During the taking of its physical inventory on December 31, 2019, Waterjet Bath Company incorrectly counted its inventory as $728,660

During the taking of its physical inventory on December 31, 2019, Waterjet Bath Company incorrectly counted its inventory as $728,660 instead of the correct amount of $719,880. 

Indicate the effect of the misstatement on Waterjet Bath’s December 31, 2019, balance sheet and income statement for the year ended December 31, 2019.

Answer:

Balance Sheet: Merchandise inventory overstated*........................ Current assets overstated.................................... Total assets overstated....................................... Owner’s equity overstated.................................... Income Statement: Cost of merchandise sold understated.................. Gross profit overstated....................................... Net income overstated.......................................... * $728,660 – $719,880 = $8,780 Amount of Misstatement Overstatement (Understatement) 8,780 $ 8,780 8,780

During the taking of its physical inventory on August 31, 2019, Kate Interiors Company incorrectly counted its inventory as $366,900

During the taking of its physical inventory on August 31, 2019, Kate Interiors Company incorrectly counted its inventory as $366,900 instead of the correct amount of $378,500. 

Indicate the effect of the misstatement on Kate Interiors’ August 31, 2019, balance sheet and income statement for the year ended August 31, 2019.

Answer:

Balance Sheet: Merchandise inventory understated*..................... Current assets understated.................................... Total assets understated....................................... Owner’s equity understated................................. Income Statement: Cost of merchandise sold overstated..................... Gross profit understated....................................... Net income understated....................................... * $378,500 – $366,900 = $11,600

The units of an item available for sale during the year were as follows: Jan. 1 Inventory 20 units at $360 $ 7,200

The units of an item available for sale during the year were as follows:

Jan.  1 Inventory  20 units at $360 $   7,200

Aug. 13 Purchase 260 units at $342 88,920

Nov. 30 Purchase  40 units at $357 14,280

Available for sale 320 units $110,400

There are 57 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost using (a) the first-in, first-out (FIFO) method; (b) the last-in, first-out (LIFO) method; and (c) the weighted average cost method.

Answer:

a. First-in, first-out (FIFO) method: $20,094 = (40 units × $357) + (17 units × $342)

b. Last-in, first-out (LIFO) method: $19,854 = (20 units × $360) + (37 units × $342)

c. Weighted average cost method: $19,665 (57 units × $345), where average cost = $345 = $110,400 ÷ 320 units

Castle Furnishings Company’s perpetual inventory records indicate that $675,400 of merchandise

Castle Furnishings Company’s perpetual inventory records indicate that $675,400 of merchandise should be on hand on November 30, 2019. The physical inventory indicates that $663,800 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Castle Furnishings Company for the year ended November 30, 2019. Assume that the inventory shrinkage is a normal amount.

Answer:

Nov. 30 

Cost of Merchandise Sold 11,600

        Merchandise Inventory 11,600

         Inventory shrinkage.

         ($675,400 – $663,800)

During 20Y5, the accountant discovered that the physical inventory at the end of 20Y4 had been understated by $42,750

During 20Y5, the accountant discovered that the physical inventory at the end of 20Y4 had been understated by $42,750. Instead of correcting the error, however, the accountant assumed that the error would balance out (correct itself) in 20Y5. 

Are there any flaws in the accountant’s assumption? Explain.

Answer:

When an error is discovered affecting the prior period, it should be corrected. In this case, the merchandise inventory account should be debited and the owner’s capital account credited for $42,750.

Failure to correct the error for 20Y4 and purposely misstating the inventory and the cost of merchandise sold in 20Y5 would cause the income statements for the two years not to be comparable. The balance sheet at the end of 20Y5 would be correct, however, because the 20Y4 inventory error reverses itself in 20Y5.

There are 2,000 units of the item in the physical inventory at December 31. The periodic inventory system is used.

The units of an item available for sale during the year were as follows:

Jan.  1 Inventory 1,800 units at $108

Mar. 10 Purchase 2,240 units at $110

Aug. 30 Purchase 2,000 units at $116

Dec. 12 Purchase 1,960 units at $120

There are 2,000 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost and the cost of merchandise sold by three methods, presenting your answers in the following form:

Cost Inventory Method Merchandise Inventory Merchandise Sold a. First-in, first-out $ $ b. Last-in, first-out c. Weighted average cost

Answer:

Merchandise Merchandise Inventory Method Inventory Sold a. FIFO$239,840 $668,160 b. LIFO216,400 691,600 c. Weighted average cost 227,000 681,000 Cost of merchandise available for sale: 1,800 units at $108........................................................................... $194,400 2,240 units at $110........................................................................... 246,400 2,000 units at $116.......................................................................... 232,000 1,960 units at $120......................................................................... 235,200 8,000 units (at an average cost of $113.50)....................................... $908,000 a. First-in, first-out: Merchandise inventory: 1,960 units at $120.......................................................................... $235,200 40 units at $116........................................................................... 4,640 2,000 units...................................................................................... $239,840

Merchandise sold: $908,000 – $239,840......................................................................... $668,160 b. Last-in, first-out: Merchandise inventory: 1,800 units at $108........................................................................... $194,400 200 units at $110......................................................................... 22,000 2,000 units.................................................................................... $216,400

Merchandise sold: $908,000 – $216,400.......................................................................... $691,600 c. Weighted average cost:

Merchandise inventory: 2,000 units at $113.50 ($908,000 ÷ 8,000 units)....................................$227,000 Merchandise sold: $908,000 – $227,000....................................................................... $681,000

The units of an item available for sale during the year were as follows: Jan. 1 Inventory 1,000 units at $120

The units of an item available for sale during the year were as follows:

Jan.  1 Inventory 1,000 units at $120

Feb. 17 Purchase 1,375 units at $128

July 21 Purchase 1,500 units at $136

Nov. 23 Purchase 1,125 units at $140

There are 1,200 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost by (a) the first-in, first-out method; (b) the last-in, first-out method; and (c) the weighted average cost method.

Answer:

a. $167,700 (1,125 units at $140 plus 75 units at $136) = $157,500 + $10,200 b. $145,600 (1,000 units at $120 plus 200 units at $128) = $120,000 + $25,600 c. $157,800 (1,200 units at $131.50) Cost of merchandise available for sale: units @ $120……………………………………………… $120,000 units @ $128……………………………………………… 176,000 units @ $136……………………………………………… 204,000 units @ $140……………………………………………… 157,500 units (at an average cost of $131.50)………………… $657,500