1. Merchandise Inventory
Chapter 6 Demonstration Problems
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2. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
Galaxy Traders, which uses the FIFO inventory costing method, has the following account balances at March 31, 2015, prior to releasing the financial statements for the year:
Merchandise Inventory, ending
$25,000
Cost of Goods Sold
120,000
Sales Revenue
200,000
Galaxy has determined that the current replacement cost (current market value) of the March 31, 2015, 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, 2015, for merchandise inventory?
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3. Accounts and Explanation
E6-23D—Req.1
Date
Accounts and Explanation
Debit
Credit
Mar. 31
Cost of Goods Sold
400
Merchandise Inventory
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﴿
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4. Accounts and Explanation
E6-23D—Req.2
Date
Accounts and Explanation
Debit
Credit
Mar. 31
Cost of Goods Sold
400
Merchandise Inventory
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﴿
Merchandise inventory would be reported at $24,600 on the March 31, 2015 balance sheet.
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5. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
White Traders reported the following comparative income statements for the years ended June 30, 2016 and 2015:
WHITE TRADERS
Income Statements
Years Ended June 30, 2016 and 2015
2016
2015
Sales Revenue
$200,000
$150,000
Cost of Goods Sold:
Beginning Merchandise Inventory
$25,000
$20,000
Net Cost of Purchases
120,000
100,000
Cost of Goods Available for Sale
145,000
Less: Ending Merchandise Inventory
23,000
25,000
Cost of Goods Sold
122,000
95,000
Gross Profit
78,000
55,000
Operating Expenses
20,000
18,000
Net Income
$58,000
$37,000
During 2016, White Traders discovered that ending 2015 merchandise inventory was overstated by $3,000.
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6. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
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.
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E6-26D—Req.1
WHITE TRADERS
Income Statements
Years Ended June 30, 2016 and 2015
2016
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
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8. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
E6-26D—Req.1
WHITE TRADERS
Income Statements
Years Ended June 30, 2016 and 2015
2016
2015
Sales Revenue
$200,000
$150,000
Cost of Goods Sold:
Beginning Merchandise Inventory
(a) $22,000
$20,000
Net Cost of Purchases
120,000
100,000
Cost of Goods Available for Sale
142,000
Less: Ending Merchandise Inventory
23,000
(a) 22,000
Cost of Goods Sold
119,000
98,000
Gross Profit
81,000
52,000
Operating Expenses
20,000
18,000
Net Income
$61,000
$34,000
Calculations:
(a)
Incorrect Merchandise Inventory
$25,000
Overstatement
(3,000)
Correct Merchandise Inventory
$22,000
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9. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
E6-26D—Req.2
June 30, 2016
June 30, 2015
Net Income before correction
$58,000
$37,000
Net Income after correction
$61,000
$34,000
Before correction, net income for the year ended June 30, 2016 is understated by $3,000 and net income for the year ended June 30, 2015 is overstated by $3,000.
Calculations:
Year Ended
June 30, 2016
June 30, 2015
Incorrect net income
$58,000
$37,000
Correct net income
﴾61,000﴿
﴾34,000﴿
Overstatement (understatement) of net income
$﴾3,000﴿
$3,000
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10. EXCELLENCE BUSINESS SERVICES
E6-27D
Excellence Business Services reported the following income statement for the year ended December 31, 2016:
EXCELLENCE BUSINESS SERVICES
Income Statement
Year Ended December 31, 2016
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
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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.)
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12. ﴾Beginning merchandise inventory + Ending merchandise inventory﴿
E6-27D—Req.1
Beginning Merchandise Inventory
$35,000
Ending Merchandise Inventory
45,000
Cost of Goods Sold
170,000
Average Merchandise Inventory ═
﴾Beginning merchandise inventory
+ Ending merchandise inventory﴿ 2
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13. ﴾Beginning merchandise inventory + Ending merchandise inventory﴿
E6-27D—Req.1
Beginning Merchandise Inventory
$35,000
Ending Merchandise Inventory
45,000
Cost of Goods Sold
170,000
Average Merchandise Inventory ═
﴾Beginning merchandise inventory
+ Ending merchandise inventory﴿ 2
﴾$35,000 + $45,000﴿
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14. ﴾Beginning merchandise inventory + Ending merchandise inventory﴿
E6-27D—Req.1
Beginning Merchandise Inventory
$35,000
Ending Merchandise Inventory
45,000
Cost of Goods Sold
170,000
Average Merchandise Inventory ═
﴾Beginning merchandise inventory
+ Ending merchandise inventory﴿ 2
﴾$35,000 + $45,000﴿
$40,000
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15. E6-27D—Req.1 Beginning Merchandise Inventory $35,000
Ending Merchandise Inventory
45,000
Cost of Goods Sold
170,000
Average Merchandise Inventory ═
﴾Beginning merchandise inventory
+ Ending merchandise inventory﴿ 2
﴾$35,000 + $45,000﴿
$40,000
Inventory Turnover ═
Cost of goods sold
Average merchandise inventory
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16. E6-27D—Req.1 Beginning Merchandise Inventory $35,000
Ending Merchandise Inventory
45,000
Cost of Goods Sold
170,000
Average Merchandise Inventory ═
﴾Beginning merchandise inventory
+ Ending merchandise inventory﴿ 2
﴾$35,000 + $45,000﴿
$40,000
Inventory Turnover ═
Cost of goods sold
Average merchandise inventory
$170,000
$40,000
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17. E6-27D—Req.1 Beginning Merchandise Inventory $35,000
Ending Merchandise Inventory
45,000
Cost of Goods Sold
170,000
Average Merchandise Inventory ═
﴾Beginning merchandise inventory
+ Ending merchandise inventory﴿ 2
﴾$35,000 + $45,000﴿
$40,000
Inventory Turnover ═
Cost of goods sold
Average merchandise inventory
$170,000
$40,000
4.25
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18. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
E6-27D—Req.2
Inventory turnover
4.25
Days’ Sales in Inventory ═
365 days
Inventory turnover
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19. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
E6-27D—Req.2
Inventory turnover
4.25
Days’ Sales in Inventory ═
365 days
Inventory turnover
365
4.25
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20. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
E6-27D—Req.2
Inventory turnover
4.25
Days’ Sales in Inventory ═
365 days
Inventory turnover
365
4.25
85.88 days
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21. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
End of Chapter 6
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