ADDIS ABABA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING FINANCE

FUNDAMENTALS OF ACCOUNTING II (Acct2202)

HANDWRITTEN INDIVIDUAL ASSIGNMENT– CH01 & CH02
Submission date: October 25, 2024

Ch. 1 Inventories
1. (E6-2)
Kale Wilson, an auditor with Sneed Chartered Accountants, is performing a review of Platinum
Company’s inventory account. Platinum did not have a good year, and top management is under
pressure to boost reported income. According to its records, the inventory balance at year-end
was £740,000. However, the following information was not considered when determining that
amount.
1. Included in the company’s count were goods with a cost of £250,000 that the company is
holding on consignment. The goods belong to Superior, Ltd.
2. The physical count did not include goods purchased by Platinum with a cost of £40,000 that
were shipped FOB destination on December 28 and did not arrive at Platinum’s warehouse
until January 3.
3. Included in the inventory account was £17,000 of office supplies that were stored in the
warehouse and were to be used by the company’s supervisors and managers during the
coming year.
4. The company received an order on December 29 that was boxed and sitting on the loading
dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and
delivered them on January 6. The shipping terms were FOB shipping point. The goods had a
selling price of £49,000 and a cost of £33,000. The goods were not included in the count
because they were sitting on the dock.
5. Included in the count was £48,000 of goods that were parts for a machine that the company
no longer made. Given the high-tech nature of Platinum’s products, it was unlikely that these
obsolete parts had any other use. However, management would prefer to keep them on the
books at cost, “since that is what we paid for them, after all.”
Instructions: Prepare a schedule to determine the correct inventory amount. Provide
explanations for each item above, saying why you did or did not make an adjustment for each
item.
2. (E6-3)
On December 1, Discount Electronics Ltd. has three DVD players left in stock. All are identical,
all are priced to sell at NT$4,500. One of the three DVD players left in stock, with serial #1012,
was purchased on June 1 at a cost of NT$3,000. Another, with serial #1045, was purchased on
November 1 for NT$2,760. The last player, serial #1056, was purchased on November 30 for
NT$2,520.
Instructions
(a) Calculate the cost of goods sold using the FIFO periodic inventory method assuming that two
of the three players were sold by the end of December, Discount Electronics’ year-end.
(b) If Discount Electronics used the specific identification method instead of the FIFO method,
how might it alter its earnings by “selectively choosing” which particular players to sell to

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 the two customers? What would Discount’s cost of goods sold be if the company wished to
minimize earnings? Maximize earnings?
(c) Which of the two inventory methods do you recommend that Discount use? Explain why.
3. E6-4

Zhu Boards sells a snowboard, Xpert, that is popular with snowboard enthusiasts. Information
relating to Zhu’s purchases of Xpert snowboards during September is shown on the next page.
During the same month, 121 Xpert snowboards were sold. Zhu’s uses a periodic inventory
system.

Date Explanation Units Unit Cost Total Cost

Sept. 1 Inventory 23 $ 970 $ 22,310
Sept. 12 Purchases 45 1,020 45,900
Sept. 19 Purchases 20 1,040 20,800
Sept. 26 Purchases 44 1,050 46,200
Totals 132 $135,210

Instructions
(a) Compute the ending inventory at September 30 and cost of goods sold using the FIFO and
average-cost methods. Prove the amount allocated to cost of goods sold under each method.
(b) For both FIFO and average-cost, calculate the sum of ending inventory and cost of goods
sold. What do you notice about the answers you found for each method?
4. E6-7

Thaam Company Ltd. had 100 units in beginning inventory at a total cost of $300,000. The
company purchased 200 units at a total cost of $680,000. At the end of the year, Thaam had 75
units in ending inventory.

Instructions
(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO and (2)
average-cost.
(b) Which cost flow method would result in the higher net income?
(c) Which cost flow method would result in inventories approximating current cost in the
statement of financial position?
(d) Which cost flow method would result in Thaam paying fewer taxes in the first year?
5. (E6-9)
Banovic Company OAO applied FIFO to its inventory and got the following results for its
ending inventory.
Tennis shoes 100 units at a cost per unit of €68
Running shoes 150 units at a cost per unit of €75
Basketball shoes 125 units at a cost per unit of €80
The net realizable value per unit at year-end was tennis shoes €70, running shoes €71, and
basketball shoes €74.
Instructions: Determine the amount of ending inventory at lower-of-cost-or-net realizable value.

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 6. Howsham Company, Ltd. reports the following for the month of June.
Units Unit Cost Total Cost
June 1 Inventory 200 £5 £1,000
12 Purchase 300 6 1,800
23 Purchase 500 7 3,500
30 Inventory 160
Instructions
a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO and (2)
average-cost.
b) Which costing method gives the higher ending inventory? Why?
c) Which method results in the higher cost of goods sold? Why?
d) Calculate the cost of the ending inventory and the cost of goods sold for (1) FIFO and (2)
moving-average cost, using a perpetual inventory system. Assume a sale of 400 units
occurred on June 15 for a selling price of £8 and a sale of 440 units on June 27 for £9.

7. E6-11
Wu Watch Company, Ltd. reported the following income statement data for a 2-year period.
2016 2017
Sales revenue $2,100,000 $2,500,000
Cost of goods sold
Beginning inventory 320,000 440,000
Cost of goods purchased 1,730,000 2,040,000
Cost of goods available for sale 2,050,000 2,480,000
Ending inventory 440,000 520,000
Cost of goods sold 1,610,000 1,960,000
Gross profit $ 490,000 $ 540,000
Wu uses a periodic inventory system. The inventories at January 1, 2016, and December 31,
2017, are correct. However, the ending inventory at December 31, 2016, was understated
$60,000.

Instructions
(a) Prepare correct income statement data for the 2 years.
(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?
(c) Explain in a letter to the president of Wu Watch Company, Ltd. what has happened, i.e., the
nature of the error and its effect on the financial statements.

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 8. E6-16

Information about Zhu Boards is presented in E6-4. Additional data regarding Zhu’s sales of
Xpert snowboards are provided below. Assume that Zhu uses a perpetual inventory system.

Date Explanation Units Unit Price Total Revenue

Sept. 5 Sale 12 $1,990 $ 23,880
Sept. 16 Sale 50 2,030 101,500
Sept. 29 Sale 59 2,090 123,310
Totals 121 $248,690

Instructions
(a) Compute ending inventory at September 30 using FIFO and moving-average cost.
(b) Compare ending inventory using a perpetual inventory system to ending inventory using a
periodic inventory system (from E6-4).
(c) Which inventory cost flow method (FIFO, moving-average cost) gives the same ending
inventory value under both periodic and perpetual? Which method gives different ending
inventory values?
9. (E6-18)
The inventory of Ipswich Company Ltd. was destroyed by fi re on March 1. From an
examination of the accounting records, the following data for the first 2 months of the year are
obtained: Sales Revenue £51,000, Sales Returns and Allowances £1,000, Purchases £31,200,
Freight-In £1,200, and Purchase Returns and Allowances £1,800.
Instructions: Determine the merchandise lost by fire, assuming:
(a) A beginning inventory of £20,000 and a gross profit rate of 40% on net sales.
(b) A beginning inventory of £30,000 and a gross profit rate of 32% on net sales.

PART II PROBLEMS
10. P6-1A

Anatolia Limited is trying to determine the value of its ending inventory at February 28, 2017,
the company’s year-end. The accountant counted everything that was in the warehouse as of
February 28, which resulted in an ending inventory valuation of 48,000. However, she didn’t
know how to treat the following transactions so she didn’t record them.
(a) On February 26, Anatolia shipped to a customer goods costing 800. The goods were shipped
FOB shipping point, and the receiving report indicates that the customer received the goods
on March 2.
(b) On February 26, Shira Inc. shipped goods to Anatolia FOB destination. The invoice price
was 350. The receiving report indicates that the goods were received by Anatolia on March
2.
(c) Anatolia had 620 of inventory at a customer’s warehouse “on approval.” The customer was
going to let Anatolia know whether it wanted the merchandise by the end of the week, March
4.

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(d) Anatolia also had 400 of inventory on consignment at a Palletine craft shop.
(e) On February 26, Anatolia ordered goods costing 780. The goods were shipped FOB shipping
point on February 27. Anatolia received the goods on March 1.
(f) On February 28, Anatolia packaged goods and had them ready for shipping to a customer
FOB destination. The invoice price was 350; the cost of the items was 220. The receiving
report indicates that the goods were received by the customer on March 2.
(g) Anatolia had damaged goods set aside in the warehouse because they are no longer saleable.
These goods cost 400 and Anatolia originally expected to sell these items for 600.

Instructions
For each of the preceding transactions, specify whether the item in question should be included
in ending inventory and, if so, at what amount. For each item that is not included in ending
inventory, indicate who owns it and what account, if any, it should have been recorded in.
11. P6-6A
You have the following information for Greco Diamonds SLU. Greco Diamonds uses the
periodic method of accounting for its inventory transactions. Greco only carries one brand and
size of diamonds—all are identical. Each batch of diamonds purchased is carefully coded and
marked with its purchase cost.
March 1 Beginning inventory 150 diamonds at a cost of $310 per diamond.
March 3 Purchased 200 diamonds at a cost of $350 each.
March 5 Sold 180 diamonds for $600 each.
March 10 Purchased 350 diamonds at a cost of $380 each.
March 25 Sold 400 diamonds for $650 each.

Instructions
(a) Assume that Greco Diamonds uses the specific identification method.
1. Demonstrate how Greco Diamonds could maximize its gross profit for the month by
specifically selecting which diamonds to sell on March 5 and March 25.
2. Demonstrate how Greco Diamonds could minimize its gross profit for the month by
selecting which diamonds to sell on March 5 and March 25.
(b) Assume that Greco Diamonds uses the FIFO cost flow assumption. Calculate cost of goods
sold. How much gross profit would Greco Diamonds report under this cost flow assumption?
(c) Assume that Greco Diamonds uses the average-cost cost flow assumption. Calculate cost of
goods sold. How much gross profit would the company report under this cost flow
assumption?
(d) Which method should Greco Diamonds select? Explain.

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 12. P6-10A
Africa Company lost 70% of its inventory in a fire on March 25, 2017. The accounting records
showed the following gross profit data for February and March.
February March (to 3/25)
Net sales €300,000 €260,000
Net purchases 197,800 191,000
Freight-in 2,900 4,000
Beginning inventory 4,500 25,200
Ending inventory 25,200 ?
Africa Company is fully insured for fi re losses but must prepare a report for the insurance
company.

Instructions
(a) Compute the gross profit rate for the month of February.
(b) Using the gross profit rate for February, determine both the estimated total inventory and
inventory lost in the fi re in March.

13. P6-11A

Terzi Department Store SA uses the retail inventory method to estimate its monthly ending
inventories. The following information is available for two of its departments at August 31,
2017.

Sporting Goods Jewelry and Cosmetics

Cost Retail Cost Retail
Net sales €1,010,000 €1,150,000
Purchases €675,000 1,066,000 €639,000 1,158,000
Purchase returns (26,000) (40,000) (10,000) (20,000)
Purchase discounts (12,360) — (8,860) —
Freight-in 9,000 — 7,000 —
Beginning inventory 47,360 74,000 32,860 62,000

At December 31, Terzi Department Store takes a physical inventory at retail. The actual retail
values of the inventories in each department are Sporting Goods €85,000, and Jewelry and
Cosmetics €52,000.

Instructions
(a) Determine the estimated cost of the ending inventory for each department on August 31,
2017, using the retail inventory method.
(b) Compute the ending inventory at cost for each department at December 31, assuming the
cost-to-retail ratios are 60% for Sporting Goods and 54% for Jewelry and Cosmetics.

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Ch. 2 Long-term assets
14. Problem 1
Foxx Ltd. was organized on January 1. During the first year of operations, the following plant
asset expenditures and receipts were recorded in random order.
Debit
1. Accrued real estate taxes paid at time of purchase of real estate Br9,000
2. Real estate taxes on land paid for the current year 6,100
3. Full payment to building contractor 520,000
4. Excavation costs for new building 19,000
5. Cost of real estate purchased as a plant site (land Br75,000 and building Br25,000) 100,000
6. Cost of parking lots and driveways 18,000
7. Architect’s fees on building plans 9,000
8. Installation cost of fences around property 6,000
9. Cost of demolishing building to make land suitable for construction of new building 19,000

Credit
10. Proceeds from salvage of demolished building 4,200
Instructions
Analyze the foregoing transactions using the following column headings. Insert the number of
each transaction in the Item column, and then insert the amounts in the other appropriate
columns. For amounts entered in the Other Accounts column, also indicate the account title.
Item Land Buildings Other Accounts

15. Problem 2
Jay’s Delivery Company and Astro’s Express Delivery exchanged delivery trucks on January 1,
2017. Jay’s truck cost Br22,000. It has accumulated depreciation of Br16,000 and a fair value of
Br4,000. Astro’s truck cost Br10,000. It has accumulated depreciation of Br7,000 and a fair
value of Br4,000. The transaction has commercial substance.
Instructions
(a) Journalize the exchange for Jay’s Delivery Company.
(b) Journalize the exchange for Astro’s Express Delivery.
16. Problem 3
Barton Enterprises purchased equipment on January 1, 2017, at a cost of €350,000. Barton uses
the straight-line depreciation method, a 5-year estimated useful life, and no residual value. At the
end of 2017, independent appraisers determined that the assets have a fair value of €320,000.
Instructions
(a) Prepare the journal entry to record 2017 depreciation using the straight-line method.
(b) Prepare the journal entry to record the revaluation of the equipment.
(c) Prepare the journal entry to record 2018 depreciation, assuming no additional
revaluation.
17. Problem 4
On January 1, 2020, Pele Industries purchased the following two machines for use in its
production process.
Machine A: The cash price of this machine was Br35,000. Related expenditures included:
sales tax Br2,200, shipping costs Br150, insurance during shipping Br80,
installation and testing costs Br70, and Br100 of oil and lubricants to be used with

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 the machinery during its first year of operations. Pele estimates that the useful life
of the machine is 5 years with a Br5,000 residual value remaining at the end of
that time period. Assume that the straight-line method of depreciation is used.
Machine B: The recorded cost of this machine was Br80,000. Pele estimates that the useful
life of the machine is 4 years with a Br5,000 residual value remaining at the end
of that time period.
Instructions
(a) Prepare the following for Machine A.
1. The journal entry to record its purchase on January 1, 2020.
2. The journal entry to record annual depreciation at December 31, 2020.
(b) Calculate the amount of depreciation expense that Pele should record for Machine B each
year of its useful life under the following assumptions.
1. Pele uses the straight-line method of depreciation.
2. Pele uses the declining-balance method. The rate used is twice the straight-line rate.
3. Pele uses the units-of-activity method and estimates that the useful life of the machine is
125,000 units. Actual usage is as follows: 2020, 42,000 units; 2021, 37,000 units; 2022,
28,000 units; and 2023, 18,000 units.
(c) Record the disposal of Machine A at the end of its useful life under the following
assumptions.
1. It was scrapped as having no value.
2. It was sold for Br3,000.
3. It was exchanged for another machine with fair value of Br8,000 and cash Br3,000 paid.
18. Problem 5
Ann Tremel has prepared the following list of statements about depreciation.
1. Depreciation is a process of asset valuation, not cost allocation.
2. Depreciation provides for the proper matching of expenses with revenues.
3. The book value of a plant asset should approximate its fair value.
4. Depreciation applies to three classes of plant assets: land, buildings, and equipment.
5. Depreciation does not apply to a building because its usefulness and revenue producing
ability generally remain intact over time.
6. The revenue-producing ability of a depreciable asset will decline due to wear and tear
and to obsolescence.
7. Recognizing depreciation on an asset results in an accumulation of cash for replacement of
the asset.
8. The balance in accumulated depreciation represents the total cost that has been
charged to expense.
9. Depreciation expense and accumulated depreciation are reported on the income statement.
10. Three factors affect the computation of depreciation: cost, useful life, and residual value.
Instructions
Identify each statement as true or false.

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