CH 06

Chapter Six
Challenge Exercise 1
Expands on: E6-1
LO: 1
Premier Bank and Trust is considering giving Bean Company a loan. Before doing so, they decide that further
discussions with Bean’s accountant may be desirable. One area of particular concern is the inventory account,
which has a year-end balance of $326,000. Discussions with the accountant reveal the following.
1. Bean received goods costing $49,000 on January 2 that were shipped FOB destination on December
29. The shipment was a rush order that was supposed to arrive December 31. This purchase was
included in the ending inventory of $326,000.
2. Bean sold goods costing $41,000 to Cusa Company, FOB shipping point, on December 28 for
$65,000.The goods are not expected to arrive at Cusa until January 12.The goods were not included in
the physical inventory because they were not in the warehouse.
3. The physical count of the inventory did not include goods costing $89,000 that were shipped to Bean
FOB destination on December 27 and were still in transit at year-end.
4. Bean received goods costing $27,000 on January 2. The goods were shipped FOB shipping point on
December 26 by Noble Co. The goods were not included in the physical count.
5. Bean sold, for $55,000 goods costing $38,000 to Limerick Co., FOB destination, on December 30. The
goods were received at Limerick on January 8. They were not included in Bean’s physical inventory.
Instructions:
(a) Determine the correct inventory amount on December 31.
(b) What correcting entry would have to be made for item 4?
Copyright © 2019 WILEY Weygandt, Financial and Managerial Accounting 3e, Challenge Exercises
(For Instructor Use Only) Page 6-1
Expands on: E6-5
LO: 2
Flying Tomato sells a snowboard, WhiteOut, that is popular with snowboard enthusiasts. Presented below is
information relating to Flying Tomato’s purchases of WhiteOut snowboards during September. During the
same month, 121 WhiteOut snowboards were sold at $170 each. Flying Tomato uses a periodic inventory
system.
Date Explanation Units Unit Cost Total Cost

Sept. 1 Inventory 25 $ 100 $ 2,500
Sept. 12 Purchases 45 106 4,770
Totals 144 $ 15,510
Instructions:
(a) Compute the ending inventory at September 30 and cost of goods sold using the FIFO and LIFO
methods. Prove the amount allocated to cost of goods sold under each method.
(b) For both FIFO and LIFO, calculate the sum of ending inventory and cost of goods sold. What do you
notice about the answers you found for each method?
(c) What is gross profit under each method?
(d) Which method results in a larger amount reported for assets on the balance sheet? Which results in a
larger amount reported for stockholders’ equity on the balance sheet?
Expands on: E6-8
LO: 2
Root Beer Company had 200 units in beginning inventory at a total cost of $16,000. The company purchased
100 units at a total cost of $11,000. At the end of the year, Root Beer had 70 units in ending inventory.
Instructions:
(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO, (2) LIFO, and (3)
average-cost.
(b) Which cost flow method would result in the highest net income?
(c) Which cost flow method would result in inventories approximating current cost in the balance sheet?
(d) Which cost flow method would result in Root Beer paying the least taxes in the first year?
(e) Suppose Root Beer decides at yearend that they want to report a lower net income. Would they be able
to manipulate net income when using FIFO or LIFO?
Expands on: E6-10
LO: 3
Scaggs Hardware reported cost of goods sold as follows.

2019 2020
Beginning inventory $ 30,000 $ 40,000
Cost of goods purchased 170,000 195,000
Cost of goods available for sale 200,000 235,000
Ending inventory 40,000 45,000
Cost of goods sold $160,000 $190,000
Scaggs made two errors: (1) 2019 ending inventory was overstated $4,000, and (2) 2020 ending inventory was
understated $7,000.
Instructions:
a) Compute the correct cost of goods sold for each year.
b) What correcting entry would Scaggs make for error (2)?
Expands on: E6-12
LO: 4
Naughty Dog Disc Golf Shop uses the lower-of-cost-or-net realizable value basis for its inventory. The
following data are available at December 31.
Item Units Unit Cost Net Realizable Value

Baskets:
Innova 10 $190 $200
Discraft 20 175 160
Disc bags:
Lightning 15 20 16
Wham-O 14 30 28
Instructions:
(a) Determine the amount of the ending inventory by applying the lower-of-cost-or-net realizable value
basis.
(b) When determining “lower of cost or net realizable value”, what is “net realizable value? Why is net
realizable value defined in this way?
Expands on: E6-15
LO: 4
The cost of goods sold computations for Letterman Company and Schaeffer Company are shown below.
Letterman Company Schaeffer Company

Beginning inventory $ 55,000 $ 81,000
Cost of goods purchased 220,000 310,000
Cost of goods available for sale 275,000 391,000
Ending inventory 65,000 79,000
Cost of goods sold $210,000 $312,000
Instructions:
(a) Compute inventory turnover and days in inventory for each company.
(b) Which company moves its inventory more quickly?
(c) Why is it generally considered to be better for a company to move its inventory more quickly?
(d) What are possible concerns you might have about a company with a very high inventory turnover?
Expands on: E6-19
LO: 6
Doc Gibbs Company reported the following information for November and December 2020.
November December
Cost of goods purchased $ 700,000 $ 915,000
Inventory, beginning-of-month 140,000 168,000
Inventory, end-of-month 168,000 ?
Sales 1,120,000 1,500,000
Doc Gibbs’s ending inventory at December 31 was damaged in a fire. After the fire, inventory which originally
cost $60,000 is salvageable. It can be sold at approximately 70% of cost.
Instructions:
(a) Compute the gross profit rate for November.
(b) Using the gross profit rate for November, determine the estimated loss on inventory lost due to the fire.
Expands on: E6-21
LO: 6
Dan’s Threads uses the retail inventory method for its two departments, Men‘s Clothes and Women‘s Clothes.
The following information for each department is obtained.
Item Men’s Dept. Women’s Dept.

Beginning inventory at cost $ 40,000 $ 50,000
Cost of goods purchased at cost 160,160 175,700
Net sales 192,000 245,000
Beginning inventory at retail 58,000 65,000
Cost of goods purchased at retail 220,000 240,000
Instructions:
Compute the estimated cost of the ending inventory for each department under the retail inventory method.

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Chapter Six

Date Explanation Units Unit Cost Total Cost

Scaggs Hardware reported cost of goods sold as follows.

Item Units Unit Cost Net Realizable Value

Letterman Company Schaeffer Company

Item Men’s Dept. Women’s Dept.

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