

understated by $1,500 understated by $1,500

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

E8-8 (2) - class - error 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 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

BE8-11 Estimated Disposal Costs 100 100 200 100

Item Jokers Kings Queens Jacks

Cost

$1,820 5000 4290 3,200 $14,310 Can this be done a total basis?

Estimated Selling Price 2100 4900 4625 4210

NRV 2000 4800 4425 4110 $15,335

LCM $1,820 4800 4290 3,200 $14,110

BE8-12 - Class

BE8-12 Cost NRV 2009 55,600 54,000 2010 68,700 61,625

a) DIRECT METHOD 31-Dec-10

INDIRECT METHOD 31-Dec-10

b) Cost NRV Direct method

2009 55,600 68,700

2010 68,700 61,625

2011 60,000 60,900

Indirect method

periodic method direct: 31-Dec-10

indirect:

E8-8 - class - error 1

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

If you adjust for the error next year

E8-8 (3) - class - error 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 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

360,000 700000 -12,000 50,000 1,098,000 847,500 250,500

Part b) Inventory Purchases Less Purchase discounts Freight-in =GAFS Less COGS = Ending inventory

360,000 700000 -12,000 50,000 1,098,000 904,000 194,000

Sales Less: Sales returns Net sales Gross profit (25% of sales COGS is sales less Gross profit

1,200,000 -70,000 1,130,000 282500 847,500

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 =

1,200,000 -70,000 1,130,000

226,000 see calc below 904,000

904000

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