Demonstration Problems Chapter 6 Merchandise Inventory 6-1 © 2016 Pearson Education, Inc.

6-2 Galaxy Traders, which uses the FIFO inventory costing method, has the following account balances at March 31, 2017, prior to releasing the financial statements for the year: Demonstration of E6-21 Merchandise Inventory, ending$25,000 Cost of Goods Sold120,000 Sales Revenue200,000 Galaxy has determined that the current replacement cost (current market value) of the March 31, 2017, ending merchandise inventory is $24,600 Requirements 1.Prepare any adjusting journal entry required from the information given. 2.What value would Galaxy report on the balance sheet at March 31, 2017, for merchandise inventory? © 2016 Pearson Education, Inc.

6-3 DateAccounts and ExplanationDebitCredit Mar. 31 Cost of Goods Sold 400 Merchandise Inventory 400 To write merchandise inventory down to market value. Calculations: Current replacement cost of inventory $24,600 Cost of inventory prior to adjustment ﴾25,000﴿ Adjustment needed $﴾400﴿ Demonstration of E6-21-Req. 1 © 2016 Pearson Education, Inc.

Calculations: Current replacement cost of inventory $24,600 Cost of inventory prior to adjustment ﴾25,000﴿ Adjustment needed $﴾400﴿ 6-4 DateAccounts and ExplanationDebitCredit Mar. 31 Cost of Goods Sold 400 Merchandise Inventory 400 To write merchandise inventory down to market value. Merchandise inventory would be reported at $24,600 on the March 31, 2017 balance sheet. Demonstration of E6-21-Req. 2 © 2016 Pearson Education, Inc.

6-5 White Traders reported the following comparative income statements for the years ended June 30, 2017 and 2016: Demonstration of E6-24 WHITE TRADERS Income Statements Years Ended June 30, 2017 and Sales Revenue $200,000$150,000 Cost of Goods Sold: Beginning Merchandise Inventory $25,000 $20,000 Net Cost of Purchases 120, ,000 Cost of Goods Available for Sale 145, ,000 Less: Ending Merchandise Inventory 23,000 25,000 Cost of Goods Sold 122,00095,000 Gross Profit 78,00055,000 Operating Expenses 20,00018,000 Net Income $58,000$37,000 During 2017, White Traders discovered that ending 2016 merchandise inventory was overstated by $3,000. © 2016 Pearson Education, Inc.

6-6 Requirements 1.Prepare corrected income statements for the two years. 2.State whether each year’s net income—before your corrections—is understated or overstated and indicate the amount of the understatement or overstatement. Demonstration of E6-24 © 2016 Pearson Education, Inc.

6-7 WHITE TRADERS Income Statements Years Ended June 30, 2017 and Sales Revenue $200,000 Cost of Goods Sold: Beginning Merchandise Inventory (a) $22,000 Net Cost of Purchases 120,000 Cost of Goods Available for Sale 142,000 Less: Ending Merchandise Inventory 23,000 Cost of Goods Sold 119,000 Gross Profit 81,000 Operating Expenses 20,000 Net Income $61,000 Calculations: (a) Incorrect Merchandise Inventory $25,000 Overstatement (3,000) Correct Merchandise Inventory $22,000 Demonstration of E6-24-Req. 1 © 2016 Pearson Education, Inc.

Calculations: (a) Incorrect Merchandise Inventory $25,000 Overstatement (3,000) Correct Merchandise Inventory $22, WHITE TRADERS Income Statements Years Ended June 30, 2017 and Sales Revenue $200,000$150,000 Cost of Goods Sold: Beginning Merchandise Inventory (a) $22,000 $20,000 Net Cost of Purchases 120, ,000 Cost of Goods Available for Sale 142, ,000 Less: Ending Merchandise Inventory 23,000 (a) 22,000 Cost of Goods Sold 119,00098,000 Gross Profit 81,00052,000 Operating Expenses 20,00018,000 Net Income $61,000$34,000 Demonstration of E6-24-Req. 1 © 2016 Pearson Education, Inc.

6-9 Before correction, net income for the year ended June 30, 2017 is understated by $3,000 and net income for the year ended June 30, 2016 is overstated by $3,000. Calculations: Year Ended June 30, 2017June 30, 2016 Incorrect net income $58,000 $37,000 Correct net income ﴾61,000﴿ ﴾34,000﴿ Overstatement (understatement) of net income $﴾3,000﴿ $3,000 June 30, 2017June 30, 2016 Net Income before correction$58,000$37,000 Net Income after correction$61,000$34,000 Demonstration of E6-24-Req. 2 © 2016 Pearson Education, Inc.

6-10 Excellence Business Services reported the following income statement for the year ended December 31, 2017: Demonstration of E6-27 EXCELLENCE BUSINESS SERVICES Income Statement Year Ended December 31, 2017 Sales Revenue $300,000 Cost of Goods Sold: Beginning Merchandise Inventory $35,000 Net Cost of Purchases 180,000 Cost of Goods Available for Sale 215,000 Less: Ending Merchandise Inventory 45,000 Cost of Goods Sold 170,000 Gross Profit 130,000 Operating Expenses 80,000 Net Income $50,000 © 2016 Pearson Education, Inc.

6-11 Requirements 1.Compute Excellence Business Services’ inventory turnover rate for the year. (Round to two decimal places.) 2.Compute Excellence Business Services’ days’ sales in inventory for the year. (Round to two decimal places.) Demonstration of E6-25 © 2016 Pearson Education, Inc.

6-12 Average Merchandise Inventory═ ﴾Beginning merchandise inventory + Ending merchandise inventory﴿ 2 Beginning Merchandise Inventory$35,000 Ending Merchandise Inventory45,000 Cost of Goods Sold170,000 Demonstration of E6-25-Req. 1 © 2016 Pearson Education, Inc.

6-13 Average Merchandise Inventory═ ﴾Beginning merchandise inventory + Ending merchandise inventory﴿ 2 ═﴾$35,000 + $45,000﴿ 2 Beginning Merchandise Inventory$35,000 Ending Merchandise Inventory45,000 Cost of Goods Sold170,000 Demonstration of E6-25-Req. 1 © 2016 Pearson Education, Inc.

6-14 Average Merchandise Inventory═ ﴾Beginning merchandise inventory + Ending merchandise inventory﴿ 2 ═﴾$35,000 + $45,000﴿ 2 ═$40,000 Beginning Merchandise Inventory$35,000 Ending Merchandise Inventory45,000 Cost of Goods Sold170,000 Demonstration of E6-25-Req. 1 © 2016 Pearson Education, Inc.

6-15 Average Merchandise Inventory═ ﴾Beginning merchandise inventory + Ending merchandise inventory﴿ 2 ═﴾$35,000 + $45,000﴿ 2 ═$40,000 Beginning Merchandise Inventory$35,000 Ending Merchandise Inventory45,000 Cost of Goods Sold170,000 Inventory Turnover ═ Cost of goods sold Average merchandise inventory Demonstration of E6-25-Req. 1 © 2016 Pearson Education, Inc.

6-16 Average Merchandise Inventory═ ﴾Beginning merchandise inventory + Ending merchandise inventory﴿ 2 ═﴾$35,000 + $45,000﴿ 2 ═$40,000 Beginning Merchandise Inventory$35,000 Ending Merchandise Inventory45,000 Cost of Goods Sold170,000 Inventory Turnover ═ Cost of goods sold Average merchandise inventory ═$170,000 $40,000 Demonstration of E6-25-Req. 1 © 2016 Pearson Education, Inc.

6-17 Average Merchandise Inventory═ ﴾Beginning merchandise inventory + Ending merchandise inventory﴿ 2 ═﴾$35,000 + $45,000﴿ 2 ═$40,000 Beginning Merchandise Inventory$35,000 Ending Merchandise Inventory45,000 Cost of Goods Sold170,000 Inventory Turnover ═ Cost of goods sold Average merchandise inventory ═$170,000 $40,000 ═4.25 Demonstration of E6-25-Req. 1 © 2016 Pearson Education, Inc.

6-18 Inventory turnover4.25 Days’ Sales in Inventory ═ 365 days Inventory turnover Demonstration of E6-25-Req. 2 © 2016 Pearson Education, Inc.

6-19 Inventory turnover4.25 Days’ Sales in Inventory ═ 365 days Inventory turnover ═ Demonstration of E6-25-Req. 2 © 2016 Pearson Education, Inc.

6-20 Inventory turnover4.25 Days’ Sales in Inventory ═ 365 days Inventory turnover ═ ═85.88 days Demonstration of E6-25-Req. 2 © 2016 Pearson Education, Inc.

End of Chapter © 2016 Pearson Education, Inc.