Intermediate Accounting I, ACCT-2321Exam 3 Study Guide: Chapters 8 – 10

Exam 3 is comprised of, multiple choice and problem questions. The study questions and sample problems below should help you prepare for the exam. Please note that the study format does not directly match the exam format.

Solutions problems can be found at the end of this study guide.

1. Describe each of the following inventory valuation systems including the impact that the cost flow assumption has on net income (assuming a period of rising prices).

a. LIFO

b. FIFO

2. Differentiate between a periodic and perpetual inventory system.

3. Identify who would pay the shipping charges and have title to merchandise (buyer or seller) under each of the following shipping terms:a. FOB Shipping Point

b. FOB Destination

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4. Explain the purpose of a physical inventory count. Include in your discussion a) when the count should generally occur; b) which items should be included in a company’s physical inventory count.

5. Define the following:

a. inventory cost

b. net realizable value

c. plant assets

d. intangible assets

e. natural resources

6. Describe some situations that might require an estimate for ending inventory.

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7. Identify when asset costs should be capitalized.

8. Discuss how research and development costs are accounted for and what is included in these costs.

Problem 1McLean Mfg. Company sold a three-speed lathe for $24,000 cash. The lathe originally cost $66,200 and had a book value of $23,200. Prepare the journal entry to record the sale.

Account Debit Credit

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Problem 2Shown below is activity for one of the products of Denver Office Equipment. Determine the cost of goods sold for each independent requirement below.

PurchasesDate Units Unit Cost Total CostJanuary 1 (beg balance) 500 @ $55 $27,500 January 10 500 @ $60 $30,000January 20 700 @ $63 $44,100

SalesDate UnitsJanuary 12 800January 28 750

a. Compute the January 31 ending inventory and cost of goods sold for January, assuming Denver uses LIFO and a perpetual inventory system.

b. Compute the January 31 ending inventory and cost of goods sold for January, assuming Denver uses FIFO and a periodic inventory system.

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Problem 2 (continued)

c. Compute the January 31 ending inventory and cost of goods sold for January, assuming Denver uses Average cost and a perpetual inventory system.

Inventory On Hand Cost of Goods Sold

Perpetual Weighted Average # of

unitsCost per

Unit Inv. Value

# of Units Sold

Avg Cost per Unit

Cost of Goods Sold

Beg Inventory 500 $55

Purchase – Jan 10 500

Subtotal Avg Cost

Sale - Jan 12

Subtotal Avg Cost

Purchase – Jan 20

Subtotal Avg Cost

Sale - Jan 28 Total Cost of Goods Sold

Problem 3 Beaver Products uses the conventional retail method to estimate its ending inventories. The following data has been summarized for the year 2016. Estimate ending inventory as of December 31, 2016

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Problem 4On January 1, 2016, the National Furniture Company adopted the dollar-value LIFO method of computing inventory. An internal cost index is used to convert ending inventory to base year. Inventory on January 1 was $200,000. Year-end inventories at year-end costs and cost indexes for its one inventory pool are shown below. Compute the ending inventory value at the end of each year.

Year Ended Inventory at December 31 Year-end Costs Cost Index

2016 $259,200 1.082017 244,400 1.042018 299,000 1.15

DateInventor

y at year-end cost

Year-end cost index

Inventory at Base Year Cost

Real Inventory Increase

1/1/2016        12/31/2016        12/31/2017        12/31/2018        

 Inventory

Layers at year-end cost

Year-end cost index

Inventory Layers at Base Year Cost

Ending Inventory DVL Cost

Base        Base        201

6        

Base        201

6        201

7        

Base        201

6        201

7        201

8        

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Problem 5On March 17, 2013, a flood destroyed the entire inventory of Beaumont Company. The following information is available from its accounting records. Compute the estimated cost of inventory lost in the flood using the Gross Profit Method.

Problem 6Memphis Wholesale Market applies the lower-of-cost-or-NRV valuation to individual products and has collected the data presented below. a) Determine the amount of inventory to be reported on the December 31 balance sheet.b) Draft the journal entry to adjust inventory assuming this is a commonplace event.

Product A Product B Product CCost $70 $75 $80Selling Price $100 $125 $80Disposal Cost $15 $20 $18

Product

Cost NRV Inventory Value

A       

B    

C

Totals

Account Debit Credit

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Problem 7Annali Company constructs a warehouse for its own use. Construction began January 1 and ended December 31 of the current year. The expenditures for construction were as follows: January 1 $250,000; March 31 $300,000; June 30, $200,000; October 31, $300,000. To help finance construction, the company arranged a 6% construction loan on January 1 for $350,000. Other borrowings of the company were outstanding for the entire year and included a $1.5 million loan at 8% and a $2.5 million loan at 6%. Annali uses the specific identification method of capitalizing interest. Determine the amount of interest to be capitalized for the year.

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Problem 8On August 15, 2016, Willis Inc. acquired all of the outstanding common stock of Bork Inc. paying $7,400,000 cash. The book values and fair values of Willis’ assets and liabilities are listed below. Prepare the journal entry to record the acquisition by Willis Inc.

Account Debit Credit

Problem 9Champion Industries exchanged a dust-scrubbing piece of equipment for another version of the same type of equipment and received $12,000 cash. The old dust scrubber cost $76,200 and had a book value of $54,500. Prepare the journal entry to record the exchange. The new dust scrubber had a fair value of $58,500.

Account Debit Credit

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Intermediate Accounting I, ACCT-2154Exam 3 Study Guide: Chapters 8 – 10

Answer Key

Problem 1

Problem 2a. LIFO Perpetual

Cost of Goods SoldJan 12 500 X $60 $30,000

300 X $55 $16,500 $46,500Jan 28 700 X $63 $44,100

50 X $55 $ 2,750 $46,850Total Cost of Goods Sold $93,350

b. FIFO PeriodicTotal units sold: 1,550

Cost of Goods Sold500 X $55 $27,500500 X $60 $30,000550 X $63 $34,650

Total Cost of Goods Sold $92,150

c. Weighted Average PerpetualInventory On Hand Cost of Goods Sold

Perpetual Weigh ted Average # of

units Cost per UnitInv.

Value

# of Units Sold

Avg Cost per Unit

Cost of Goods Sold

Beg Inventory 500 $55 $27,500 Purchase – Jan 10 500 $60 30,000

Subtotal Avg Cost 1,000

$57.50($57,500/1,000

) $57,500 Sale - Jan 12 800 $57.50 $46,000Subtotal Avg Cost 200 $57.50 $11,500Purchase – Jan 20 700 $63 $44,100

Subtotal Avg Cost 900$61.78

($55,600/900) $55,600Sale - Jan 28 750 $61.78 $46,335Total Cost of Goods Sold $92,335

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Problem 3Conventional Retail Method of Estimating Inventory

Problem 4

DateInventor

y at year-end cost

Year-end cost index

Inventory at Base Year Cost

Real Inventory Increase

1/1/2013 $200,000 1.00 $200,00

0  12/31/2013 259,200 1.08 240,000 $40,00012/31/2014 244,400 1.04 235,000 <5,000

>12/31/2015 299,000 1.15 260,000 25,000

 Inventory

Layers at year-end cost

Year-end cost index

Inventory Layers at Base Year Cost

Ending Inventory DVL Cost

Base $200,000 1.00 $200,000 $200,000Base $200,000 1.00 $200,000  2013 40,000 1.08 43,200 $243,200Base $200,000 1.000 $200,000  2013 35,000* 1.08 37,800  2014 ------ --- ------ $237,800Base $200,000 1.00 $200,0002013 35,000 1.08 37,8002014 ----- --- -----2015 25,000 1.15 28,750 $266,550

* 2013 layer is $40,000 less real decrease of $5,000.

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Problem 5Gross Profit Method of Estimating Inventory

   

*$600,000 x (1 - .40)

Problem 6

Product

CostNet

Realizable Value

Inventory Value

A  $70 $85 $70

 B 75 105 75

C 80 62 62

Total $225 $207

Account Debit CreditCost of Goods Sold ($225-$207) 18 Inventory 18

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Problem 7Average accumulated expenditures:January 1 $250,000 x 12/12 = $ 250,000March 31 300,000 x 9/12 = 225,000June 30 200,000 x 6/12 = 100,000October 30 300,000 x 2/12 = 50,000

$625,000

Interest capitalized:$625,000–350,000 x 6% = $21,000$275,000 x 6.75%* = 18,563 (rounded to nearest whole dollar)

$ 39,563 = Interest capitalized

* Weighted-average rate of all other debt:$1,500,000 x 8% = $120,000 2,500,000 x 6% = 150,000$4,000,000 $270,000

$270,000 = 6.75% weighted average$4,000,000

Problem 8

Problem 9

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