Accounting Homework -
Question 1: Inventory Measurement
StayCool, Inc. sells air conditioners. On January 1, 2003, they had 5,000 air conditioner units in inventory.
If StayCool reported inventory on a FIFO basis, its beginning inventory balance would include the following:
|
Year units were purchased
|
Number of units
|
Cost per unit
|
|
2001
|
1,000
|
$500
|
|
2002
|
4,000
|
$600
|
If StayCool reported inventory on a LIFO basis, its beginning inventory balance would include the following:
| Year units were purchased |
Number of units
|
Cost per unit
|
|
1988
|
2,000
|
$300
|
|
1992
|
3,000
|
$400
|
During 2003, StayCool purchased 5,000 air conditioner units. Related costs were as follows:
|
Paid to supplier
|
$3,500,000
|
|
Freight-in charges
|
100,000
|
|
Selling commissions
|
200,000
|
During 2003, StayCool sold 6,000 air conditioner units at a price of $1,200 each. StayCool uses a periodic inventory system.
a. Calculate Cost of Sales for 2003 if StayCool, Inc. uses "Periodic LIFO" to value inventory.
b. Calculate the balance in ending inventory on December 31, 2003 if StayCool, Inc. uses "Periodic FIFO" to value inventory.
Question 2: Dollar Value LIFO Inventory
Neuman Company adopted the dollar-value LIFO method on December 31, 2003. On this date, its inventory consisted of the following items. Neuman has only one inventory pool.
|
Item
|
Number of units
|
Cost per unit
|
Total cost
|
|
A
|
300
|
$2.00
|
$600
|
|
B
|
900
|
$5.00
|
4,500
|
|
|
|
$5,100
|
Neuman purchased inventory of $45,000 during 2004. The following information regarding inventory quantities and cost of each item at December 31, 2004 is also available.
|
December 31, 2004
|
|
Units of item A in inventory
|
450
|
|
Cost per unit of item A
|
$3.00
|
|
Units of Item B in inventory
|
1,200
|
|
Cost per unit of item B
|
$6.00
|
a. Calculate the price index for 2004.
b. Calculate Ending Inventory reported on the Balance Sheet at 12/31/04.
Question 3: Inventory (LIFO Disclosure)
Tzachi Zach was hired as CFO of Rankin, Inc. on December 31, 2004. Rankin currently uses the LIFO method of costing its inventory. Tzachi reviews the process involved in applying the LIFO method and questions whether it is cost efficient to continue using LIFO. In order to complete his analysis, Tzachi must calculate the net income effects of using the LIFO method relative to the FIFO method. Rankin, Inc. adopted LIFO when it began operations on January 1, 2001. The following information is available from Rankin's accounting records.
|
Ending Inventory:
|
LIFO
|
FIFO
|
|
December 31, 2001
|
$1,960,000
|
$2,080,000
|
|
December 31, 2002
|
2,500,000
|
2,840,000
|
|
December 31, 2003
|
2,850,000
|
3,300,000
|
|
December 31, 2004
|
3,020,000
|
3,420,000
|
Tzachi asks you to help him complete his analysis. He tells you to assume a tax rate of 40% and to ignore present value effects in your calculations. He also tells you that he expects inventory costs and quantities to rise in the foreseeable future. Below are the specific instructions he provides you.
a. Calculate the total amount of any tax differences associated with the use of LIFO since its adoption on January 1, 2001. Be sure to indicate whether more or less tax has been paid as a result of using LIFO.
b. Calculate the pre-tax income statement tax effect associated with using LIFO for the year ended December 31, 2004. Be sure to indicate whether reported income is higher or lower when LIFO is used.
c. Assume the estimated incremental cost of using LIFO (relative to FIFO) is approximately $40,000 per year (before-tax). The incremental costs are primarily due to increased recordkeeping costs. Based on this information and your analysis, would you recommend that the company stops using LIFO? Show calculations to support your answer and state any relevant assumptions you are making in your recommendation.
Question 4: Inventory (Lower of cost or market rule)
Schmeit's Shoe Box is a large retail chain with 200 stores nationwide. The following table gives data pertinent to items included in Schmeit's inventory on December 31, 2005. Salespeople earn a 20 percent commission on all sales and normal profit margin is 40 percent of the selling price of an item.
|
Ugg boots
|
Boring loafers
|
Trendy mules
|
Cool clogs
|
|
Units in ending inventory
|
100,000
|
50,000
|
20,000
|
30,000
|
|
Cost
|
$150
|
$130
|
$185
|
$92
|
|
Selling price
|
0*
|
$170
|
$280
|
$110
|
|
Replacement cost
|
$150
|
$120
|
$190
|
$90
|
|
Estimated cost to sell
(20% sales commission)
|
0
|
$34
|
$56
|
$22
|
|
Ceiling
|
|
|
|
|
|
Floor
|
|
|
|
|
|
Unit inventory value under LCM rule
|
|
|
|
|
|
|
|
|
|
|
*A. Schmeits, the Company's CEO, recently read an article in People magazine stating that Ugg boots are no longer in fashion and as a result, deemed the Ugg boots held in the company's inventory as worthless (i.e. no longer saleable).
a. Using the given information, calculate ceiling values, floor values and the unit inventory value under the lower-of-cost-or-market rule for each of the items included in Schmeits's inventory. Please write your answers in the space provided in the table above. Include any supporting calculations in the space below.
b. Show two alternative journal entries that Schmeits may make to the record inventory write-down on December 31, 2004.
c. In January 2005, Schmeits discovers that its competitors are still selling Ugg boots despite claims being made by fashion "experts". Schmeits decides to return Ugg boots to its shelves at a selling price of $250 per pair. The entire stock of boots is sold during January and February 2005. Assuming that no other LCM adjustments are made during the year, calculate the effect these sales will have on Schmeits's 2005 cost of goods sold and net income (before-tax).