An entity purchased US $1 .000 gross amount of inventory on account with terms of 2 f discount if paid within 10 days. The seller was responsible for delivery to the shipping point, with freight of US $30 prepaid by the seller. The entity records purchases at the net amount The journal entry to record payment 8 days after the invoice date is
Answer(s): A
Under the net method, the payable is initially credited at the discounted amount Because the payment was within the discount period and freight was prepaid. the buyer's remittance to the seller includes the freight cost of US $30 and the discounted price of the merchandise [US $1 .000 x1 0 - 1.02) = US $980], a total of US $1 .010. An entity with a December 31 year-end purchased US $2, 000 of inventory on account. The seller was responsible for delivery to the shipping point, with freight of US $50 paid at destination by the buyer. The invoice date was December 27. Year I). and the goods arrived on January 3, Year 2.
Now assume the terms required the seller to deliver to the destination instead of the shipping point. What is the correct amount of inventory and freight-in relating to this purchase on the Year 1 financial statements?
Title and risk of loss passed to the buyer at the destination, and the seller incurred the erase of delivery to that point The goods did not arrive until after year-end, so they should not be included in Year 1 inventory. Freight-in should also not be recorded until Year 2.
A merchandising company had the following inventory related transactions in its first year of operations:If the company uses the first-in-first-outFIFO) method of inventory valuation, its ending inventory balancerounded) will be
Answer(s): C
The first-in-first-outFIFO) method assumes that the oldest units are used first and the newest units remain in inventory. Because the company has 12, 000 units remaining, ending inventory equals US $78, 750 [(5, 000 $7) +7, 000 $6.25)].
The cost of materials has risen steadily over the year. The entity uses its newest materials first when removing items from inventory. Which of the following methods of estimating the ending balance of the materials inventory account will result in the highest profit, all other variables held constant?
Answer(s): B
The first-in-first-outFIFO) method assumes that the oldest and hence least costly units are used first, and the newest and most costly items remain in inventory. This method will result in the highest inventory balance if costs rise steadily during the accounting period. Accordingly. FIFO results in the lowest cost of goods sold and the highest profit.
An entity uses the retail method of inventory estimation for interim reporting purposes. Management expects some normal shrinkage in the inventory because of theft. What effect will the failure to consider this shrinkage have on the computation of1) the cost- retail ratio, and2) the estimated ending inventory at retail?
The retail method of inventory estimation applies a cost-retail ratio to the ending inventory at retail to determine ending inventory at cost For example, a popular method calculates the ratio as goods available for sale at cost divided by goods available at retail, with markups but not markdowns included in the calculation of the retail amount. Normal inventory is subtracted from the retail amount of goods available because are not available. However, abnormal amounts of theft, etc., are removed from the cost and retail amounts. The reason for the difference in treatment is that normal but not abnormal inventory losses are anticipated and included in the sellingretail value). Accordingly. failure to account for normal inventory shrinkage has no effect on the calculate , n , : rl the :_ost-retail ratio but overstates ending inventory at retail.
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