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Intermediate Accounting 10th Edition Loren A Nikolai, D. Bazley and Jefferson P. Jones - Solutions

In auditing the Train Company, you obtain directly from the bank Train€™s bank statement, canceled checks, and other memoranda which relate to the company€™s bank account for December 2007. In reconciling the bank balance on December 31, 2007 with that shown on the
The president of Poor Corporation, who likes to have large balances of cash on hand, has recently been reading articles in highly respected financial magazines about very successful businesses. The president noticed that each company stressed the importance of cash management and internal control
When a company has a policy of making sales for which credit is extended, it is reasonable to expect a portion of those sales to be uncollectible. As a result of this, a company must recognize bad debt expense. There are basically two methods of recognizing bad debt expense:(1) Direct write-off
The Moore Company is undergoing a period of financial stress due to the depressed economy. The company is in desperate need of cash. The only liquid asset that the company holds is $500,000 of accounts receivable.Required1. Explain the various types of arrangements that may be used to obtain cash
Magrath Company has an operating cycle of less than one year and provides credit terms for all of its customers. On April 3, 2007, the company factored, without recourse, some of its accounts receivable. On August 1, 2007, Magrath sold special order merchandise and received an interest-bearing
A discrepancy usually will exist between a company’s bank statement balance and its cash records due to the time lag associated with the use of a checking account. The time lag results in many transactions being recorded on the company’s records prior to their appearance on the bank statement.
DGK Company maintains a lockbox account to facilitate the collection of its accounts receivable. All of the company’s cash receipts from credit sales are sent directly to a post office box held in the company’s name, which is accessed directly by bank personnel. Each day the bank processes the
Cash is an important asset of a company.1. What are the normal components of cash?2. Under what circumstances, if any, do valuation problems arise in connection with cash?
On December 31, 2007, Carme Company had significant amounts of accounts receivable as a result of credit sales to its customers. Carme Company uses the allowance method based on credit sales to estimate bad debts. Based on past experience, 1% of credit sales normally will not be collected. This
In order to induce prompt payment, the Swope Company offers a cash discount of 2% to customers who make payment on their account within 10 days of the invoice date. The company’s bookkeeper is not sure how these discounts should be recorded.Required1. Explain the methods of recording accounts
Marie Company has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 2, 2007, some trade accounts receivable were assigned to Daniel Finance Company on a with-recourse, nonnotification basis for an advance of 75% of their amount at an
Hogan Company uses the net method of accounting for sales discounts. Hogan also offers trade discounts to various groups of buyers. On August 1, 2007, Hogan factored some accounts receivable on a without-recourse basis. Hogan incurred a finance charge. Hogan also has some notes receivable bearing
Tidal Company has significant amounts of trade accounts receivable. In March of this year, Tidal assigned specific trade accounts receivable to Herb Finance Company on a with-recourse, nonnotification basis as collateral for a loan. Tidal signed a note and received 70% of the amount assigned.
Refer to the financial statements and related notes of the Coca-Cola Company in Appendix A of this book.Required1. What were the cash and cash equivalents at the end of 2004? What does the company classify as cash equivalents?2. What were the trade accounts receivable (net) at the end of 2004? At
At the end of 2007, the accounting firm for which you work is auditing the books of Debitus Publishing Inc. for the first time. Debitus, a calendar year company, publishes textbooks that are used in colleges and universities across the country. These textbooks are purchased by students through
SituationHamilton Company operates in an industry with numerous competitors. It is experiencing a shortage of cash and decides to obtain money from a large bank by using some of its receivables as collateral. Hamilton pledges $100,000 of its receivables, is charged a 12% fee on this amount, and
Distinguish among the types of inventory accounts used for merchandising and manufacturing companies.
What are the cost components of each of the three inventory accounts of a manufacturing company?
Explain the differences between the perpetual and periodic inventory systems in terms of inventory quantity and cost. Does the use of a perpetual system eliminate the need for taking a physical inventory count?
What is the general rule used to determine if a company includes an item in inventory? Apply the concept to the accounting for goods in transit and goods on consignment.
Which of the following items does a manufacturing company include in its inventory account? (a) Goods in transit purchased FOB shipping point, invoice received, (b) Raw materials, (c) Goods out on consignment, (d) Goods in transit sold to Breyer, Inc., shipped FOB destination, (e) Manufacturing
Which of these costs does a company include in its inventory cost? (a) Sales commissions, (b) Supervisor’s salary, (c) Freight charges, (d) Indirect factory production labor, (e) Storage costs, (f) Corporate executive salaries.
Discuss the advantages and disadvantages of the two methods of accounting for purchases discounts taken in regard to management’s needs, inventory cost, and the valuation of accounts payable.
What criteria should a company use to decide between alternative inventory cost flow assumptions? Evaluate the relevance of the LIFO cost flow assumption. Why is LIFO not allowed under international accounting standards?
During a period of rising costs, indicate whether the LIFO cost flow assumption results in a larger or a smaller net income as compared to the FIFO cost flow assumption and explain why. Explain how a company’s net income would compare during a period of falling costs.
Discuss the cost flow assumptions of the LIFO inventory method. Under what conditions would a company’s ending inventory differ under a perpetual and a periodic LIFO system?
Explain the issue of inventory liquidation when a company uses the LIFO cost flow assumption. Why is this an issue exclusive to LIFO?
Discuss the LIFO and FIFO cost flow assumptions relative to the issue of holding gains (inventory profits).
Explain the dollar-value LIFO method of inventory valuation. What are the advantages of dollar-value LIFO as compared to simple LIFO?
Describe the double-extension and link-chain methods used in dollar-value LIFO and when each should be used.
When a company changes from FIFO to LIFO, what effect does the change have on its net income and working capital of the current period?
What is the impact of LIFO inventory liquidation on a company’s interim financial statements?
Explain what causes an exchange gain or loss and when each occurs.
Multiple Choice Questions1. The moving average inventory cost flow method is applicable to which of the following inventory systems?Periodic Perpetuala. Yes..... Yesb. Yes..... Noc. No..... Nod. No..... YesQuestions M8-2 and M8-3 are based on the following data: City Stationers,
The Fujita Company produces a single product. Costs accumulated at the end of the period are as follows:Assume the beginning raw material inventory to be $67,400, the beginning finished goods inventory to be $123,500, and no beginning work in process inventory.RequiredCompute the closing account
The Gravais Company made two purchases on December 29, 2007. One purchase for $3,000 was shipped FOB destination, and the second for $4,000 was shipped FOB shipping point. Neither purchase had been received on December 31, 2007.RequiredWhich of these purchases, if either, does the Gravais Company
The following are several items that the controller of the Golosow Company has questioned regarding their inclusion in Inventory:1. An invoice has been received for goods ordered. The goods were shipped FOB destination but have not been received.2. Purchases have been ordered and received, but no
A retailer of washing machines receives a rebate of $25 per machine purchased if total purchases exceed 1,000 units. On reviewing the inventory records in December, it discovers that it has purchased 1,100 units during the year. The company claims the rebate immediately but it is not received until
The Hirsch Company buys inventory for $20,000 on terms of 2/10, n/30. It pays within the discount period.RequiredPrepare the journal entries to record the purchase and the payment under both the(1) Gross price and(2) Net price methods.
The Nelson Company bought inventory for $50,000 on terms of 2/15, n/60. It pays for the first $37,500 of inventory purchased within the discount period and pays for the remaining $12,500 two months later.RequiredPrepare the journal entries to record the purchase and the payment under both the (1)
The Nevens Company uses a periodic inventory system. During November the following transactions occurred:RequiredCompute the cost of goods sold for November and the inventory at the end of November for each of the following cost flow assumptions:1. FIFO2. LIFO3. Averagecost
The perpetual inventory records of the Park Company indicate the following transactions in the month of June:RequiredCompute the cost of goods sold for June and the inventory at the end of June, using each of the following cost flow assumptions:1. FIFO2. LIFO3. Average cost (round unit costs to 2
The Frate Company was formed on December 1, 2006. The following information is available from Frate's inventory records for Product Ply:A physical inventory on March 31, 2007 shows 1,600 units on hand.RequiredPrepare schedules to compute the ending inventory at March 31, 2007 under each of the
The inventory records of the Riedel Company showed the following transactions for the fiscal period ended June 30:RequiredCompute the ending inventory and the cost of goods sold under the LIFO cost flow assumption, assuming both a perpetual and a periodic inventory system. Explain any difference in
A company adopted the LIFO method when its inventory was $1,800. One year later its ending inventory was $2,100 and costs had increased 5% during the year.RequiredWhat is the ending inventory using dollar-value LIFO?
On January 1, 2006 the Sato Company adopted the dollar-value LIFO method of inventory costing. The company's ending inventory records appear as follows:RequiredCompute the ending inventory for the years 2006, 2007, 2008, and 2009, using the dollar-value LIFO method (round to the nearestdollar).
The Belstock Company manufactures one product. On December 31, 2006 Belstock adopted the dollar-value LIFO inventory method. The inventory on that date, using the dollar-value LIFO inventory method, was $200,000. Inventory data for succeeding years are as follows:RequiredCompute the inventory for
The Acute Company manufactures a single product. On December 31, 2006 Acute adopted the dollar-value LIFO inventory method. It computes the inventory on that date using the dollar-value LIFO inventory method as $300,000. Inventory data for succeeding years are as follows:RequiredCompute the
The Stone Shoe Company adopted dollar-value LIFO on January 1, 2007. The company produces four products and uses a single inventory pool. The company's beginning inventory consists of the following:During 2007, the company has the following purchases and sales:Required1. Compute the LIFO cost of
The Grimstad Company uses FIFO for internal reporting purposes and LIFO for financial reporting and income tax purposes. At the end of 2007 the following information was obtained from the inventory records:Required1. Prepare the necessary adjusting journal entry, assuming that the company converts
The following values were obtained from the inventory records of the Harris Company, which has a fiscal year ending on December 31:Inventory, January 1, 2007, LIFO ..... $80,000Inventory, March 31, 2007, LIFO ..... 70,000Required1. Under what conditions is the company’s inventory liquidation
On January 15, 2007, the Searle Company, a U.S. company, acquired machinery on credit from a British company for ￡12,000. The company paid for the machine on January 30, 2007. The exchange rates on January 15 and 30 were $1.85 and $1.80, respectively.RequiredRecord the journal entries for the
On June 21, 2007, the Livingston Company, a U.S. company, sold merchandise on credit to a Swiss company for 25,000 francs. The company received payment for the merchandise on July 10, 2007. The exchange rates on June 21 and July 10 were $0.69 and $0.68, respectively.RequiredRecord the journal
As the auditor of the Hayes Company for the year ended December 31, 2007, you found the following transactions occurred near its closing date:1. Merchandise received on January 8, 2008, and costing $800, was recorded on January 6, 2008. An invoice on hand showed the shipment was made FOB
The inventory on hand at the end of 2007 for the Reddall Company is valued at a cost of $87,450. The following items were not included in this inventory:1. Purchased goods in transit, under terms FOB shipping point, invoice price $3,700, freight costs $170.2. Goods out on consignment to Marlman
As an accountant for the Lee Company, your supervisor gave you the following calculations of the gross profit for the first quarter:The three alternative cost flow assumptions are FIFO, Average, and LIFO (the alternatives are not necessarily presented in this sequence). The company uses the
On April 11, Edwards Construction Company purchased inventory for $20,000 on terms of 2/10, n/30. It pays the account balance on April 21.Required1. Prepare the journal entries to record the purchase and payment using each of the following methods: (a) Gross price,(b) Net price.2. If the company
The Garrett Company has the following transactions during the months of April and May:The cost of the inventory on April 1 is $5, $4, and $2 per unit, respectively, under the FIFO, average, and LIFO cost flow assumptions.Required1. Compute the costs of goods sold for each month and the inventories
The Totman Company has the following transactions during the months of January and February:The cost of the inventory at January 1 is $24, $23, and $15 per unit, respectively, under the FIFO, average, and LIFO cost flow assumptions.Required1. Compute the cost of goods sold for each month and the
The Habicht Company was formed in 2006 to produce a single product. The production and sales for the next four years were as follows:Required1. Determine the gross profit for each year under each of the following periodic inventory methods:a. FIFOb. LIFOc. Average cost (round unit costs to 3
On January 1, 2004 Grover Company changed its inventory cost flow method to the LIFO cost method from the FIFO cost method for its raw materials inventory. It made the change for both financial statement and income tax reporting purposes. Grover uses the multiple-pools approach, under which it
The Olson Company adopted the dollar-value LIFO method for inventory valuation at the beginning of 2006. The following information about the inventory at the end of each year is available from the company records:Required1. Calculate the dollar-value LIFO inventory at the end of each year.2.
The Kwestel Company adopted the dollar-value LIFO method for inventory valuation at the beginning of 2006. The following information about the inventory at the end of each year is available from the company records:RequiredCalculate the dollar-value LIFO inventory at the end of eachyear.
The Webster Company adopted dollar-value LIFO on January 1, 2007. The company produces three products: X, Y, and Z. The company's beginning inventory consisted of the following:During 2007, the company had the following purchases and sales:Required1. Compute the LIFO cost of the ending inventory
The Kelly Company adopted dollar-value LIFO on January 1, 2006 using two inventory pools, each of which includes two types of inventory items. The following information about the inventory at the end of each year is available:Required1. Compute the cost index for each year for each pool using a
On January 1, 2007 Lucas Distributors, Inc., adopted the dollar-value LIFO inventory method for income tax and external financial reporting. However, Lucas continued to use the FIFO inventory method for internal accounting and management purposes. In applying the LIFO method, Lucas uses internal
The Hammond Company adopted LIFO when it was formed on January 1, 2005. Since then, the company has had the following purchases and sales of its single inventory item:In December 2008, the controller realized that because of an unexpected increase in demand, the company had sold 22,000 units but
The following information for 2007 is available for the Marino Company:1. The beginning inventory is $100,000.2. Purchases of $300,000 were made on terms of 2/10, n/30. Eighty percent of the discounts were taken.3. Purchases returns of $4,000 were made.4. At December 31, purchases of $20,000 were
You are engaged in an audit of the Roche Mfg. Company for the year ended December 31, 2007. To reduce the workload at year-end, the company took its annual physical inventory under your observation on November 30, 2007. The company’s inventory account, which includes raw materials and work in
The Allen Company is a wholesale distributor of automotive replacement parts. Initial amounts taken from Allen€™s accounting records are as follows:Inventory at December 31, 2007 (based on physicalcount of goods in Allen€™s warehouse on December 31, 2007) ... $1,250,000Sales in
In January Broome, Inc., requested and secured permission from the Commissioner of Internal Revenue to compute inventories under the lastin, first-out (LIFO) method and elected to determine inventory cost under the dollar-value method. Broome, Inc., satisfied the Commissioner that cost could be
Part a. A company may compute inventory under one of various cost flow assumptions. Among these assumptions are first-in, first-out (FIFO) and last-in, first-out (LIFO). In the past, some companies have changed from FIFO to LIFO for computing portions or all of their inventory.Required1. Ignoring
Taylor Company, a household appliances dealer, purchases its inventories from various suppliers. Taylor has consistently stated its inventories at the lower of cost (FIFO) or market.Required1. Taylor is considering alternate methods of accounting for the cash discounts it takes when paying its
Happlia Co. imports expensive household appliances. Each model has many variations and each unit has an identification number. Happlia pays all costs for getting the goods from the port to its central warehouse in Des Moines. After repackaging, the goods are consigned to retailers. A retailer makes
The Atgar Corporation records all purchases and the corresponding liabilities net of cash discounts. Whenever it pays after the discount period, it credits cash for the full amount of the invoice, and debits accounts payable for the net amount and an expense account for the discount
The Auge Company annually purchases 1,000 tons of raw material at a cost of $100,000 with terms of 2/10, n/30. Freight costs amount to $10,000 and storage and handling costs to $7,500.Required1. What is the correct inventory cost?2. Explain whether your answer to Requirement 1 would change if the
A company should determine cost for inventory purposes by the inventory cost flow method most clearly reflecting its periodic income.Required1. Explain the fundamental cost flow assumptions of the average cost, FIFO, and LIFO inventory cost flow methods.2. Discuss the reasons a company uses LIFO in
The 1970s were a period of historically high inflation. The 1976 financial statements of the Ford Motor Company included the following note: Note 1 (in part): Inventory valuation. Inventories are stated at the lower of cost or market. In 1976 the company changed its method of accounting from
The Kelly Company uses FIFO. It has experienced rising costs for the last 5 years and expects that trend to continue. The King Company increased the number of LIFO pools it uses to account for its inventory.Required1. Explain why you think each company follows its policy.2. Does either practice
Robin Smith is considering buying shares in the Mah Company. The company has reported an increase in net income this year. On careful reading of the notes to the financial statements, Robin learns that the company had a LIFO liquidation this year. Robin understands what caused the liquidation but
Gasper Company has transactions with companies in many countries. It purchases components from companies in Korea and several European countries and sells its products throughout the world. The CEO is concerned that the stock market does not like companies to have volatile earnings. However, she is
Refer to the financial statements and related notes of the Coca-Cola Company in Appendix A of this book.Required1. Which inventory method(s) does the company use? Explain why you think the company selected this method(s).2. Compute the inventory turnover ratio for 2004 and 2003 using the ending
Textbook publishers provide a copy of a particular book to each professor who is making a decision about adopting a book for the class. These books may be solicited by the professor or may be unsolicited. Some of the books are stamped “For Faculty Use Only.” “Used book” companies send out
Situation To pump up sales of all brands, Philip Morris is moving aggressively to ship extra cases of cigarettes into distributors’ warehouses and record them as sales, a practice generally known as “trade loading.” (Adapted from Fortune, April 6, 1992). Philip Morris’ president has asked
Situation The Fenimore Manufacturing Company uses the average cost method. It has followed a policy of expensing all its manufacturing cost variances. It is considering a change in its policy that will involve allocating them between cost of goods sold and inventory. Fenimore’s president has
Define the terms cost and market as used in the lower of cost or market inventory valuation rule.
Define the upper and lower constraints used in the lower of cost or market rule. What is the purpose of each constraint?
How may a company apply the lower of cost or market method to its inventory?
What arguments may be used against the lower of cost or market rule?
Under what conditions does a company anticipate price declines?
How, and under what conditions, does a company recognize a purchase obligation or a product financing arrangement in its financial statements?
What are the exceptions to historical cost valuation of inventory allowed under generally accepted accounting principles? Under what conditions is each allowed?
Describe four situations in which the gross profit method of estimating inventory would be useful.
What is the basic assumption underlying the gross profit method? How may the gross profit percentage for the prior year be modified to provide a better estimate of the inventory value?
What are the necessary conditions for the retail inventory method to provide valid results?
Explain the meaning of the following terms: markup, additional markup, markup cancellation, net markup, markdown, markdown cancellation, net markdown.
Describe how a company computes the cost-to-retail ratio for the following cost flow assumptions: FIFO, average cost, LIFO, lower of average cost or market. Why do the different methods approximate each cost flow assumption?
What assumptions are necessary for the lower of cost or market retail inventory method to actually produce an inventory value equal to the lower of average cost or market?
The retail inventory method indicated an inventory value of $80,000. A physical inventory indicated a value of $70,000. Suggest possible causes of this discrepancy.
Indicate the effect of each of the following errors on a company’s balance sheet and income statement of the current and succeeding years:a. The ending inventory is overstated.b. Merchandise received was not recorded in the Purchases account until the succeeding year although the item was

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