ACC E272 Lecture Notes - Lecture 6: Perpetual Inventory, Moving Average, Historical Cost
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Background: This is a continuation of the activities at TECHNOGYM in January, 2017. As in past activities, TECHNOGYM uses a Jan. 1 â Dec. 31 financial year.
Exercise for Inventory:
TECHNOGYM uses a periodic inventory system for its normal operations. Following are the unadjusted account balances as of Dec. 31, 2016 for all accounts related to sales and inventory of TechTone products.
Account Debit Credit
Accounts Receivable 17,607,500
Allowance for Doubtful Accounts 20,000
Purchases 85,832,500
Inventory 2,500,000
TechTone Sales Revenue 134,500,000
TechTone Sales Returns 2,017,500
Cost of TechTone Equipment Sold 0
Upper management is contemplating changing the method used to report the cost of goods sold. They will choose the method (either FIFO or DVLIFO) that maximizes operating cash flow. The general ledger has historically been kept on a FIFO basis. Following is the inventory purchases information for 2016:
| Purchases for 2016 (normal operations) | |||||
| Beginning: | 5,000 | units @ | $500 | each | |
| Purchases: | |||||
| Apr-May | 40,000 | units @ | $500 | each | |
| Jun-Jul | 35,000 | units @ | $505 | each | |
| Aug-Sep | 48,500 | units @ | $515 | each | |
| Oct | 24,000 | units @ | $520 | each | |
| Nov-Dec | 20,000 | units @ | $535 | each | |
| Year-End Physical Inventory Count | 38,000 | units | |||
Note: For full credit, you must show documentation for both DVLIFO and FIFO calculations, with indication and reasoning for your choice.
Requirement 1: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using FIFO for 2016.
Requirement 2: Show the adjusting journal entry(ies) (if any) that is/are needed on Dec. 31, 2016 related to FIFO inventory. Remember to show the journal entry in proper form!
Requirement 3: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using DVLIFO for 2016. Hint: DVLIFO adjustments are calculated at the end of the year, using annual layersânot based on each individual purchase. TECHNOGYM used 1.07 as its DVLIFO index.
| DV LIFO | Ending Inventory at Year-End Cost | Index | Ending Inventory at Base-Yr Cost | Inventory Layers at | Inventory Layers at | Ending Inventory at DV LIFO Cost | LIFO Reserve Adjustment |
| 2015 | |||||||
| 2016 | |||||||
Requirement 4: Show the adjusting journal entry(ies) (if any) that would be needed on Dec. 31, 2016 if management decides to adopt the DVLIFO inventory method. Remember to show the journal entry in proper form!
Requirement 5: Using the table below, show the amounts that would appear on indicated line items of the Income Statement and Balance Sheet under the two methods.
| FIFO Method | DVLIFO Method | ||
| Income Statement | Cost of TechTone Equipment Sold | ||
| Balance Sheet | Inventory |
Which method gives higher net income?
Which method gives higher assets?
| . Make all 16 adjustments to journal entries. Remember to include a description under each journal entry. |
| 1 | On March 1, ABC purchased a one-year liability insurance policy for $98,400. | ||||||||
| Upon purchase, the following journal entry was made: | |||||||||
| Dr Prepaid insurance | 98,400 | ||||||||
| Cr Cash | 98,400 | ||||||||
| The expired portion of insurance must be recorded as of 12/31/14. | |||||||||
| Notice that the expired portion from March through November has been recorded already. | |||||||||
| Make sure that the Prepaid Insurance balance after the adjusting entry is correct. | |||||||||
| 2 | Depreciation expense must be recorded for the month of December. | ||||||||
| The building was purchased with cash on February 1, 2014, for $150,000 with a remaining useful life of 30 years and a salvage value of $6,000. | |||||||||
| The method of depreciation for the building is straight-line. | |||||||||
| The equipment was purchased with cash on February 1, 2014, for $60,000 with a remaining useful life of 5 years and a salvage value of $3,000. | |||||||||
| The method of depreciation for the equipment is double-declining balance. | |||||||||
| Depreciation has been recorded for the building and equipment for months February through November. | |||||||||
| 3 | On December 1, XYZ Co. agreed to rent space in ABC's building for $12,000 per month, | ||||||||
| and XYZ paid ABC on December 1 in advance for the first three months' rent. | |||||||||
| The entry made on December 1 was as follows: | |||||||||
| Dr Cash | 36,000 | ||||||||
| Cr Unearned rent revenue | 36,000 | ||||||||
| The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/14. | |||||||||
| 4 | Per timecards, from the last payroll date through December 31, 2014, ABC's employees have worked a total of 250 hours. | ||||||||
| Including payroll taxes, ABC's wage expense averages about $51 per hour. The next payroll date is January 5, 2015. | |||||||||
| The liability for wages payable must be recorded as of 12/31/14. | |||||||||
| 5 | On November 30, 2014, ABC borrowed $235,000 from American National Bank by issuing an interest-bearing note payable. | ||||||||
| This loan is to be repaid in three months (on February 28, 2015), along with interest computed at an annual rate of 6%. | |||||||||
| The entry made on November 30 to record the borrowing was: (for Statement of Cash Flow purposes, consider a financing item) | |||||||||
| Dr Cash | 235,000 | ||||||||
| Cr Notes payable | 235,000 | ||||||||
| On February 28, 2015 ABC must pay the bank the amount borrowed plus interest. | |||||||||
| Assume the beginning balance for Notes Payable is correct. | |||||||||
| Interest through 12/31/14 must be accrued on the $235,000 note. | |||||||||
| 6 | ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete | ||||||||
| physical inventory at year-end. A physical count was taken on December 31, 2014, and the inventory on-hand at | |||||||||
| that time totaled $75,000, which reflects historical cost. | |||||||||
| Record the 2014 Cost of Goods Sold and the 12/31/14 Inventory adjustment. | |||||||||
| Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. | |||||||||
| A review of inventory data further indicated that the current retail sales value of the ending inventory is $110,000 and estimated costs of | |||||||||
| completion and shipping is 15% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory | |||||||||
| using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting | |||||||||
| for adjustments of inventory to market value. | |||||||||
| 7 | It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC realized | ||||||||
| that their intangible asset might be impaired on December 31, 2014. Record the impairment if any. | |||||||||
| The expected future net cash flows for this intangible asset totals $30,000, and the fair value of the asset is $27,500. | |||||||||
| 8 | On 7/1/14, ABC purchased 7,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury | ||||||||
| stock was $7 per share, or $49,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/14, | |||||||||
| ABC reissued these 7,000 shares of treasury stock at $10 per share. Record the journal entry required for the reissuance of the treasury stock. | |||||||||
| 9 | On 12/31/14, ABC issued 5,000 shares of $3 par value common stock at the closing market price of $7 per share. Prepare ABC's journal entry | ||||||||
| to reflect the issuance of the stock on 12/31/14. | |||||||||
| 10 | On 7/1/14, ABC sold 12% bonds having a maturity value of $800,000 for $861,771, resulting in an effective yield of 10%. The bonds are | ||||||||
| dated 7/1/14, and mature 7/1/19. Interest is payable semiannually on July 1 and January 1. ABC uses the effective interest method of | |||||||||
| amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/14. | |||||||||
| Hint: Develop an abbreviated amortization schedule to accurately determine the interest expense. | |||||||||
| 11 | The following information is available for ABC Corporation at 12/31/14 regarding its investments in stocks of other companies. | ||||||||
| Securities | Cost | Fair Value | |||||||
| 2,200 shares of Toyota Corporation Common Stock | $ 100,000 | $ 125,000 | |||||||
| 1,100 shares of G.M. Corporation Common Stock | $ 67,000 | $ 34,000 | |||||||
| $ 167,000 | $ 159,000 | ||||||||
| Prepare the adjusting entry (if any) for 2014, assuming the securities are classified as trading. | |||||||||
| 12 | On 1/1/14, ABC Corporation purchased, as a held-to-maturity investment, $200,000 of the 8%, 5-year bonds of Intuit Corporation for $177,824, | ||||||||
| which provides an 11% return. Prepare ABC's 12/31/14 journal entry to reflect the receipt of annual interest and discount amortization. | |||||||||
| Assume the bond investment pays interest annually on 12/31 each year and that effective interest amortization is used. | |||||||||
| Note: Notice that a discount account is not used for this investment. Therefore, for purposes of this adjusting entry, amortize the discount directly to the | |||||||||
| investment account. | |||||||||
| 13 | ABC Corporation prepares an aging schedule on 12/31/14 that estimates total uncollectible accounts at $25,000. Assuming that the allowance method is used, | ||||||||
| prepare the entry to record bad debt expense. | |||||||||
| 14 | On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery vehicle. The terms of the lease called for ABC to Corporation to make | ||||||||
| annual payments of $10,503 at the beginning of each year, starting January 1, 2014. The delivery vehicle has an estimated useful life of 6 years and a $7,000 | |||||||||
| unguaranteed residual value. The delivery vehicle reverts back to the lessor at the end of the lease term. ABC Corporation uses the straight-line method | |||||||||
| of depreciation for the delivery vehicle. ABC Corporation's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown. No entries have yet | |||||||||
| been made concerning this lease arrangement. After determining the type of lease arrangement (capital or operating), prepare the necessary multiple-part journal | |||||||||
| entry for 2014 for ABC Corporation. (Hints: You will need to compute the present value of the minimum lease payments and 4 separate sub-entries for | |||||||||
| this lease transaction. Also, for Statement of Cash Flow purposes, the principal portion of lease payments are correctly categorized as a financing activity.) | |||||||||
| 15 | ABC Corporation provides a defined benefit pension plan for its employees. A combination adjusting entry should be made to correctly account for this type of pension | ||||||||
| plan given the following items of information for the 2014 plan year, including the recording of pension expense and the employer's contribution to the pension plan in 2014. | |||||||||
| Note: Use the summary entry method as demonstrated and discussed in the chapter lectures on pension accounting to prepare the adjusting entry. | |||||||||
| Pension asset/liability (January 1) | $0 | ||||||||
| Actual return on plan assets | $40,000 | ||||||||
| Expected return on plan assets | $20,000 | ||||||||
| Contributions (funding) in 2014 | $37,000 | ||||||||
| Fair value of plan assets (December 31) | $75,000 | ||||||||
| Settlement rate | 10% | ||||||||
| Projected benefit obligation (January 1) | $0 | ||||||||
| Service cost | $60,000 | ||||||||
| Benefits paid in 2014 | $0 | ||||||||
| *For purposes of financial statement presentation, consider Pension Expense as an operating item and any resulting Pension Asset/Liability as long-term in nature. | |||||||||
| 16 | On December 31, 2014, ABC Corporation issued 1,000 shares of restricted stock to its Chief Financial Officer. ABC stock had a fair value (closing market price) of | ||||||||
| $10 per share on December 31, 2014. Additional information is as follows: | |||||||||
| a. The service period related to the restricted stock is 2 years. | |||||||||
| b. Vesting occurs if the CFO stays with the company for a two-year period. | |||||||||
| c. The par value of the common stock is $3 per share. | |||||||||
| Make the appropriate accounting entry as of the grant date, 12/31/14. Note: use the alternative method as described in your textbook for deferred compensation. | |||||||||
| Do this step after preparing the Income Statement except for the Income taxes line: (You need to calculate Income Before Income Taxes in order to calcualte total Income Tax Expense) | |||||||||
| 17 | Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15. | ||||||||
| However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full | |||||||||
| on the return's March 15, 2015 due date. | |||||||||
| ABC's income tax rate is 40%. The entire year's income tax expense was estimated at the beginning of 2014 to be $69,600, | |||||||||
| so January through November income tax expense recognized amounts to $63,800 (11/12 months). | |||||||||
| Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents | |||||||||
| tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities. | |||||||||
| Based on the income before income taxes figure from the income statement, record December's income tax expense | |||||||||
| so that the entire year's total tax expense is correct. | |||||||||