HOMEWORK CHAPTER 6

❖ PRATICE MULTIPLE – CHOICE QUESTIONS:

1. a 4. c 7. d 10. d 13. b
2. b 5. d 8. b 11. d 14. d
3. b 6. c 9. b 12. b 15. d
❖ BRIEF EXERCISES:
BE6.1
a) Included
b) Excluded
c) Excluded
d) Excluded
BE6.2
Ending Inventory = €200,000 + €25,000 + €22,000 = €247,000.
BE6.3
a) The ending inventory under FIFO consists of (200 units at NT$240) + (220 units at NT$210) for
a total allocation of NT$94,200 or (NT$48,000 + NT$46,200).
b) The average cost of a unit in ending inventory is NT$206.67 (NT$186,000 ÷ 900). The average
cost per unit is computed as follows:
300 units at NT$180 = NT$ 54,000
400 units at NT$210 = 84,000
200 units at NT$240 = 48,000
900 units NT$186,000
Ending inventory is therefore NT$86,801.4 or (420 x NT$206.67).
BE6.4
a) FIFO would result in the highest net income.
b) FIFO would result in the highest ending inventory.
c) Average-cost would result in the lowest income tax expense (because it would result in the
lowest net income).
d) Average-cost would result in the most stable income over a number of years because it averages
out any big changes in the cost of inventory.
BE6.5
The understatement of ending inventory caused cost of goods sold to be overstated €5,000 and net
income to be understated €5,000. The correct net income for 2011 is €95,000 or (€90,000 +
€5,000).
Total assets in the statement of financial position will be understated by the amount that ending
inventory is understated, €5,000.
BE6.6
 Investory Cost Net Realizable
Categories Data Value Data LCNRV
Cameras £12,000 £12,100 £12,000
Camcorders 9,420 9,200 9,420
Blu-ray players 14,000 12,800 12,800
Total valuation £34,220

BE6.8
a) FIFO Method
Product E2-D2
Date Purchases Cost of Goods Sold Blance
May 7 (50 @ £11) £550 (50 @ £11) £550
June 1 (30 @ £11) £330 (20 @ £11) £220
July 28 (30 @ £13) £390 (20 @ £11)
} £610
(30 @ £13)
Aug. 27 (20 @ £11)
(20 @ £13)
} £480 (10 @ £13) £130

b) Moving-average cost
Product E2-D2
Date Purchases Cost of Goods Sold Blance
May 7 (50 @ £11) £550 (50 @ £11) £550
June 1 (30 @ £11) £330 (20 @ £11) £220
July 28 (30 @ £13) £390 (50 @ £12.2)* £610
Aug. 27 (40 @ £12.2) £488 (10 @ £12.2) £122
*(£220 + £390) ÷ 50
❖ EXERCISES:
E6.1
Ending inventory—physical count £297,000
1. No effect—title passes to purchaser upon shipment when terms are FOB
shipping point. 0
2. No effect—title does not transfer to Alou until goods are received. 0
3. Add to inventory: Title passed to Alou when goods were shipped. 25,000
4. Add to inventory: Title remains with Alou until purchaser receives goods. 35,000
5. The goods did not arrive prior to year-end. The goods, therefore, cannot be
included in the inventory. (44,000)
Correct inventory £313,000
E6.2
 Ending inventory—as reported £740,000
1. Subtract from inventory: The goods belong to Superior Ltd.
Platinum is merely holding them as a consignee. (250,000)
2. No effect-title does not pass to Platinum until goods are received
(Jan. 3). 0
3. Subtract from inventory: Office supplies should be carried in a
separate account. They are not considered inventory held for
resale. (17,000)
4. Add to inventory: The goods belong to Platinum until they are
shipped (Jan. 1). 33,000
5. Subtract from inventory: IFRS require that inventory be valued at
the lower of cost or net realizable value. Obsolete parts should be
adjusted from cost to zero if they have no other use. (48,000)
Correct inventory £458,000
E6.3
a) FIFO Cost of Goods Sold: (#1012) NT$3,000 + (#1045) NT$2,760 = NT$5,760
b) It could choose to sell specific units purchased at specific costs if it wished to impact earnings
selectively. If it wished to minimize earnings it would choose to sell the units purchased at
higher costs-in which case the Cost of Goods Sold would be $5,760. If it wished to maximize
earnings it would choose to sell the units purchased at lower costs-in which case the cost of
goods sold would be $5,280.
c) I recommend they use the FIFO method because it produces a more appropriate statement of
financial position valuation and reduces the opportunity to manipulate earnings.
E6.4
a)
FIFO
Beginning inventory (23 x HK$970) HK$ 22,310
Purchases
Sept. 12 (45 x HK$1,020) HK$45,900
Sept. 19 (20 x HK$1,040) 20,800
Sept. 26 (44 x HK$1,050) 46,200 112,900
Cost of goods available for sale 135,210
Less: Ending inventory (11 x HK$1,050) 11,550
Cost of goods sold HK$123,660

Proof
 Date Units Unit Cost Total Cost
Sept. 1 23 HK$ 970 HK$ 22,310
Sept. 12 45 1,020 45,900
Sept. 19 20 1,040 20,800
Sept. 26 33 1,050 34,650
121 HK$123,660

Average-Cost
Cost of goods available for sale HK$135,210
Less: Ending inventory (11 x HK$1024.32) 11,268
Cost of goods sold HK$123,942
Cost of
b) FIFO HK$11,550 (ending inventory) + HK$123,660 (COGS) = HK$135,210 goods

Average-cost HK$11,268 (ending inventory) + HK$123,942 (COGS) = HK$135,210

} available
for sale
Under both methods, the sum of the ending inventory and cost of goods sold equals the same
amount, HK$135,210, which is the cost of goods available for sale.
E6.5
FIFO
Beginning inventory (30 x €9) €270
Purchases
May 15 (22 x €11) €242
May 24 (38 x €12) 456 698
Cost of goods available for sale 968
Less: Ending inventory (22 x €12) 264
Cost of goods sold €704

Proof
Date Units Unit Cost Total Cost
May 1 30 €9 €270
May 15 22 11 242
May 24 16 12 192
68 €704

Average-Cost
Cost of goods available for sale €968
Less: Ending inventory (22 x €10.76) 237
Cost of goods sold €731
E6.6
a)
FIFO
Beginning inventory (200 x £5) £1,000
Purchases
June 12 (300 x £6) £1,800
June 23 (500 x £7) 3,500 5,300
Cost of goods available for sale 6,300
Less: Ending inventory (160 x £7) 1,120
Cost of goods sold £5,180

Average-Cost
Cost of goods available for sale £6,300
Less: Ending inventory (160 x £6.30) 1,008
Cost of goods sold £5,292

b) The FIFO method will produce the higher ending inventory because costs have been rising.
Under this method, the earliest costs are assigned to cost of goods sold and the latest costs remain in
ending inventory. For Howsham Interiors, the ending inventory under FIFO is £1,120 or (160 x £7)
compared to £1,008 or (160 x £6.30) under average-cost.
c) The average-cost method will produce the higher cost of goods sold for Howsham Interiors. The
cost of goods sold is £5,292 or [£6,300 – £1,008] compared to £5,180 or (£6,300 – £1,120) under
FIFO.
E6.7
a)
(1) FIFO
Beginning inventory NT$ 30,000,000
Purchases 136,000,000
Cost of goods available for sale 166,000,000
Less: ending inventory (75 x NT$680,000) 51,000,000
Cost of goods sold NT$115,000,000

(2) Average-Cost
Beginning inventory NT$ 30,000,000
Purchases 136,000,000
Cost of goods available for sale 166,000,000
Less: ending inventory (75 x NT$553,333.33) 41,500,000
Cost of goods sold NT$124,500,000
b) The use of FIFO would result in the highest net income since the earlier lower costs are matched
with revenues.
c) The use of FIFO would result in inventories approximating current cost in the statement of
financial position, since the more recent units are assumed to be on hand.
d) The use of average-cost would result in Jones paying the least taxes in the first year since income
will be lower.
E6.8
Net Realizable
Item Cost Data Value Data LCNRV
Cameras:
Minolta ₩1,360,000 ₩1,248,000 ₩1,248,000
Canon 900,000 912,000 900,000
Total 2,260,000 2,160,000
Light meters:
Vivitar 1,500,000 1,380,000 1,380,000
Kodak 1,610,000 1,890,000 1,610,000
Total 3,110,000 3,270,000
Total ₩5,370,000 ₩5,430,000 ₩5,138,000
inventory
E6.10
2019 2020
Beginning inventory € 20,000 € 30,000
Cost of goods purchased 150,000 175,000
Cost of goods available for sale 170,000 205,000
Corrected ending inventory 28,000(1) 41,000(2)
Cost of goods sold €142,000 €164,000

(1)
€30,000 - €2,000 = €28,000
(2)
€35,000 + €6,000 = €41,000
E6.11
a)
2019 2020
Sales revenues HK$2,100,000 HK$2,500,000
Cost of goods sold
Beginning inventory 320,000 500,000
Cost of goods purchased 1,730,000 2,040,000
Cost of goods available for sale 2,050,000 2,540,000
Ending inventory 500,000* 520,000
 Cost of goods sold 1,550,000 2,020,000
Gross profit HK$ 550,000 HK$ 480,000
* HK$440,000 + HK$60,000 = HK$500,000
b) The cumulative effect on total gross profit for the two years is zero as shown below:
Incorrect gross profits: HK$610,000 + HK$420,000 = HK$1,030,000
Correct gross profits: HK$550,000 + HK$480,000 = HK$1,030,000
Difference HK$ 0
c) Dear Mr./Ms. President:
Because your ending inventory of December 31, 2019 was overstated by HK$60,000, your net
income for 2019 was overstated by HK$60,000. For 2020 net income was understated by
HK$60,000.
In a periodic system, the cost of goods sold is calculated by deducting the cost of ending
inventory from the total cost of goods you have available for sale in the period. Therefore, if this
ending inventory figure is overstated, as it was in December 2019, then the cost of goods sold is
understated and therefore net income will be overstated by that amount. Consequently, this
overstated ending inventory figure goes on to become the next period’s beginning inventory
amount and is a part of the total cost of goods available for sale. Therefore, the mistake repeats
itself in the reverse.
The error also affects the statement of financial position at the end of 2019. The inventory
reported in the statement of financial position is overstated; therefore, total assets are overstated.
The overstatement of the 2019 net income results in the retained earnings account balance being
overstated. The statement of financial position at the end of 2020 is correct because the
overstatement of the retained earnings account at the end of 2019 is offset by the understatement
of the 2020 net income and the inventory at the end of 2020 is correct.
Thank you for allowing me to bring this to your attention. If you have any questions, please
contact me at your convenience.
Sincerely,

E6.14*
(1) FIFO
Date Purchases Cost of Goods Sold Blance
Jan. 1 (3 @ €600) €1,800
Jan. 8 (2 @ €600) €1,200 (1 @ €600) 600
Jan. 10 (6 @ €648) €3888 (1 @ €600)
(6 @ €648) €4,488
Jan. 15 (1 @ €600)
 (3 @ €648) €2,544 (3 @ €648) €1,944

(2) Moving-average cost

Date Purchases Cost of Goods Sold Blance
Jan. 1 (3 @ €600) €1,800
Jan. 8 (2 @ €600) €1,200 (1 @ €600) 600
Jan. 10 (6 @ €648) €3888 (7 @ €641.14) 4,488
Jan. 15 (4 @ €641.14) €2,565 (3 @ €641.14) 1,923

E6.15*
a) The cost of goods available for sale is: £1,000 + £1,800 + £3,500 = £6,300.
(1) FIFO
Date Purchases Cost of Goods Sold Blance
June 1 (200 @ £5) £1,000
June 12 (300 @ £6) £1,800 (200 @ £5)
} £2,800
(300 @ £6)
June 15 (200 @ £5) £1,000
(200 @ £6) 1,200 (100 @ £6) £ 600
(100 @ £6) £4,100
}
June 23 (500 @ £7) £3,500 (500 @ £7)

June 27 (100 @ £6) 600 (160 @ £7) £1,120

(340 @ £7) 2,380
£5,180
Ending inventory: £1,120
Cost of goods sold: £6,300 - £1,120 = £ 5,180
(2) Moving-average cost
Date Purchases Cost of Goods Sold Blance
June 1 (200 @ £5) £1,000
June 12 (300 @ £6) £1,800 (500 @ £5.6) £2,800
June 15 (400 @ £5.6) £2,240 (100 @ £5.6) £ 560
June 23 (500 @ £7) £3,500 (600 @ £6.767) £4,060
June 27 (440 @ £6.767) 2,977 (160 @ £6.767) £1,083
£5,217
Ending inventory: £1,083
Cost of goods sold: £6,300 - £1,083 = £5,217
b) FIFO gives the same ending inventory and cost of goods sold values under both the periodic and
perpetual inventory system. Moving-average gives different ending inventory and cost of goods
 sold values under the periodic and perpetual inventory systems, due to the average calculation
being based on different pools of costs.
c) The simple average would be [($5 + $6 + $7) ÷ 3)] or $6. However, the moving-average cost
method uses a weighted-average unit cost that changes each time a purchase is made rather than a
simple average.
❖ PROBLEMS:
P6.1
a) The goods should not be included in inventory as they were shipped FOB shipping point and
shipped February 26. Title to the goods transfers to the customer February 26. Anatolia should
have recorded the transaction in the Sales and Accounts Receivable accounts.
b) The amount should not be included in inventory as they were shipped FOB destination and not
received until March 2. The seller still owns the inventory. No entry is recorded.
c) Include ₺620 in inventory.
d) Include ₺400 in inventory.
e) ₺780 should be included in inventory as the goods were shipped FOB shipping point.
f) The sale will be recorded on March 2. The goods should be included in inventory at the end of
February at their cost of ₺220.
g) The damaged goods should not be included in inventory. They should be recorded in a loss
account since they are not saleable.
P6.2
a)
COST OF GOODS AVAILABLE FOR SALE
Date Explanation Units Unit Cost Total Cost
March 1 Beginning Inventory 1,500 € 7 € 10,500
March 5 Purchase 3,500 8 28,000
March 13 Purchase 4,000 9 36,000
March 21 Purchase 2,000 10 20,000
March 26 Purchase 2,000 11 22,000
Total 13,000 €116,500
b)
FIFO
(1) Ending Inventory (2) Cost of Goods Sold
Unit Cost of goods
Date Units Cost Total Cost available for sale €116,500
March 26 2,000 €11 €22,000 Less: Ending
March 21 1,000 10 10,000 inventory 32,000
3,000* €32,000 Cost of goods sold €84,500
*13,000 – 10,000 = 3,000
Proof
 Unit Total
Date Units Cost Cost
March 1 1,500 €7 €10,500
March 5 3,500 8 28,000
March 13 4,000 9 36,000
March 21 1,000 10 10,000
10,000 €84,500

Average-cost
(1) Ending Inventory (2) Cost of Goods Sold
€116,500 ÷ 13,000 = €8.96 Cost of goods available for sale €116,500
Unit Total Less: Ending
Units Cost Cost inventory 26,900
3,000 €8.96 €26,900 Cost of goods sold € 89,600

c) (1) As shown in (b) above, FIFO produces the highest inventory amount, €32,000.
(2) As shown in (b) above, average-cost produces the highest cost of goods sold, €89,600.