Chapter 6 Solutions 2241

Chapter 6
Inventory and Cost of Goods Sold

Exercises
(15-20 min.)
E 6-13
Req. 1
Perpetual System
(Thousands)
1.
2.
Purchases:
Inventory.................................................................................
1,200
Accounts Payable.............................................................
1,200
Sales:
Cash ($2,000 0.20)...............................................................400
Accounts Receivable ($2,000 0.80)...................................
1,600
Sales Revenue...................................................................
2,000
Cost of Goods Sold ($550 + $1,200 $850)........................900

Inventory............................................................................
900
Req. 2
(Thousands)
BALANCE SHEET
Current assets:
Inventory.
INCOME STATEMENT
398
Financial Accounting Third Canadian Edition Instructors Solutions Manual

Copyright 2010 Pearson Canada Inc.
$ 850
Sales revenue.
Cost of goods sold
Gross profit.
399

$2,000
900
$1,100
(15-25 min.)
E 6-14
Journal
DATE
Reg.
1.a.
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Inventory ($1,760 + $850)...........................................................................

2,610
Accounts Payable.................................................................................
Reg.
1.b.
Accounts Receivable (11 @ $500)
2,610
5,500
Sales Revenue......................................................................................
5,500
Cost of Goods Sold....................................................................................

1,710*
Inventory...............................................................................................
Reg.
2.
1,710
Sales revenue..............................................................................................
$5,500
Cost of goods sold.....................................................................................
1,710
Gross profit.................................................................................................
$3,790
Ending inventory
($750 + $1,760 + $850 $1,710)...........................................................
$1,650**
_____
*(5 @ $150) + (6 @ $160) = $1,710
** (5 @ $170) + (5 @ $160) = $1,650
Chapter 6 Inventory and Cost of Goods Sold

400
(10-15 min.)
E 6-15
1.
Inventory
Begin. Bal.
Purchases
Oct. 15
26
Ending bal.
(a)
Specific
unit cost
( 5 units @ $150)
750
(11 units @ $160) 1,760

( 5 units @ $170) 850
(10 units @ $?)
?
Cost of goods sold

(11 units @ $?)
Cost of Goods Sold
Ending Inventory
(3 @ $150)
+ (8 @ $160)
(b)
Weightedaverage cost
11 $160*
$1,730
(2 @ $150)
+ (3 @ $160)
+ (5 @ $170)
= $1,630
$1,760
10 $160*
= $1,600
_____
*Weighted-average cost
per unit
(c) FIFO
(5 @ $150)
+ (6 @ $160)
($750 + $1,760 + $850)
(5 + 11 + 5)
=
$1,710
(5 @ $170)
+ (5 @ $160)
$160
$1,650
2. Weighted-average cost produces the highest cost of goods sold, $1,760.

FIFO produces the lowest cost of goods sold, $1,710.
401

The increase in inventory cost from $150 to $160 to $170 per unit causes the
difference in cost of goods sold. With FIFO the lowest cost item is sold first, with
specific cost more items at higher cost were sold, and with average cost the
increase in cost of purchases raised the average cost of items sold.

402
(15 min.)
1.
a.
b.
FIFO
Cost of goods sold:
(6 @ $95) + (2 @ $100)...
Ending inventory:
9 @ $100
Weighted-average cost
Cost of goods sold:
8 @ $98.235
Ending inventory:
9 @ $98.235...
*Weighted-average cost
=
2.
E 6-17
$770
$900
$785.88
$884.12
(6 $95) + (11 $100)

= $98.235
6 + 11
MusicBiz.net Ltd.
Income Statement
for the Month Ended June 30, 2011
Sales revenue (3 @ $155) + (5 @ $160)...........................................

Cost of goods sold............................................................................
Gross profit........................................................................................
Operating expenses..........................................................................
Income before income tax................................................................
Income tax expense (25%)...............................................................
Net income.........................................................................................
403

$1,265
770
495
319
176
44
$ 132
(5-10 min.)
E 6-21
Tavistock Inc.
Income Statement (partial)
for the Year Ended December 31, 2011
Sales revenue
$125,000
Cost of goods sold [$78,000 + ($14,000 $12,000)]
80,000
Gross profit
$ 45,000
Note: Cost is used for beginning inventory because cost is lower than net realizable
value. Net realizable value is used for ending inventory because net
realizable value is lower than cost at year end.

404
Problems
Group A
(20-30 min.)
P 6-48A
Req. 1
Inventory.
9,200,000
Accounts Payable
Accounts Payable.
9,200,000
8,800,000
Cash.
8,800,000
Cash.
5,000,000
Accounts Receivable...
9,400,000
Sales Revenue..
Cost of Goods Sold (150,000 $63.75*).
14,400,000
9,562,500
Inventory.
9,562,500
_____
*($1,000,000 + $9,200,000) + (20,000 + 30,000 + 50,000 + 60,000) = $63.75
Operating Expenses......
4,000,000
Cash ($4,000,000 0.80)......
3,200,000
Accrued Liabilities ($4,000,000 0.20).

Income Tax Expense.....
800,000
276,375
Income Tax Payable......

[($14,400,000 $9,562,500 $4,000,000) 0.33 = $276,375]
405

276,375
(continued)
P 6-48A
Req. 2
Inventory
Beg. bal.
1,000,000
Purchases
9,200,000
End. bal.
COGS
9,562,500
637,500
Req. 3
Best Buy Store in Toronto
Income Statement
for the Year Ended February 28, 2011
Sales revenue
$14,400,000
Cost of goods sold..
9,562,500
Gross profit
4,837,500
Operating expenses.
4,000,000
Income before tax.
837,500
Income tax expense (33%).
276,375
Net income.
561,125

406
(20-30 min.)
P 6-49A
Req. 1
The store uses FIFO.
This is apparent from the flow of costs out of inventory. For example, the August 11
sale shows unit cost of $40, which came from the beginning inventory. This is how
FIFO, and only FIFO, works.
Req. 2
Cost of goods sold:
16
$40
$ 640
24
40
960
41
369
30
41
1,230
$3,199
Sales 16 + 24 = 40 units $70
= $2,800
9 + 30 = 39 units $72
= 2,808
Cost of goods sold.
Gross profit..
$5,608
3,199
$2,409
Req. 3
Cost of August 31 inventory (18 $42) + (41 $41).
407

$2,437
(20-30 min.)
P 6-50A
Req. 1
Inventory
Begin. bal.
Purchases:
Mar. 4
19
25
Ending bal.
( 70 units @ $20) 1,400

(100 units @ $22) 2,200
(160 units @ $24) 3,840
( 40 units @ $25) 1,000
( 50 units @ $?)
?
Cost of Goods Sold

320 $22.8108* =
$7,299
Cost of goods sold

(320 units @ $?)
Ending Inventory
50 $22.8108*
$1,141
____
*Weightedaverage cost
per unit
FIFO
(70 @ $20) + (100

@ $22) + (150 @
$24)
($1,400 + $2,200 + $3,840 + $1,000)

(70 + 100 + 160 + 40)
= $ 7,200
(40 @ $25) + (10 @ $24)
= $22.8108
= $1,240
Req. 2
Weighted-average cost results in the highest cost of goods sold because (a) the cost
of tents is rising and (b) weighted-average cost includes in cost of goods sold the
cost of the latest inventory purchases. When costs are rising, these latest inventory

408
costs are the highest, and that makes cost of goods sold the highest under
weighted-average cost.
Student responses may vary.
Req. 3
Army-Navy Surplus Ltd.
Income Statement
for the Month Ended March 31, 2011
Sales revenue (320 $45)..
Gross profit...
Operating expenses
Income before income taxes.
Net income.
409

$14,400
7,299
7,101
4,000
3,101
651
$ 2,450
(30-40 min.)
P 6-51A
Req. 1 (partial income statements)

Armstrong Aviation Supply Inc.
Income Statement
For the Year Ended December 31, 2011
WEIGHTED-AVERAGE
Sales revenue
Cost of goods sold
Gross profit
FIFO
$127,800
$127,800
67,514
67,015
$ 60,286
$ 60,785
Computations of cost of goods sold:

per unit
COGS at average cost

FIFO COGS
($4,900 + $2,115 + $63,000 + $4,250)

(700 + 300 + 8,400 + 500)
= 9,000 $7.5015
= (700 @ $7.00) + (300 @ $7.05) + (8,000 @ $7.50)
$7.5015
=
$67,514
$67,015

410
(continued)
P 6-51A
Req. 2
Use the weighted-average cost method to minimize income tax because cost of
goods sold is highest (gross profit is lowest) under weighted-average cost when
inventory costs are rising.
411

(15-30 min.)
P 6-52A
AMC should apply the lower-of-cost-or-net realizable value rule to account for
inventories. The current net realizable value of ending inventory is less than AMCs
actual cost, so AMC must write the inventory down to net realizable value, with the
following journal entry:
Cost of Goods Sold
Inventory...
To write inventory down to net realizable value.
80,000
80,000
AMC should report the following amounts in its financial statements:

BALANCE SHEET
Inventory at net realizable value
$110,000
INCOME STATEMENT
Cost of goods sold ($780,000 + $80,000)
_____
$860,000
The Lower of Cost or Net Realizable Value rule (LCNRV) is the reason to account for
inventory at the lower of cost or net realizable value. This characteristic directs
accountants to write inventory down if cost appears unrealistically high. In this case the
net realizable value (market value) of AMCs ending inventory is less than cost. Under the
LCNRV rule, this requires a write-down of the inventory value to net realizable value.
AMC could increase the value of the inventory at the end of the next fiscal period if the
net realizable value of the inventory had increased. The amount of the increase is limited
to the amount of the original write down from the original cost of the inventory.

Problems
Group B
(20-30 min.)
P 6-57B
Req. 1
Inventory.
8,940,000
Accounts Payable
Accounts Payable
8,940,000
8,610,000
Cash
8,610,000
Cash.
4,700,000
Accounts Receivable..
8,200,000
Sales Revenue..
Cost of Goods Sold (260,000 $33.6774*)
12,900,000
8,756,124
Inventory
8,756,124
$1,500,000 + $1,280,000 + $1,360,000 + $6,300,000

= $33.6774
*
50,000 + 40,000 + 40,000 + 180,000
Operating Expenses
2,080,000
Cash ($2,080,000 0.60)
1,248,000
Accrued Liabilities ($2,080,000 0.40)..
832,000
Income Tax Expense...
660,440
Income Tax Payable

[($12,900,000 $8,756,124 $2,080,000)
0.32 = $660,440]
413

660,440
(continued)
P 6-57B
Req. 2
Inventory
Beg. bal.
1,500,000
Purchases
8,940,000
End. bal.
1,683,876
COGS
8,756,124
Req. 3
Italian Leather Goods Inc.
Income Statement
for the Year Ended December 31, 2011
Sales revenue
$12,900,000
8,756,124
Gross profit
4,143,876
Operating expenses
2,080,000
Income before tax
2,063,876
660,440
Net income.
$ 1,403,436

P 6-59B
(20-30 min.)
Req. 1
Inventory
Begin. bal.
(100 units @ $76)
7,600
Purchases:
Oct.
(200 units @ $81) 16,200
12
( 90 units @ $82)
7,380
24
(240 units @ $85)
20,400
Ending bal.
(130 units @ $?)
500 $81.873*
(500 units @ $?)
Cost of Goods Sold

Weighted-average
cost
Cost of goods sold
$40,937
Ending Inventory
130 $81.873*
$10,643
____
*Weighted-average
cost per unit
=
FIFO
($7,600 + $16,200 + $7,380 + $20,400)

(100 + 200 + 90 + 240)
(100 @ $76) + (200 @ $81)

+ (90 @ $82) + (110 @ $85)
415
= $81.873
= $40,530
130 @ $85

= $11,050
(continued)
P 6-59B
Req. 2
Weighted-average cost of goods sold is highest because (a) prices are rising and
(b) weighted-average cost includes in cost of goods sold the cost of the latest
inventory purchases. When costs are rising, these latest inventory costs are the
highest, and that makes cost of goods sold the highest under weighted-average
cost.
Req. 3
Spice Inc.
Income Statement
for the Month Ended October 31, 2011
Sales revenue (500 @ $130)..
Gross profit
Operating expenses
Income before income taxes.
Net income.
$65,000
40,937
24,063
10,000
14,063
3,234
$10,829

(30-40 min.)
P 6-60B
Req. 1 (partial income statements)

Sonic Sound Systems Inc.
Income Statement
For the Year Ended December 31, 2011
Sales revenue
WEIGHTED-AVERAGE
FIFO
$910,000
$910,000
618,429
610,500
$291,571
$299,500
Cost of goods sold

Gross profit
Computations of cost of goods sold:
Weighted-Average cost
per case
($121,500 + $201,000 + $140,000 + $259,000)
COGS at weighted-average cost

FIFO COGS
(400 + 600 + 400 + 700)

= 1,800 $343.5714
= (300 @ $300) + (100 @ $315) + (600 @ $335) +

(400 @ $350) + (400 @ $370)
= $343.5714
= $618,429
$610,500
(continued)
P 6-60B
Req. 2
Use FIFO to report the highest net income because cost of goods sold is lowest
(gross profit is highest) under FIFO when inventory costs are rising. Inventory
costs of first inventory will be lower.
(15-20 min.)
P 6-61B
Westside Copiers should apply the lower-of-cost-or-net realizable value rule to

account for inventories. The net realizable value of ending inventory is less than
Westsides actual cost, so Westside must write the inventory down to net
realizable value, with the following journal entry:
Cost of Goods Sold...............................2,100,000*

Inventory...........................................
2,100,000
To write inventory down to net realizable value.

*$8,900,000 $6,800,000 = $2,100,000
Westside should report the following in its financial statements:
BALANCE SHEET
Inventory, at net realizable value (which is lower than
cost of $8,900,000) ................................................................
$ 6,800,000
INCOME STATEMENT
Cost of goods sold ($36,400,000 +
$2,100,000)........................................................................
$38,500,000
Lower of Cost and Net Realizable Value (LCNRV) is the reason to account for
inventory at the lower of cost or net realizable value. This characteristic (Faithful
Representation) directs accountants to write inventory down if cost appears

higher than net realizable value. In this case the net realizable value (net
realizable value) of Westsides ending inventory is less than cost, and the lowerof-cost-or-net realizable value rule requires a write-down of the inventory value to
net realizable value.
Westside copiers could increase the value of its inventory up to its original cost if
the realizable value increased up to that amount.
419
Financial Accounting Fourth Canadian Edition Instructors Solutions Manual


Chapter 6 Solutions 2241

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Chapter 6

Inventory and Cost of Goods Sold

Cost of Goods Sold ($550 + $1,200 $850)........................900

Financial Accounting Third Canadian Edition Instructors Solutions Manual

Financial Accounting Third Canadian Edition Instructors Solutions Manual

ACCOUNT TITLES AND EXPLANATION

Inventory ($1,760 + $850)...........................................................................

Accounts Receivable (11 @ $500)

Cost of Goods Sold....................................................................................

Chapter 6 Inventory and Cost of Goods Sold

(11 units @ $160) 1,760

Cost of goods sold

Cost of Goods Sold

($750 + $1,760 + $850)

2. Weighted-average cost produces the highest cost of goods sold, $1,760.

Financial Accounting Third Canadian Edition Instructors Solutions Manual

Chapter 6 Inventory and Cost of Goods Sold

(6 $95) + (11 $100)

Sales revenue (3 @ $155) + (5 @ $160)...........................................

Financial Accounting Third Canadian Edition Instructors Solutions Manual

Cost of goods sold [$78,000 + ($14,000 $12,000)]

Chapter 6 Inventory and Cost of Goods Sold

Cash ($4,000,000 0.80)......

Accrued Liabilities ($4,000,000 0.20).

Income Tax Payable......

Financial Accounting Third Canadian Edition Instructors Solutions Manual

Cost of goods sold..

Income before tax.

Income tax expense (33%).

Chapter 6 Inventory and Cost of Goods Sold

Sales 16 + 24 = 40 units $70

Financial Accounting Third Canadian Edition Instructors Solutions Manual

( 70 units @ $20) 1,400

Cost of Goods Sold

Cost of goods sold

(70 @ $20) + (100

($1,400 + $2,200 + $3,840 + $1,000)

(40 @ $25) + (10 @ $24)

Chapter 6 Inventory and Cost of Goods Sold

Student responses may vary.

Financial Accounting Third Canadian Edition Instructors Solutions Manual

Req. 1 (partial income statements)

Computations of cost of goods sold:

COGS at average cost

($4,900 + $2,115 + $63,000 + $4,250)

= (700 @ $7.00) + (300 @ $7.05) + (8,000 @ $7.50)

Chapter 6 Inventory and Cost of Goods Sold

Financial Accounting Third Canadian Edition Instructors Solutions Manual

AMC should report the following amounts in its financial statements:

Student responses may vary.

Chapter 6 Inventory and Cost of Goods Sold

$1,500,000 + $1,280,000 + $1,360,000 + $6,300,000

Cash ($2,080,000 0.60)

Accrued Liabilities ($2,080,000 0.40)..

Income Tax Expense...

Income Tax Payable

Financial Accounting Third Canadian Edition Instructors Solutions Manual

Cost of goods sold..

Income before tax

Income tax expense (32%).

Chapter 6 Inventory and Cost of Goods Sold

(100 units @ $76)

(200 units @ $81) 16,200