Lab/Quiz Problems With Solutions BUA111: Week 14 Lab/Quiz Problems With Solutions

P6-30A P6-30A Accounting principles for inventory and applying the lower-of-cost- or-market rule Some of E and S Electronics’s merchandise is gathering dust. It is now December 31, 2016, and the current replacement cost of the ending merchandise inventory is $20,000 below the business’s cost of the goods, which was $105,000. Before any adjustments at the end of the period, the company’s Cost of Goods Sold account has a balance of $400,000. Requirements Journalize any required entries. At what amount should the company report merchandise inventory on the balance sheet? At what amount should the company report cost of goods sold on the income statement? Which accounting principle or concept is most relevant to this situation?

Accounts and Explanation Solution: P6-30A Requirement 1 Date Accounts and Explanation Debit Credit Dec. 31 Cost of Goods Sold 20,000   Merchandise Inventory To write merchandise inventory down to market value.

Solution: P6-30A (con’t.) Requirement 2 Merchandise inventory should be reported at $85,000 on the balance sheet. Calculations: $ 105,000 Merchandise inventory prior to adjustment (20,000) Adjustment $ 85,000 Merchandise inventory, adjusted

Solution: P6-30A (con’t.) Requirement 3 Cost of goods sold should be reported at $420,000 on the income statement. Calculations: Requirement 4 The conservatism principle is most relevant to this situation. $ 400,000 Cost of goods sold prior to adjustment 20,000 Adjustment $ 420,000 Cost of goods sold, adjusted

Exercise 6-25 E6-25 Computing inventory turnover and days’ sales in inventory New Home reported the following income statement for the year ended December 31, 2017 (see next slide). Requirements Compute New Home’s inventory turnover rate for the year. (Round to two decimal places.) Compute New Home’s days’ sales in inventory for the year. (Round to two decimal places.)

Exercise 6-25 (con’t.)

Average merchandise inventory Solution: Exercise 6-25 Requirement 1 Inventory turnover is 6.04 times for the year. Calculations: Average merchandise inventory = (Beginning merchandise inventory + Ending merchandise inventory) / 2   ($8,800 + $13,000) / 2 $10,900 Inventory turnover Cost of goods sold / Average merchandise inventory $65,800 / $10,900 6.04 times for the year

Solution: Exercise 6-25 (con’t.) Requirement 2 Days’ sales in inventory is 60.43 days for the year. Calculations: * Calculated in Requirement 1. Days’ sales in inventory = 365 days / Inventory turnover   365 days / 6.04 times* 60.43 days