Lifetime Distribution markets classic children’s books. At the beginning of June, Lifetime had in beginning inventory 1,200 books with a unit cost of $3. During June, Lifetime made the following purchases of books.

    June 3    4,000 @$3        June 29 4,000 @ $6
    June 18   7,500 @$5

During June, 10,500 books were sold. Lifetime uses a periodic inventory system.

Instructions

(a) Determine the cost of goods available for sale.

(b) Determine (1) the ending inventory and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average-cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods. (Note: For average-cost, round cost per unit to three decimal places.)

Marshall Company discovers in 2014 that its ending inventory at December 31, 2013, was $5,000 understated. What effect will this error have on 2014 net income.

Gary Bauer launches a computer consulting business called Technology Consultants and completes the following transactions in April.

April 1 Bauer invested $100,000 cash along with$24,000 in office equipment in the company.
 2 The company prepaid $7,200 cash for twelve months’ rent for an office. (Hint: Debit Prepaid Rent for$7,200.)
 3 The company made credit purchases of office equipment for $12,000 and office supplies for$2,400. Payment is due within 10 days.
 6 The company completed services for a client and immediately received $2,000 cash.
 9 The company completed an$8,000 project for a client, who must pay within 30 days.
 13 The company paid $14,400 cash to settle the account payable created on April 3.
 19 The company paid$6,000 cash for the premium on a 12-month insurance policy. (Hint: Debit Prepaid Insurance for $6,000.)
 22 The company received$6,400 cash as partial payment for the work completed on April 9.
 25 The company completed work for another client for $2,640 on credit.
 28 Bauer withdrew$6,200 cash from the company for personal use.
 29 The company purchased $800 of additional office supplies on credit.
 30 The company paid$700 cash for this month’s utility bill.

Required
1. Prepare general journal entries to record these transactions (use the account titles listed in part 2).
2. Open the following ledger accounts — their account numbers are in parentheses (use the balance column format): Cash (101); Accounts Receivable (106); Office Supplies (124); Prepaid Insurance (128); Prepaid Rent (131); Office Equipment (163); Accounts Payable (201); G. Bauer, Capital (301); G. Bauer, Withdrawals (302); Services Revenue (403); and Utilities Expense (690). Post the journal entries from part 1 to the ledger accounts and enter the balance after each posting.
3. Prepare a trial balance as of the end of April.

Marshall Company discovers in 2014 that its ending inventory at December 31, 2013, was $5,000 understated. What effect will this error have on (a) 2013 net income.

When an account is written off using the allowance method for uncollectible accounts:

A. the net accounts receivable (accounts receivable less the allowance for doubtful accounts) will decrease.

B. net accounts receivable (accounts receivable less the allowance for doubtful accounts) will stay the same

C. allowance for doubtful accounts will increase.

D. cash realizable value of total accounts receivable will increase.

How does the average-cost method of inventory costing differ between a perpetual inventory system and a periodic inventory system?

“When perpetual inventory records are kept, the results under the FIFO and LIFO methods are the same as they would be in a periodic inventory system.” Do you agree? Explain.

What is the LIFO reserve? What are the consequences of ignoring a large LIFO reserve when analyzing a company?

Under what circumstances might inventory turnover be too high—that is, what possible negative consequences might occur?

Dipoto Company’s balance sheet shows Inventory $162,800. What additional disclosures should be made?

Why is it inappropriate for a company to include freight-out expense in the Cost of Goods Sold account?

LaTour Inc. is based in France and prepares its financial statements in accordance with IFRS. In 2014, it reported cost of goods sold (in euros) of 578 million and average inventory of 154 million. Briefly discuss how analysis of LaTour’s inventory turnover (and comparisons to a company using GAAP) might be affected by differences in inventory accounting between IFRS and GAAP.

Kevin Farley, an auditor with Koews CPAs, is performing a review of Knight Company’s Inventory account. Knight did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at yearend 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$228,000 that the company is holding on consignment. The goods belong to Mather Corporation.
2. The physical count did not include goods purchased by Knight with a cost of $40,000 that were shipped FOB shipping point on December 28 and did not arrive at Knight’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 was 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 $40,000 and a cost of$29,000. The goods were not included in the count because they were sitting on the dock.
5. On December 29, Knight shipped goods with a selling price of $80,000 and a cost of$50,000 to Houchins Sales Corporation FOB shipping point. The goods arrived on January 3. Houchins Sales had only ordered goods with a selling price of $10,000 and a cost of$6,000. However, a sales manager at Knight had authorized the shipment and said that if Houchins wanted to ship the goods back next week, it could.
6. Included in the count was $50,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Knight’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, stating why you did or did not make an adjustment for each item.

An item must possess two characteristics to be classified as inventory. What are these two characteristics?