CHAPTER 7_revised

PRACTICE EXERCISES

PE 7–1 (LO1) Inventory Identification

The correct answer is A. Cranes at a construction site have not been purchased with the intent
of being resold to customers. The answer is not D because the screws would be considered
part of the overhead cost involved in the manufacturing of inventory.

PE 7–2 (LO1) Costs Included in Inventory

The correct answer is C. The company president’s salary is an example of an administrative

expense that does not relate directly to the cost of inventory. The answer is not E because the
factory supervisor’s salary is part of manufacturing overhead, which is included in the cost of
manufactured inventory.

PE 7–3 (LO1) Goods in Transit

Collin Wholesale owns the inventory on December 31, 2017. With shipping terms of FOB desti-
nation, the seller owns the inventory during transit because ownership does not transfer until
the goods reach their destination.

PE 7–4 (LO1) Computing Cost of Goods Sold

Beginning inventory .................................................................................. HK$ 60,000

Add: Purchases.......................................................................................... 250,000
Cost of goods available for sale ............................................................... HK$310,000
Less: Ending inventory ............................................................................. 45,000
Cost of goods sold .................................................................................... HK$265,000

PE 7–5 (LO2) Inventory Purchases

(1). and (2).

Perpetual Periodic
Inventory .......................... 37,500 Purchases ....................... 37,500
Accounts Payable ....... 37,500 Accounts Payable ....... 37,500

PE 7–6 (LO2) Transportation Costs

(1). and (2).

Perpetual Periodic
Inventory .......................... 920 Freight In ......................... 920
Cash ............................. 920 Cash ............................. 920

1
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2 Chapter 7
PE 7–7 (LO2) Purchase Returns

(1). and (2).

Perpetual Periodic
Accounts Payable ........... 3,000 Accounts Payable ........... 3,000
Inventory ...................... 3,000 Purchase Returns ....... 3,000
Returned 20 tables costing ￡150 each; 20  ￡150 = ￡3,000.

PE 7–8 (LO2) Purchase Discounts

(1). and (2).

Perpetual Periodic
Accounts Payable ........... 34,500 Accounts Payable ........... 34,500
Inventory ...................... 690 Purchase Discounts ... 690
Cash ............................. 33,810 Cash ............................. 33,810
Paid for 230 tables [(250 purchased – 20 returned)  ￡150 = $34,500] with a 2% discount (￡
34,500  0.02 = ￡690).

PE 7–9 (LO2) Sales

(1). and (2).

Perpetual Periodic
Accounts Receivable ...... 14,000 Accounts Receivable...... 14,000
Sales (70  ￡200)........ 14,000 Sales ............................ 14,000

Cost of Goods Sold ........ 10,570

Inventory (70  ￡151) . 10,570
(依題目要求係要考慮賒帳買貨-退貨-折扣期內付款後才進行銷貨)

(若無題目要求，這題成本以￡150 也給對，因實際情況不會賒帳買貨-退貨-折扣期內付款後才進行銷貨)
Cost of Goods Sold ........ 10,500
Inventory (70  ￡150) . 10,500

Cost per table

Initial cost ￡150 per table
Transportation ￡920/(250 tables – 20 tables returned) = ￡920/230 tables =
￡4 per table
Discount ￡690/230 tables = ￡3 per table
Total ￡150 + ￡4 –￡3 = ￡151 per table
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Chapter 7 3
PE 7–10 (LO2) Sales Returns

(1). and (2).

Perpetual Periodic
Sales Returns (6  $200) 1,200 Sales Returns .................. 1,200
Accounts Receivable .. 1,200 Accounts Receivable.. 1,200

Inventory (6  $151) ........ 906

Cost of Goods Sold .... 906

(若無題目要求，這題成本以￡150 也給對，因實際情況不會賒帳買貨-退貨-折扣期內付款後才進行銷貨)
Inventory (6  $150) ........ 900
Cost of Goods Sold .... 900

PE 7–11 (LO3) Closing Inventory Entries for a Periodic System

(1). Inventory ........................................................................ 34,730

Purchase Returns ......................................................... 3,000
Purchase Discounts ..................................................... 690
Freight In .................................................................. 920
Purchases ................................................................ 37,500

(2). Cost of Goods Sold ...................................................... 10,180

Inventory (￡0+￡34,730 –￡24,550) ....................... 10,180

PE 7–12 (LO3) Inventory Shrinkage

Cost of Goods Sold .............................................................. 3,500

Inventory (€182,000 – €178,500) ..................................... 3,500

PE 7–13 (LO3) Computing Cost of Goods Sold with a Periodic System

Beginning inventory ................................................................................... NT$ 6,000

Plus: Net purchases ................................................................................... 23,000
Cost of goods available for sale................................................................ NT$29,000
Less: Ending inventory ............................................................................. (7,500)
Cost of goods sold ..................................................................................... NT$21,500

PE 7–14 (LO3) Errors in Ending Inventory

Net income is overstated by €20,000. An ending inventory overstatement reduces the reported
cost of goods sold. If cost of goods sold is understated by €20,000, gross margin and net in-
come will both be overstated by €20,000.

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4 Chapter 7
PE 7–15 (LO3) Inventory Errors—Multiple Years

2017
Beginning inventory $ XXX (OK)
+ Purchases XXX (OK)
= Cost of goods available for sale $ XXX (OK)
– Ending inventory 2,000 ( 2,000 ,代表實際數應要增加 2,000)
= Cost of goods sold $2,000 ( 2,000)
Net income $2,000 ( 2,000)
Correct net income: $3,000 + $2,000 = $5,000

PE 7–16 (LO3) Inventory Errors—Multiple Years

2018 期初存貨影響 期末存貨影響

Beginning inventory $2,000 ( 2,000)

+ Purchases XXX (OK)
= Cost of goods available for sale $2,000 ( 2,000)
– Ending inventory 450 ( 450 ,代表實際數應要減少 450)
= Cost of goods sold $2,450 ( 2,000； 450 )
Net income $2,450 ( 2,000； 450 )
Correct net income: $3,000 – $2,450 = $550

PE 7–17 (LO4) Specific Identification Cost Formula

Cameras Costs
Beginning inventory 8 NT$800
Net purchases 34 4,000
Goods available for sale 42 NT$4,800
Ending inventory 16 1,755
Cost of goods sold 26 NT$3,045

(1). Cost of goods sold calculation:

4 cameras from beginning inventory, NT$100 each ........................ NT$ 400
5 cameras purchased October 3, NT$110 each ............................... 550
3 cameras purchased on October 14, NT$115 each ........................ 345
14 cameras purchased on October 20, NT$125 each ...................... 1,750
Total cost of goods sold (26 units) ................................................... NT$3,045

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Chapter 7 5
PE 7–17 (LO4) (Continued)

(2). Ending inventory calculation:

4 cameras from beginning inventory, NT$100 each ........................ NT$ 400
7 cameras purchased on October 3, NT$110 each .......................... 770
4 cameras purchased on October 14, NT$115 each ........................ 460
1 camera purchased on October 20, NT$125 ................................... 125
Total ending inventory (16 units) ...................................................... NT$1,755

PE 7–18 (LO4) FIFO Cost Formula

Cameras Costs
Beginning inventory 8 NT$ 800
Net purchases 34 4,000
Goods available for sale 42 NT$4,800
Ending inventory 16 1,990
Cost of goods sold 26 NT$2,810

(1). FIFO Cost of goods sold calculation (oldest 26 units):

8 cameras from beginning inventory, NT$100 each ....................... NT$ 800
12 cameras purchased October 3, NT$110 each ............................. 1,320
6 cameras purchased on October 14, NT$115 each ....................... 690
Total cost of goods sold (26 units) ................................................... NT$2,810

(2). FIFO Ending inventory calculation (newest 16 units):

1 camera purchased on October 14, NT$115................................... NT$ 115
15 cameras purchased on October 20, NT$125 each ..................... 1,875
Total ending inventory (16 units) ...................................................... NT$1,990

PE 7–19 (LO4) Weighted Average Cost Formula

Cameras Costs
Beginning inventory 8 NT$ 800
Net purchases 34 4,000
Goods available for sale 42 NT$4,800
($4,800/42 units) = $114.286 per unit

(1). Weighted average cost of goods sold: 26 units  NT$114.286 per unit = NT$2,971 (rounded)
(2). Weighted average ending inventory: 16 units  NT$114.286 per unit = NT$1,829 (rounded)

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6 Chapter 7
PE 7–20 (LO5) Lower of Cost or Net Realizable Value

Lower of Cost or Net Realizable Value:

Item A $ 720
Item B 375
Item C 1,100
Total $2,195

PE 7–21 (LO5) Recording an Inventory Write-Down

Cost of Goods Sold .............................................................. 700

Allowance for Inventory Write-Down ............................. 700

EXERCISES

E 7–1 (LO1) Goods on Consignment

1. ￡30,000 Counted
– 8,000 On consignment from supplier, Jacob Company
+ 10,000 On consignment to customer, Adrienne Company
￡32,000 Ending inventory

2. ￡27,000 Beginning inventory

+ 59,000 Net purchases
￡86,000 Cost of goods available for sale
– 32,000 Ending inventory [determined in part (1)]
￡54,000 Cost of goods sold

3. ￡36,000 Counted
+ 4,000 On consignment to customer, Adrienne Company
– 10,000 On consignment from suppliers, Jacov Company
￡30,000 Ending inventory

4. ￡24,000 Beginning inventory

XNet purchases
￡77,500 Cost of goods available for sale
– 30,000 Ending inventory [determined in part (3)]
￡47,500 Cost of goods sold
X = ￡47,500 + ￡30,000 –￡24,000 = ￡53,500

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Chapter 7 7
E7-2(LO1) Determine the correct inventory amount

￡ 594,000 Counted
+ 50,000 Title passed to Beta when goods were shipped
+ 0 No effect
+ 0 No effect
+ 70,000 Title remains with Beta until purchaser receives goods
+ 0 No effect
￡714,000 Ending inventory

E 7–3 (LO2) Recording Sales Transactions—Perpetual Inventory System

June 24 Accounts Receivable ............................................ 75,000

Sales Revenue ................................................. 75,000
Cost of Goods Sold .............................................. 45,000
Inventory .......................................................... 45,000
Sold merchandise to Emily Clark, terms 2/10,
n/30 (cost is ￡75,000  0.60 = ￡45,000).

30 Cash ....................................................................... 39,200

Sales Discounts .................................................... 800
Accounts Receivable ...................................... 40,000
Received partial payment from Emily Clark
(discount is ￡40,000  0.02 = ￡800).
June 30 Sales Returns ........................................................ 10,000
Accounts Receivable ...................................... 10,000
Inventory ................................................................ 6,000
Cost of Goods Sold ......................................... 6,000
Accepted return of merchandise that
originally sold for $10,000
(cost is ￡10,000  0.60 = ￡6,000).

E 7–4 (LO2) Perpetual Inventory System

Oct. 2 Inventory ................................................................ 27,650

Accounts Payable ............................................ 27,000
Cash .................................................................. 650
5 Accounts Receivable ............................................ 8,250
Sales Revenue ................................................. 8,250
Cost of Goods Sold .............................................. 4,900
Inventory .......................................................... 4,900
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8 Chapter 7

10 Accounts Payable ................................................. 13,950

Inventory .......................................................... 279*
Cash .................................................................. 13,671
*(HK$13,950  0.02 = HK$279)
14 Accounts Payable ................................................. 1,100
Inventory .......................................................... 1,100
19 Cash ....................................................................... 4,560
Accounts Receivable ...................................... 4,560

20 Accounts Payable ................................................. 11,950*

Cash .................................................................. 11,950
*(HK$27,000 – HK$13,950 – HK$1,100)
22 Accounts Receivable ............................................ 5,200
Sales Revenue ................................................. 5,200
Cost of Goods Sold .............................................. 3,800
Inventory .......................................................... 3,800
Oct. 24 Sales Returns ........................................................ 3,250
Cash .................................................................. 3,250
Inventory ................................................................ 1,800
Cost of Goods Sold ......................................... 1,800
Beginning inventory ............................................. HK$12,000
27,650
(4,900)
(279)
(1,100)
(3,800)
1,800
Ending inventory................................................... HK$31,371

E 7–5 (LO2) Recording Sales Transactions—Periodic Inventory System

June 24 Accounts Receivable ............................................ 105,000

Sales Revenue ................................................. 105,000
Sold merchandise to Jack Simpson,
terms 2/10, n/30.
30 Cash ....................................................................... 58,800
Sales Discounts .................................................... 1,200
Accounts Receivable ...................................... 60,000
Received partial payment from Jack Simpson
(discount is ￡60,000  0.02 = ￡1,200).
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Chapter 7 9

30 Sales Returns ........................................................ 15,000

Accounts Receivable ...................................... 15,000
Accepted return of ￡15,000 of merchandise.

E 7–6 (LO2) Cost of Goods Sold Calculations

Able Baker Carter Delmont Eureka

Company Company Company Company Company
Beginning inventory ￡32,000 ￡49,600 (5) €34,200 (7) €65,800 €38,400
Purchases 53,000 (3) 131,200 86,000 179,000 (9) 129,000
Purchase returns (1) 800 2,000 3,600 400 4,400
Cost of goods
available for sale 84,200 (4) 178,800 116,600 (8) 244,400 163,000
Ending inventory (2) 17,400 44,400 30,400 57,600 (10) 26,200
Cost of goods sold 66,800 134,400 (6) 86,200 186,800 136,800

Calculations (in the following order):

(1) ￡32,000 + ￡53,000 –￡84,200 = ￡800
(2) ￡84,200 –￡66,800 = ￡17,400
(3) ￡178,800 + ￡2,000 – ￡49,600 = ￡131,200
(4) ￡134,400 + ￡44,400 = ￡178,800
(5) €116,600 + €3,600 – €86,000 = €34,200
(6) €116,600 – €30,400 = €86,200
(7) €244,400 + €400 – €179,000 = €65,800
(8) €57,600 + €186,800 = €244,400
(9) €163,000 + €4,400 – €38,400 = €129,000
(10) €163,000 – €136,800 = €26,200

E 7–7 (LO2) Journalizing Inventory Transactions

1. Jan. 24 Purchases ...................................................... 18,000

Accounts Payable.................................... 18,000
30 Accounts Payable ......................................... 18,000
Purchase Discounts (NT$18,000  0.02) 360
Cash.......................................................... 17,640
Mar. 14 Purchases ...................................................... 140,000
Freight In ....................................................... 1,150
Accounts Payable.................................... 140,000
Cash.......................................................... 1,150
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10 Chapter 7

Apr. 1 Accounts Payable ......................................... 25,000

Purchase Returns .................................... 25,000
13 Accounts Payable ......................................... 115,000
Cash.......................................................... 115,000

2. Beginning inventory ..................................................... $ 23,400

Purchases ...................................................................... NT$158,000
Less: Purchase returns ................................................ (25,000)
Purchase discounts ........................................... (360)
Add: Freight in ............................................................. 1,150
Net purchases ............................................................... 133,790
Cost of goods available for sale .................................. NT$157,190
Less: Ending inventory ................................................ 26,250
Cost of goods sold ....................................................... NT$130,940

E 7-8 (LO2, 3) Compute inventory and cost of goods sold

(1) FIFO
Beginning inventory (46 X $1,067) ....................................... $49,082
Purchases
Sept. 12 (90 X $1,122) ...................................................... $100,980
Sept. 19 (40 X $1,144) ...................................................... 45,760
Sept. 26 (88 X $1,155) ...................................................... 101,640 248,380
Cost of goods available for sale .......................................... 297,462
Less: Ending inventory (22 X $1,155) ................................. 25,410
Cost of goods sold ............................................................... $272,052

Calculation (Cost of goods sold)

Date Units Unit Cost Total Cost

9/1 46 € 970 € 49,082
9/12 90 1,122 100,980
9/19 40 1,144 45,760
9/26 66 1,155 76,230
242 €272,052

Weighted Average Cost

Cost of goods available for sale .......................................... € 297,462
Less: Ending inventory (22 X €1,126.75*) .......................... 24,788.5
Cost of goods sold ............................................................... € 272,673.5

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Chapter 7 11
*Average unit cost is €1,126.75 computed as follows:

€297,462 (Cost of goods available for sale) = €1,126.75 (整除)

264 units (Total units available for sale)

Recalculation (因為單位成本是整除數，故可以用此法驗證)
242 units X €1,126.75 = €272,673.5

(b)
Cost of
FIFO €25,410 (ending inventory) + €272,052 (COGS) = €297,462 goods
Weighted average cost €24,788.5 (ending inventory) + €272,673.5 } availa-
(COGS) = €297,462, ble
for sale

Under both methods, the sum of the ending inventory and cost of goods sold equals the same
amount, €297,462, which is the cost of goods available for sale.

E 7–9 (LO3) Adjusting Inventory (Perpetual System)

Cost of Goods Sold .............................................................. 28,000

Inventory .......................................................................... 28,000
To adjust the inventory account balance to
current amount per physical count.
(HK$120,000 – HK$92,000 = HK$28,000)

E 7–10 (LO3) Adjusting Inventory and Closing Entries (Periodic System)

Inventory ................................................................................ 195,000

Purchase Returns ................................................................. 5,000
Purchases ........................................................................ 200,000
Closed temporary inventory accounts.

Cost of Goods Sold .............................................................. 225,000

Inventory .......................................................................... 225,000
To adjust the inventory account to the appropriate balance of ￡95,000.
(￡125,000 beginning inventory+ ￡195,000 net purchases –￡95,000 ending inventory)

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12 Chapter 7
E 7–11 (LO3) Cost of Goods Sold Calculation

Cost of goods sold:

Inventory January 1, 2017 .................................................... ￡ 120,000
Purchases .............................................................................. ￡780,000
Less: Purchase returns ........................................................ (22,920)
Purchase discounts ................................................... (2,640)
Add: Freight in ..................................................................... 37,200
Net purchases ....................................................................... 791,640
Cost of goods available for sale .......................................... ￡911,640
Less inventory, December 31, 2017 .................................... (144,000)
Cost of goods sold ............................................................... ￡767,640

E 7–12 (LO3) Adjusting Inventory Records for Physical Counts

(a) = €125, (b) = €3.20, (c) = 31, (d) = €1.90

Inventory ................................................................................ 11.50

Cost of Goods Sold ......................................................... 11.50
To adjust inventory after physical count.
(€125.00 + €60.80 + €65.10 + €81.70 = €332.60;
€332.60 –€321.10 = €11.50)

E 7–13 (LO3) Inventory Errors

1. a b c
Sales revenue .......................................... $181,000 $181,000 $156,000
Beginning inventory ............................... $ 36,000 $ 36,000 $ 36,000
Net purchases ......................................... 55,000 55,000 55,000
Cost of goods available for sale ............ $ 91,000 $ 91,000 $ 91,000
Ending inventory..................................... (25,000) (14,500) (14,500)
Cost of goods sold ................................. $ 66,000 $ 76,500 $ 76,500
Gross margin........................................... $115,000 $104,500 $ 79,500

2. The proper method is (b), recording the sale and not counting the inventory.

3. Method (a) overstates gross margin and net income.

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Chapter 7 13
E 7–14 (LO4) Specific Identification Method

1. Cost of goods sold:

Ring A 2 units at NT$600 = NT$1,200
Ring A 3 units at 600 = 1,800
Ring A 1 unit at 650 = 650
Ring B 2 units at 450 = 900
Ring B 2 units at 350 = 700
Ring C 4 units at 200 = 800
Ring C 3 units at 250 = 750
Ring C 1 unit at 250 = 250
NT$7,050

Beginning inventory ............................................................... NT$19,650

Net purchases ......................................................................... 4,800
Cost of goods available for sale ............................................ NT$24,450
Ending inventory..................................................................... (17,400)
Cost of goods sold ................................................................. NT$ 7,050

Purchases:
4 Type A rings at NT$600 = NT$2,400
2 Type B rings at 450 = 900
5 Type C rings at 300 = 1,500
NT$4,800

Ending inventory:
Ring A 7 units at NT$600 = NT$ 4,200
Ring A 9 units at 650 = 5,850
Ring B 5 units at 300 = 1,500
Ring B 4 units at 350 = 1,400
Ring B 3 units at 450 = 1,350
Ring C 3 units at 200 = 600
Ring C 4 units at 250 = 1,000
Ring C 5 units at 300 = 1,500
NT$17,400
2. Sales:
Ring A 2 units at $1,000 = NT$ 2,000
Ring A 3 units at 1,050 = 3,150
Ring A 1 unit at 1,200 = 1,200
Ring B 2 units at 850 = 1,700
Ring B 2 units at 800 = 1,600
Ring C 4 units at 450 = 1,800
Ring C 3 units at 500 = 1,500
Ring C 1 unit at 550 = 550
NT$13,500
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14 Chapter 7

Sales revenue ..................................................... NT$13,500

Cost of goods sold ............................................ 7,050
Gross margin...................................................... NT$6,450

E 7–15 (LO4) FIFO Cost Formula

Cost of Goods Sold

Ring Type Units Cost Total Cost
A 6 ￡600 ￡3,600
B 4 300 1,200
C 7 200 1,400
C 1 250 250
￡6,450

Beginning inventory ....................................................................... ￡19,650

Net purchases ................................................................................. 4,800*
Cost of goods available for sale .................................................... ￡24,450
Cost of goods sold ......................................................................... 6,450
Ending inventory ............................................................................. ￡18,000

*4  ￡600 = ￡2,400; 2  $450 = ￡900; 5  $300 = ￡1,500;

￡2,400 + ￡900 + ￡1,500 = ￡4,800

E 7–16 (LO4) FIFO and Weighted Average Cost Calculations (Periodic Inventory System)

(a) FIFO
Cost of goods sold..............................40 computers at NT$1,350 = NT$ 54,000
Cost of goods available for sale ....................................................... NT$150,100
Less cost of goods sold .................................................................... 54,000
Ending inventory................................................................................ NT$ 96,100
Cost of goods available for sale:
Beginning inventory.............................60 computers at NT$1,350 = NT$ 81,000
Nov. 5 Purchase ............................14 computers at NT$1,400 = 19,600
11 Purchase ............................12 computers at NT$1,500 = 18,000
24 Purchase.............................18 computers at NT$1,750 = 31,500
Cost of goods available for sale ...................................................... NT$150,100

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Chapter 7 15

(b) Weighted Average Cost

Units
Model B computers available for sale ......................... 104 (60 + 14 + 12 + 18)
Model B computers sold .............................................. 40
Model B computers ending inventory ......................... 64
$150,100
Average Cost = = NT$1,443.27 per computer (rounded)非整除
104
1.先求:Ending inventory ................ 64 computers at NT$1,443.27 = NT$92,369
2.Cost of goods sold 需以 Cost of goods available for sale- Ending inventory
=NT$150,100-NT$92,369 = NT$57,731

E 7–17 (LO5) Lower of Cost or Net Realizable Value

1. Purchases .............................................................................. 400

Accounts Payable............................................................ 400
Purchased 50 standard widgets at $8 each.

2. Purchases .............................................................................. 300

Accounts Payable............................................................ 300
Purchased 15 deluxe widgets at $20 each.

3. There is no entry to write up the inventory. Inventory can never be valued above cost.

4. Cost of Goods Sold .............................................................. 24

Allowance for Inventory Write-Down ............................. 24
To write down deluxe widgets to lower of cost or
NRV [12 at $20-($23-$5)].

5. Cost of Goods Sold .............................................................. 10

Allowance for Inventory Write-Down ............................ 10
To write down standard widgets inventory [10 at
$8-($10-$3)].

6. Allowance for Inventory Write-Down .................................. 24

COGS ............................................................................... 24

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not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
16 Chapter 7
E 7–18 (LO5) Lower of Cost or Net Realizable Value

1. The inventory items should be written down to the following amounts (in NT$):
Item Write-Down
Plywood .............................. 21 units at $100 ($450 – $350) = $ 2,100
Maple ................................... 23 units at $50 ($1,900 – $1,850) = 1,150
Pine ..................................... 38 units at $50 ($700 – $650) = 1,900
Redwood ............................. Not written down —
$5,150

2. a. Applied to each item

Item Write-Down
Plywood ........... $ 2,100
Maple................ 1,150
Pine .................. 1,900
$5,150
Cost of Goods Sold ................................................. 5,150
Allowance for Inventory Write-Down ................ 5,150

b. Applied to total inventory

Item Cost Market Difference
Plywood ...... 21  $ 450 = $ 9,450 21  $ 350 = $ 7,350
Maple........... 23  1,900 = 43,700 23  1,850 = 42,550
Pine ............. 38  700 = 26,600 38  650 = 24,700
Redwood ..... 16  1,600 = 25,600 16  1,700 = 27,200
$105,350 $101,800 $3,550

Cost of Goods Sold ................................................. 3,550

Allowance for Inventory Write-Down ................ 3,550

E 7-19(LO5) Compute lower-of-cost-or-net realizable value

Lower
-of-Cost-
Cost NRV or-NRV
Running shoes € 12,200 € 12,600 € 12,200

Tennis shoes 20,400 19,200 19,200

Basketball shoes 18,000 16,750 16,750
Total inventory €50,600 €48,550 €48,150

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not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 7 17

PROBLEMS

P 7–1 (LO1) What Should Be Included in Inventory?

1. NT$61,800
+ 2,000 a
– 1,200 b
+ 2,300 c
+ 8,000 d
+ 900 e (2)
+ 5,100 e (4)
NT$78,900 Ending inventory

2. NT$ 79,200 Net purchases (as stated)

– 2,600 e (1)
$ 76,600 Corrected net purchases
$ 38,700 Beginning inventory
+ 76,600 Net purchases
$115,300 Cost of goods available for sale
– 78,900 Ending inventory
$ 36,400 Cost of goods sold

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not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 214
P 7–2 (LO2) Perpetual and Periodic Journal Entries

1. Periodic Inventory System 2. Perpetual Inventory System

a. Purchases .............................. 20,000 a. Inventory ................................. 20,000
Accounts Payable .............. 20,000 Accounts Payable .............. 20,000
Purchased 500 automobile Purchased 500 automobile
tires on account at HK$40 each. tires on account at HK$40 each.
b. Purchases .............................. 24,000 b. Inventory ................................. 24,000
Accounts Payable .............. 24,000 Accounts Payable .............. 24,000
Purchased 300 truck tires Purchased 300 truck tires
on account at HK$80 each. on account at HK$80 each.
c. Accounts Payable .................. 480 c. Accounts Payable .................. 480
Purchase Returns .............. 480 Inventory ............................. 480
Returned 12 automobile Returned 12 automobile
tires to supplier. tires to supplier.
d. Accounts Payable .................. 19,520 d. Accounts Payable .................. 19,520
Cash .................................... 19,520 Cash .................................... 19,520
Paid for automobile tires. Paid for automobile tires.

e. Accounts Payable .................. 12,000 e. Accounts Payable .................. 12,000

Cash .................................... 12,000 Cash .................................... 12,000
Paid for half of truck tires Paid for half of truck tires
purchased. purchased.
f. Accounts Payable .................. 12,000 f. Accounts Payable .................. 12,000
Cash .................................... 12,000 Cash .................................... 12,000
Paid remaining amount Paid remaining amount
owed on truck tires. owed on truck tires.

Chapter 7
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P 7–2 (LO2) (Continued)

Chapter 7
Periodic Inventory System Perpetual Inventory System
g. Accounts Receivable ............. 36,000 g. Accounts Receivable ............. 36,000
Sales ................................... 36,000 Sales.................................... 36,000
Sold 400 automobile tires Cost of Goods Sold ............... 16,000
on account at HK$90 each. Inventory ............................. 16,000
Sold 400 automobile tires
that cost HK$40 each for HK$90
each, on account.
h. Accounts Receivable ............. 30,000 h. Accounts Receivable ............. 30,000
Sales ................................... 30,000 Sales.................................... 30,000
Sold 200 truck tires on Cost of Goods Sold ............... 16,000
account at HK$150 each. Inventory ............................. 16,000
Sold 200 truck tires that
cost HK$80 each for HK$150
each, on account.
i. Sales Returns ......................... 630 i. Sales Returns ......................... 630
Accounts Receivable ......... 630 Accounts Receivable ......... 630
Accepted 7 automobile Inventory ................................. 280
tires back from customers, Cost of Goods Sold............ 280
HK$90 each. Accepted 7 automobile
tires (sold for HK$90 each)
back from customers;
cost HK$40 each.

215
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P 7–2 (LO2) (Continued)

216
3. It is helpful to first look at the inventory and related accounts to see what adjustments are needed.

PERIODIC PERPETUAL

Inventory Inventory
Auto tires Auto tires
beg. inv. 4,000 beg. inv. 4,000
Truck tires Truck tires
beg. inv. 5,600 beg. inv. 5,600 (c) 480
(a) 20,000
(b) 24,000
Purchases
(g) 16,000
(a) 20,000
(i) 280 (h) 16,000
(b) 24,000
21,400

Purchase Returns
After posting entries (a)–(i), the inventory
(c) 480
account has a balance of HK$21,400.

Chapter 7
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P 7–2 (LO2) (Continued)

Chapter 7
Periodic Inventory System Perpetual Inventory System
We now need to make entries to eliminate the bal- Because the physical count of inventory of $20,480 was
ances in all accounts (except Inventory) and add “net less than the balance in the inventory account, an ad-
purchases” to inventory. The entry is: justment for shrinkage must be made. The entry is:
Inventory ............................................. 43,520 Cost of Goods Sold ......................... 920
Purchase Returns............................... 480 Inventory ..................................... 920
Purchases ...................................... 44,000 Adjusted Inventory for shrinkage
Closed Net Purchases to Inven- (HK$21,400 – HK$20,480). Adjustment
tory. Closing of temporary inven- of Inventory balance to reflect
tory accounts. inventory shrinkage.
After this entry the inventory account includes the be- The accuracy of this entry can be determined by exam-
ginning inventory and net purchases, so its total is ining the physical number of tires on hand as follows:
cost of goods available for sale as follows: Automobile Truck
Inventory Tires Tires
Auto tires Beg. inv. 100 70
beg. inv. 4,000 Transaction (a) 500
Truck tires Transaction (b) 300
beg. inv. 5,600 Transaction (c) (12)
Net purchases 43,520 Transaction (g) (400)
Goods available Transaction (h) (200)
for sale 53,120 Transaction (i) 7
Ending inventory 195 170
Now we need to adjust for ending inventory. We know
Per count 184 164
from the physical count that the ending inventory is:
Shrinkage 11 6
Auto tires 184  HK$40 =HK$ 7,360 Cost  HK$ 40  HK$ 80
Truck tires 164  HK$80 = 13,120 HK$ 440 HK$ 480
Total HK$20,480 HK$920

217
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218 Chapter 7

P 7–2 (LO2) (Continued)

Periodic Inventory System

To adjust Inventory to the correct amount, it must be credited for HK$32,640
(HK$53,120 – HK$20,480). The entry is:

Cost of Goods Sold .............................................................. 32,640

Inventory .......................................................................... 32,640
Adjustment of Inventory to appropriate ending balance.

The inventory account balance is now HK$20,480 as shown below.

Inventory
Auto tires
beg. inv. 4,000 Adjust end. inv. 32,640
Truck tires
beg. inv. 5,600
Net purchases 43,520
End. inv. 20,480

The cost of goods sold account will be closed with other closing entries.

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Chapter 7 219
P 7–3 (LO2) Statement of Comprehensive Income Calculations

The easiest way to solve this problem is to set up the known data in statement of
comprehensive income format as follows (ignore comprehensive income):

Stout Company
Statement of Comprehensive Income
For the Year Ended December 31, 2017
Revenues:
Gross sales ................................................ € (1)
Less sales returns ..................................... 4,200
Net sales ..................................................... $169,800
Cost of goods sold:
Inventory, January 1, 2017 ........................ €22,000
Gross purchases........................................ € (2)
Less purchase returns .............................. (2,000)
Add freight in.............................................. 800 (2)
Cost of goods available for sale ............... €84,000
Less inventory, December 31, 2017 ......... (4)
Cost of goods sold .......................................... (3)
Gross margin ................................................... € (5)
Operating expenses ........................................ 7,500
Net income ....................................................... € (6)

Given the above statement, the calculations can be completed in the following or-
der:

(1) Gross sales (3) Cost of goods sold

€169,800 + €4,200 = $174,000 €174,000 = 250% (X)
X = €69,600
(2) Net purchases
€ 84,000 Cost of goods (4) Ending inventory
available for sale €84,000 – €69,600 = €14,400
– 22,000 Beginning inventory
€ 62,000 Net purchases (5) Gross margin
€169,800 – €69,600 = €100,200
Gross purchases
€ 62,000 Net purchases
(6) Net income
+ 2,000 Purchase returns
€100,200 – €7,500 = €92,700
– 800 Less freight in
€ 63,200 Gross purchases

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220 Chapter 7
P 7–4 (LO2) Statement of Comprehensive Income Calculations

Company Company Company Company

A B C D
Sales revenue ............................. €2,000 (4) €499 €480 €1,310
Beginning inventory................... 200 76 0 600
Purchases ................................... (1) 1,320 423 480 249
Purchase returns ........................ (20) (19) (0) (8) (19)
Cost of goods available
for sale ................................... 1,500 480 480 830
Ending inventory ........................ 300 110 (6) 155 195
Cost of goods sold ..................... 1,200 370 (7) 325 (9) 635
Gross margin .............................. (2) 800 (5) 129 155 (10) 675
Operating expenses ................... 108 22 34 129
Net income .................................. (3) 692 107 121 546
The individual missing numbers are computed as follows, in the order given. Note:
Cost of goods available for sale has been inserted to simplify the calculation.

Company A:
(1) Since ending inventory is €300 and cost of goods sold is €1,200, goods avail-
able for sale must be €1,500. The beginning inventory of $200 and net pur-
chases must total €1,500. Purchases is therefore €1,320 (€200 + €1,320 minus
purchase returns of $20 total €1,500).
(2) Sales revenue (€2,000) minus cost of goods sold (€1,200) equals gross margin
(€800).
(3) Gross margin (€800) minus operating expenses (€108) equals net income
(€692).

Company B:
(5) Operating expenses (€22) plus net income (€107) equals gross margin (€129).
(4) Gross margin (€129) plus cost of goods sold (€370) equals sales revenue
(€499).

Company C:
(7) Sales revenue (€480) minus gross margin (€155) equals cost of goods sold
(€325).
(6) Goods available for sale (€480) minus cost of goods sold (€325) equals ending
inventory (€155).

Company D:
(10) Net income (€546) plus operating expenses (€129) equals gross margin (€675).
(9) Sales revenue (€1,310) minus gross margin (€675) equals cost of goods sold
(€635).

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Chapter 7 221
P 7–4 (LO2) (Continued)

(8) Cost of goods sold (€635) plus ending inventory (€195) equals goods available
for sale (€830). Goods available for sale (€830) equals beginning inventory
(€600) plus purchases (€249) minus purchase returns (€19).

P 7–5 (LO3) The Effect of Inventory Errors

1. Net Ending
Purchases Inventory
$ 80,800 $29,800
+ 1,800 + 800
– 3,000 – 300
$ 79,600 $30,300

2. Beginning inventory........................................................................... $ 20,200

Net purchases .................................................................................... + 79,600
Cost of goods available for sale ....................................................... $ 99,800
Ending inventory ................................................................................ – 30,300
Cost of goods sold ............................................................................. $ 69,500

3. Beginning inventory........................................................................... $ 20,200

Net purchases (before correcting) .................................................... + 80,800
Cost of goods available for sale ....................................................... $101,000
Ending inventory (before correcting) ............................................... – 29,800
Cost of goods sold (overstated) ....................................................... $ 71,200
Cost of goods sold (correct) ............................................................. – 69,500
Overstatement .................................................................................... $ 1,700

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222 Chapter 7

Chapter 7
P 7–6 (LO3) Correction of Inventory Errors

The best way to solve this problem is to remember that inventory overstatements at the beginning of the year
reduce net income, and overstatements at the end of the year increase net income as shown below. (Understate-
ments have the opposite effect.)

Overstatement—Beginning of Year Overstatement—End of Year

Revenue ...................................... OK Revenue ..................................... OK
Cost of goods sold: Cost of goods sold:
Beginning inventory ............. Too high Beginning inventory ............ OK
Purchases .............................. OK Purchases ............................. OK
Goods available .................... Too high Goods available.................... OK
Ending inventory................... OK Ending inventory .................. Too high
Cost of goods sold ..................... Too high Cost of goods sold .................... Too low
Gross margin .............................. Too low Gross margin ............................. Too high
Expenses .................................... OK Expenses .................................... OK
Net income .................................. Too low Net income ................................. Too high

The correct amount of net income can be calculated by subtracting overstatements of ending inventory and adding
overstatements of beginning inventory. Remember that the ending inventory of one period becomes the beginning
inventory of the next period.
2014 2015 2016 2017
Reported net income....................................................................... $30,000 $40,000 $35,000 $45,000
Inventory overstatement, beginning of year ................................. 3,000
Inventory understatement, beginning of year .............................. (4,000) (1,000)
Inventory overstatement, end of year............................................ (3,000) (2,000)
Inventory understatement, end of year ......................................... 4,000 1,000
Correct net income.......................................................................... $34,000 $33,000 $39,000 $42,000

239
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 240
P 7–7 (LO3) The Effect of Inventory Errors

1. The effect of each of these errors on gross margin is as follows:

(a) No effect (liabilities are understated).
(b) Ending inventory is understated, $4,400.
(c) Net purchases are overstated, $900.
(d) Net purchases are understated, $1,200.
(e) Net purchases are overstated, $3,100.
(f) Ending inventory is overstated, $800.
The following analysis shows how these errors affect cost of goods sold:

Beginning Net Goods Ending Cost of

Error Inventory + Purchases = Available – Inventory = Goods Sold
(a) No effect No effect No effect No effect No effect
(b) No effect No effect No effect $4,400 understated $4,400 overstated
(c) No effect $900 overstated $900 overstated No effect $900 overstated
(d) No effect $1,200 understated $1,200 understated No effect $1,200 understated
(e) No effect $3,100 overstated $3,100 overstated No effect $3,100 overstated
(f) No effect No effect No effect $800 overstated $800 understated
Totals No effect $2,800 overstated $2,800 overstated $3,600 understated $6,400 overstated
If cost of goods sold is overstated by $6,400, gross margin is understated by $6,400. The correct gross margin
is $31,400 ($25,000 + $6,400).

2. Since the ending inventory of 2017 becomes the beginning inventory of 2018, net income would be $3,600
overstated.

Chapter 7
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224 Chapter 7
P 7-8 (LO4) Calculate ending inventory, cost of goods sold and compare results.

Cost of Goods Available for Sale

Beginning inventory........................................................................... € 5,760
10/6 purchases ................................................................................. + 12,480
10/15 purchases ................................................................................. + 7,560
10/27 purchases ................................................................................. + 8,960
Cost of goods available for sale ....................................................... € 34,760

Ending Inventory in Units:

Units available for sale (120+240+140+160) ..................................... 660
Sales (200+130+240) .......................................................................... - 570
Units remaining in ending inventory ................................................ 90

Sales Revenue
10/11 sales ........................................................................................ 14,000
10/22 sales ........................................................................................ + 10,400
10/29 sales ........................................................................................ + 19,200
Total sales revenue ............................................................................ € 43,600

(a)

(1) FIFO

Ending Inventory
10/27 (90@€56) ................................................................................... 5,040

Cost of Goods Sold

Cost of goods available for sale ....................................................... 34,760
Ending Inventory ................................................................................ - 5,040
Cost of goods sold ............................................................................. € 29,720

(2) Weighted Average Cost

Weighted Average cost per unit: 34,760/660=52.667(rounded)
一定要先計算 Ending Inventory
Ending Inventory
(90@€52.667) ...................................................................................... 4,740

Cost of Goods Sold

Cost of goods available for sale ....................................................... 34,760
Ending Inventory ................................................................................ - 4,740
Cost of goods sold ............................................................................. € 30,020

(b) Weighted average cost produces the lower ending inventory value and its cost
of goods sold is higher than FIFO.

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Chapter 7 241

P 7–9 (LO4) Cost Formulas for Inventory

1. a. FIFO
Beginning inventory units ...... 460
Purchase, January 16 ............. 110
Purchase, February 16 ........... 105
Purchase, March 10 ................ 150
Total units available................ 825
Units sold:
January 25 .......................... (216)
February 27 ........................ (307)
March 30 ............................. (190)
Total units sold ....................... (713)
Ending inventory..................... 112
Units Total Cost
Ending inventory................................ 112(at NT$28) NT$3,136
Cost of goods sold: Units Total Cost
Beginning inventory .......................... 460(at NT$30) NT$13,800
Purchase, January 16 ........................ 110(at NT$32) 3,520
Purchase, February 16 ...................... 105(at NT$36) 3,780
Purchase, March 10 ........................... 38(at NT$28) 1,064
713 NT$22,164
Or:
Cost of goods available for sale ....... NT$25,300
Less ending inventory ....................... 3,136
Cost of goods sold ............................ NT$22,164
Gross margin:
Sales revenue ..................................... NT$31,500*
Less cost of goods sold .................... 22,164
Gross margin ..................................... NT$ 9,336
*Sales revenue:
216 at NT$45= NT$ 9,720
307 at 40= 12,280
190 at 50= 9,500
NT$31,500

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242 Chapter 7
P 7–9 (LO4) (Continued)

b. Weighted Average cost

Units Total Cost
Beginning inventory .......................... 460 (at NT$30) NT$13,800
Purchase, January 16 ........................ 110 (at NT$32) 3,520
Purchase, February 16 ...................... 105 (at NT$36) 3,780
Purchase, March 10 ........................... 150 (at NT$28) 4,200
825 NT$25,300
$25,300
= NT$30.67 average cost (rounded)
825
題目要求，最後答案計算至整數位
一定要先計算 Ending Inventory
Ending inventory:
112 at NT$30.67 = NT$3,435
Cost of goods sold:
Cost of goods available for sale ....... NT$25,300
Less ending inventory ....................... 3,435
Cost of goods sold ............................ NT$21,865
Gross margin:
Sales revenue ..................................... NT$31,500
Less cost of goods sold .................... 21,865
Gross margin ..................................... NT$ 9,635

2. In this case, the weighted average cost formula results in higher gross margin.
The reason for this unusual result is that prices are neither going up nor going
down consistently, but are moving randomly in both directions. Since the
higher costs are the average costs (not the earliest), the weighted average cost
formula keeps more of these costs in inventory than FIFO.

P 7–10 (LO4) Periodic Inventory System with Different Cost Formulas

1. FIFO
Cases Ending inventory (9,480-5,110) .............................................. 4,370

Cost of goods available for sale:

5,100 at ￡10.50 ............................................................................ ￡ 53,550
1,210 at ￡12.00 ............................................................................ 14,520
1,050 at ￡12.50 ............................................................................ 13,125
2,120 at ￡13.00 ............................................................................ 27,560
9,480 ￡108,755

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Chapter 7 243
P 7–10 (LO4) (Continued)
Cost of goods sold:
5,100 cases at ￡10.50 = ￡53,550
10 cases at ￡12.00 = 120
￡53,670

Cost of goods available for sale ....................................................... ￡108,755

Cost of goods sold ............................................................................. 53,670
Ending inventory ................................................................................ $ 55,085

2. Weighted Average cost

Cost of goods available for sale ....................................................... ￡108,755
Total units available ........................................................................... ÷ 9,480
Weighted average cost per unit ........................................................ ￡ 11.47 (rounded)
一定要先計算 Ending Inventory
Ending inventory: ￡11.47  4,370 =￡50,124
Cost of goods sold: ￡108,755 –￡50,124 = ￡58,631

P7-11 (LO4) Determine cost of goods sold and ending inventory using FIFO and
weighted average cost with analysis.

1. Cost of Goods Available for Sale

Beginning inventory........................................................................... € 31,500
3/5 purchases ................................................................................... + 84,000
3/13 purchases ................................................................................... +108000
3/21 purchases ................................................................................... + 60,000
3/26 purchases ................................................................................... + 66,000
Cost of goods available for sale €349,500

2. (1) FIFO

Ending Inventory
Units: (2,250+5,250+6,000+3,000+3,000-15,000) .......................... 4,500
Cost: 3,000@€22+1,500@€20 ........................................................ €96,000

Cost of Goods Sold

Cost of goods available for sale ....................................................... 349,500
Ending Inventory ................................................................................ - 96,000
Cost of goods sold ............................................................................. €253,500

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244 Chapter 7

(2) Weighted average Cost

Weighted-Average cost per unit: 349,500/19,500=17.92(rounded)

一定要先計算 Ending Inventory

Ending Inventory
(4,500@€17.92) ........................................................................ 80,640

Cost of Goods Sold

Cost of goods available for sale ....................................................... 349,500
Ending Inventory ................................................................................ - 80,640
Cost of goods sold ............................................................................. €268,860

(c) (1) As shown above, FIFO produces the higher inventory amount, €96,000.

(2) As shown above, weighted average cost produces the higher cost of
goods sold, €268,860

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Chapter 7 245

EXPANDED MATERIAL

Practice Exercises

PE 7–27 (LO8) Weighted Average Cost and a Perpetual Inventory System

Weighted Average Cost 1. Cost of Goods Sold 2. Ending Inventory

January 16 (200 units) 200  $17.50 = $3,500 100  $17.50 = $1,750

July 23 (600 units)

100  $17.50 = $ 1,750
900  $18.00 = 16,200
1,000 $17,950
$17,950/1,000 = $17.95 per unit
600  $17.95 = $10,770 $17,950- $10,770= $7,180

November 1 (1,300 units)

400  $17.95 = $ 7,180
1,200  $18.25 = 21,900
1,600 $29,080
$29,080/1,600 = $18.175 per unit
1,300  $18.175 = $23,628* $29,080-$23,628=$5,452
Total = $37,898 Total = $5,452
*Rounded

PE 7–28 (LO9) Estimating Inventory

1. and 2.
Last Year % Two Years Ago %
Sales ......................................................... $6,500,000 $6,500,000
Cost of goods sold (estimated) .............. 2,600,000 2,275,000
Gross margin (estimated) ....................... $3,900,000* $4,225,000**
Beginning inventory .......................... $1,650,000 $1,650,000
+ Purchases ........................................... 4,130,000 4,130,000
= Cost of goods available for sale ....... $5,780,000 $5,780,000
– August 17 inventory (estimated) ...... 3,180,000 3,505,000
= Cost of goods sold (estimated) ........ $2,600,000 $2,275,000
*60% × $6,500,000 = $3,900,000
**65% × $6,500,000 = $4,225,000

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246 Chapter 7
Exercises

E 7–25 (LO8) FIFO, LIFO, and Weighted Average Cost Calculations (Per-
petual Inventory System)

1. (a) FIFO
Cost of goods sold:
First sale ............................................... 4,000 units at $2.00 = $ 8,000
Second sale .......................................... 3,000 units at 2.00 = 6,000
Third sale .............................................. 5,000 units at 2.00 = 10,000
$24,000
Remaining Inventory
Number Unit Total Number of Units Total
Date Transaction of Units Cost Cost and Cost Cost
July 1 Beg. inventory 28,000 $2.00 $ 56,000 28,000 @ $2.00 $56,000
5 Sold (4,000) 2.00 (8,000) 24,000 @ $2.00 48,000
13 Purchased 6,000 2.25 13,500 24,000 @ $2.00 61,500
6,000 @ $2.25
17 Sold (3,000) 2.00 (6,000) 21,000 @ $2.00 55,500
6,000 @ $2.25
25 Purchased 8,000 2.50 20,000 21,000 @ $2.00 75,500
6,000 @ $2.25
8,000 @ $2.50
27 Sold (5,000) 2.00 (10,000) 16,000 @ $2.00 $65,500
6,000 @ $2.25 ending
8,000 @ $2.50 inventory

(c) Weighted Average Cost

July 1 Beginning inventory ............ 28,000 units at $2.00 = $56,000
5 Cost of goods sold............... 4,000 units at $2.00 = $ 8,000
24,000 units at $2.00 = $48,000
13 New unit cost ........................ 6,000 units at $2.25 = 13,500
30,000 units $61,500
$61,500/30,000 = $2.05 per unit
17 Cost of goods sold............... 3,000 units at $2.05 = $ 6,150
27,000 units at $2.05 = $55,350
25 New unit cost ........................ 8,000 units at $2.50 = 20,000
35,000 units $75,350
$75,350/35,000 = $2.15* per unit
*Rounded

27 Cost of goods sold............... 5,000 units at $2.15 = $10,750

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Chapter 7 247

Total cost of goods sold ...................... $ 8,000

6,150
10,750
$24,900

Ending inventory $89,500 – $24,900 = $64,600

2. Any of the three cost formulas can be “best,” depending on the objectives of
the firm (such as high earnings or low taxes).

E 7–26 (LO9) Gross Margin Method of Estimating Inventory

1. Sales revenue ............................................................... $550,000

Gross margin (0.40  $550,000) ................................... $220,000
Cost of goods sold ($550,000 – $220,000).................. 330,000

Ending inventory:
Beginning inventory ............................................... $ 95,000
Net purchases ......................................................... 300,000
Cost of goods available for sale ............................ $395,000
Less: Cost of goods sold ...................................... 330,000
Ending inventory..................................................... 65,000

2. The missing inventory could be a result of the following:

a. Theft
b. A gross margin percentage lower than 40%. For example, if the gross
margin percentage has fallen to 30%, the ending inventory would be only
$10,000.
c. Physical inventory counting mistakes
d. Accounting errors

E 7–27 (LO9) Estimating Inventory Amounts (Gross Margin Method)

Sales ...................................................................................... $80,000

Gross margin (0.35  $80,000) ............................................. $28,000
Cost of goods sold ($80,000 – $28,000).............................. 52,000

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248 Chapter 7

Ending inventory:
Beginning inventory ....................................................... $ 6,500
Net purchases ................................................................. 48,000
Cost of goods available for sale .................................... $54,500
Less: Cost of goods sold .............................................. 52,000
Ending inventory............................................................. 2,500

E 7–28 (LO9) Estimating Inventory (Gross Margin Method)

Sales ................................................................................. $2,000,000

Gross margin (0.30  $2,000,000) ................................... $ 600,000
Cost of goods sold($2,000,000 – $600,000) ................... 1,400,000

Ending inventory:
Beginning inventory .................................................. $ 300,000
Net purchases ............................................................ 1,600,000
Cost of goods available for sale ............................... $1,900,000
Less: Cost of goods Sold ......................................... 1,400,000
Ending inventory........................................................ 500,000

Computed ending inventory ........................................... $500,000

Actual ending inventory ................................................. 450,000
Missing inventory ............................................................ $ 50,000

E 7-29 (LO9) Estimated Inventory (Retail Inventory Method)

Goods available for sale at cost = NT$52,500 + NT$141,750 = NT$194,250

Goods available for sale at retailing price = NT$143,200 + NT$411,800
= NT$555,000
Cost-to-retail percentage = NT$194,250/NT$555,000=35%

Ending inventory at retail price= NT$555,000- NT$488,700 = NT$66,300

Cost of ending inventory = NT$66,300*35% = NT$23,205

E 7-30 (LO9) Estimated Inventory (Retail Inventory Method)

1. Goods available for sale at cost = NT$313,500 + NT$1,202,280 = NT$1,515,780

Goods available for sale at retailing price = NT$773,450 + NT$3,236,550
= NT$4,010,000
Cost-to-retail percentage =NT$1,515,780/NT$4,010,000= 37.8%

© 2017 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 7 249
Ending inventory at retail price
= NT$4,010,000-(NT$3,788,000- NT$38,000) = NT$260,000
Cost of ending inventory = NT$260,000*37.8% = NT$98,280

2. NT$90,150 − NT$98,280 = NT$(8,130)

Problems

P 7–15 (LO8) Unifying Concepts: Cost Formulas for Inventory

1. FIFO
Total cases available.......................................................................... 8,300
Total cases sold ................................................................................. 4,300
Total cases remaining........................................................................ 4,000
Cost of goods available for sale:
4,100 at $10.50 = $43,050
1,500 at 11.00 = 16,500
1,000 at 11.00 = 11,000
1,700 at 11.50 = 19,550
$90,100
Cost of goods sold:
First sale ............................. 950 cases at $10.50 = $ 9,975
Second sale ........................ 1,450 cases at 10.50 = 15,225
Third sale ............................ 1,700 cases at 10.50 = 17,850
200 cases at 11.00 = 2,200
$45,250
Cost of goods available for sale ....................................................... $90,100
Cost of goods sold ............................................................................. 45,250
Ending inventory ................................................................................ $44,850

3. Weighted average cost (*表 rounded)

4,100 at $10.50 = $43,050
Aug. 4 New cost per unit = 1,500 at 11.00 = 16,500
5,600 $59,550
$59,550/5,600 units = $10.63* per unit

Aug. 9 Cost of Goods Sold: $10.63*950=$10,099

$59,550-$10,099 = $49,451
Aug. 13 New cost per unit = 1,000 at 11.00 = 11,000
5,650 $60,451
(5,600-950+1,000=5,650)

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250 Chapter 7

$60,451/5,650 units = $10.70* per unit

Aug. 19 Cost of Goods Sold: $10.70*1,450=$15,515

$60,451-$15,515 = $44,936
Aug. 26 New cost per unit = 1,700 at 11.50 = 19,550
5,900 $64,486
(5,650-1,450+1,700=5,900)

$64,486/5,900 units = $10.93* per unit

Aug. 30 Cost of Goods Sold: $10.93*1,900=$20,767

Total Cost of goods sold: $10,099+$15,515+$20,767=$46,381

Ending Inventory: Cost of goods available for sale- Cost of goods sold
=$90,100-$46,381=$43,719

P 7–16 (LO8) Perpetual Inventory System with Different Cost Formulas

Cost of goods available for sale (Same under all cost formulas)
Unit Number
Cost of Units Amount
Beginning inventory $30 460 $13,800
Purchases 32 110 3,520
36 105 3,780
28 150 4,200
825 $25,300

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Chapter 7 251
P 7–16 (LO8) (Continued)

1. a. FIFO
Remaining Inventory
Number
Number Unit Total of Units Total
Date Transaction of Units Cost Cost and Cost Cost
Jan. 1 Beg. inventory 460 $30 $13,800 460 @ $30 $13,800
16 Purchase 110 32 3,520 460 @ $30 17,320
110 @ $32
25 Sale (216) 30 (6,480) 244 @ $30 10,840
110 @ $32
Feb. 16 Purchase 105 36 3,780 244 @ $30 14,620
110 @ $32
105 @ $36
27 Sale (307) 244 @ $30 (9,336) 47 @ $32 5,284
63 @ $32 105 @ $36
Mar. 10 Purchase 150 28 4,200 47 @ $32 9,484
105 @ $36
150 @ $28
30 Sale (190) 47 @ $32 (6,348) 112 @ $28 $ 3,136
105 @ $36
38 @ $28

Sales (Same under all assumptions)

216 @ $45 = $ 9,720
307 @ $40 = 12,280
190 @ $50 = 9,500
$31,500

Sales ...................................................... $31,500

Cost of goods available for sale ......... $25,300
Ending inventory .................................. 3,136
Cost of goods sold ............................... 22,164
Gross margin ........................................ $ 9,336

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252 Chapter 7
P 7–16 (LO8) (Continued)

c. Weighted average cost (*表 rounded)

Number of Total Average
Date Transaction Units and Cost Cost† Cost
Jan. 1 Beg. inventory 460 @ $30 $13,800
16 Purchase 110 @ $32 3,520
Average cost ($17,320 ÷ 570 units) $17,320 $30.39*
25 Sale (216 @ $30.39) (6,564)
Remaining inventory 354 $10,756
Feb. 16 Purchase 105 @ $36 3,780
($14,536 ÷ 459 units) $14,536 $31.67*
27 Sale (307 @ $31.67) (9,723)
Remaining inventory 152 $ 4,813
Mar. 10 Purchase 150 @ $28 4,200
($9,013 ÷ 302 units) $ 9,013 $29.84*
30 Sale (190 @ $29.84) (5,670)
Remaining inventory 112 $ 3,343

Sales ...................................................... $31,500

Cost of goods available for sale ......... $25,300
Ending inventory .................................. 3,343
Cost of goods sold ............................... 21,957
Gross margin ........................................ $ 9,543

P 7–17 (LO9) Unifying Concepts: Inventory Estimation Methods

1. Gross Margin Method:

Sales revenue ............................................................... $410,000
Gross margin ($410,000  0.46) ................................... $188,600
Cost of goods sold ($410,000 – $188,600).................. 221,400

Ending inventory:
Beginning inventory ............................................... $ 60,000
Net purchases ......................................................... 215,000
Cost of goods available for sale ............................ $275,000
Less: Cost of goods sold 221,400
Ending inventory ($275,000 – $221,400) ............... $53,600
The cost of the ending inventory using the gross margin method is $53,600.

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the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 7 253
2. Goods available for sale at cost = $60,000 + $215,000 = $275,000
Goods available for sale at retailing price = $95,000 + $400,000
= $495,000
Cost-to-retail percentage = $275,000/$495,000=56%*
*(題目要求四捨五入至整數百分比)

Ending inventory at retail price= NT$495,000- NT$410,000 = NT$85,000

Cost of ending inventory = NT$85,000*56% = NT$47,600

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the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.