Problem Set 3northparkvikings.ca/classes/scorcia-bat4mr-f16/files/...There were 37 units on hand. What journal entry, if any, should the company make to record the difference? (d)

Mr.Scorcia March 3, 2015

PROBLEM SET3 CHAPTERS 6-7

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2 | CHAPTER 6

All rights reserved. Copyright 2014, John Wiley & Sons Canada, Ltd.

Weygandt et al., Principles of Financial Accounting: Canadian Edition

Instructions (a) Determine the cost of goods sold and the ending inventory for the month of July. (b) Determine the gross profit for the month of July.

TA K I N G I T F U R T H E R Should EastPoint Honda use the specific identification cost determination method or one of the cost formulas? Explain.

P6–3B You are given the following information for Danielle Company for the month ended June 30, 2014:

Date Description Units Unit PriceJune 1 Beginning inventory 20 $50 4 Purchase 85 55 10 Sale (90) 18 Purchase 35 58 25 Sale (30) 26 Sales return (June 25 sale) 5 28 Purchase 15 60

Danielle Company uses a perpetual inventory system. All sales and purchases are on account.

Instructions (a) Calculate the cost of goods sold and the ending inventory using average. (Hint: Round the average

cost per unit to two decimal places.) (b) Assume the sales price was $90 per unit for the goods sold on June 10, and $95 per unit for the sale

on June 25. Prepare journal entries to record the June 10 sale and the June 18 purchase. (c) At the end of June, the company counted its inventory. There were 37 units on hand. What journal

entry, if any, should the company make to record the difference? (d) If the company had not discovered this shortage, what would be overstated or understated on the

balance sheet and income statement and by what amount?

TA K I N G I T F U R T H E R In what respects does average provide more useful information than FIFO?

P6–4B Information for Danielle Company is presented in P6–3B. Assume the same inventory data and that the company uses a perpetual inventory system. Ignore the inventory difference from P6–3B (c).

Instructions (a) Calculate the cost of goods sold and the ending inventory at June 30 using FIFO. (b) Prepare the journal entries to record the June 25 sale and June 26 sales return. (c) If the company changes from FIFO to average and prices continue to rise, would you expect the cost

of goods sold and ending inventory amounts to be higher or lower than these amounts?

TA K I N G I T F U R T H E R If Danielle Company wishes to change from FIFO to the average cost formula, what factors must it consider before making this change?

P6–5B Bennett Basketball sells a variety of basketballs and accessories. Information follows for Bennett Basketball’s purchases and sales during February and March for Up-Snap, one of its top brands of basketballs:

Purchases Sales Units Unit Cost Units Unit PriceFeb. 7 18 $32 23 50 $20 26 50 30Mar. 10 24 19 23 32 29

Bennett uses a perpetual inventory system. On February 1, Bennett had 36 units on hand at a cost of $21 each. All purchases and sales during February and March were on account.

Apply perpetual average. Record sales and inventory adjustment and calculate gross profi t. (SO 2) AP

Apply perpetual FIFOand answer questions.(SO 2, 3) AP

Apply perpetual FIFO and average. Answer questions about fi nancial statement eff ects. (SO 2, 3) AP

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CHAPTER 6 | 3


Problems: Set B

Instructions (a) Determine the cost of goods sold and ending inventory under a perpetual inventory system using

(1) FIFO and (2) average. (Hint: Round the average cost per unit to three decimal places.) (b) Calculate gross profit using (1) FIFO and (2) average. (c) What impact, if any, does the choice of cost formula have on cash flows?

TA K I N G I T F U R T H E R What factors should Bennett’s owner consider when choosing a cost formula?

P6–6B You are given the following information for transactions by Schwinghamer Co. All transactions are settled in cash. Returns are normally not damaged and are restored immediately to inventory for resale. Schwinghamer uses a perpetual inventory system and the FIFO cost formula.

Date Transaction Units Unit PriceOct. 1 Beginning inventory 60 $14 5 Purchase 110 13 8 Sale (140) 20 10 Sale return 25 20 15 Purchase 35 12 16 Purchase return (5) 12 20 Sale (70) 16 25 Purchase 15 11

Instructions (a) Prepare the required journal entries for the month of October for Schwinghamer Co. (b) Determine the ending inventory for Schwinghamer. (c) On October 31, Schwinghamer Co. determines that the product has a net realizable value of $10 per

unit. What amount should the inventory be valued at on the October 31 balance sheet? Prepare any required journal entries.

(d) What amount should ending inventory be valued at on the October 31 balance sheet? What amount should cost of goods sold be valued at on the October income statement?

TA K I N G I T F U R T H E R What if Schwinghamer had used average instead of FIFO? How would this affect the October 31 ending inventory on the balance sheet compared with FIFO?

P6–7B The records of Deveraux Company show the following amounts in its December 31 financial statements:

2014 2013 2012Total assets $600,000 $575,000 $525,000Owner’s equity 280,000 275,000 250,000Cost of goods sold 315,000 335,000 300,000Profit 60,000 50,000 40,000

Deveraux made the following errors in determining its ending inventory: 1. The ending inventory account balance at December 31, 2012, included $20,000 of goods held on

consignment for Leblanc Company. 2. The ending inventory account balance at December 31, 2013, did not include goods that were pur-

chased for $30,000 and shipped on December 30, 2013, FOB shipping point.

All purchases and sales of inventory were correctly recorded each year.Instructions (a) Calculate the correct amount for each of the following for 2012, 2013, and 2014:

1. Total assets 2. Owner’s equity 3. Cost of goods sold 4. Profit

(b) Indicate the effect of these errors (overstated, understated, or no effect) on cash at the end of 2012, 2013, and 2014.

TA K I N G I T F U R T H E R If the merchandise inventory balance is correct as at December 31, 2014, is it necessary to correct the errors in the previous years’ financial statements? Explain.

Record transactions using perpetual FIFO. Apply LCNRV. (SO 2, 5) AP

Determine eff ects of inventory errors. (SO 1, 4) AN


Mr.Scorcia March 3, 2015

�2

2 | CHAPTER 6


Weygandt et al., Principles of Financial Accounting: Canadian Edition

Instructions (a) Determine the cost of goods sold and the ending inventory for the month of July. (b) Determine the gross profit for the month of July.

TA K I N G I T F U R T H E R Should EastPoint Honda use the specific identification cost determination method or one of the cost formulas? Explain.

P6–3B You are given the following information for Danielle Company for the month ended June 30, 2014:

Date Description Units Unit PriceJune 1 Beginning inventory 20 $50 4 Purchase 85 55 10 Sale (90) 18 Purchase 35 58 25 Sale (30) 26 Sales return (June 25 sale) 5 28 Purchase 15 60

Danielle Company uses a perpetual inventory system. All sales and purchases are on account.

Instructions (a) Calculate the cost of goods sold and the ending inventory using average. (Hint: Round the average

cost per unit to two decimal places.) (b) Assume the sales price was $90 per unit for the goods sold on June 10, and $95 per unit for the sale

on June 25. Prepare journal entries to record the June 10 sale and the June 18 purchase. (c) At the end of June, the company counted its inventory. There were 37 units on hand. What journal

entry, if any, should the company make to record the difference? (d) If the company had not discovered this shortage, what would be overstated or understated on the

balance sheet and income statement and by what amount?

TA K I N G I T F U R T H E R In what respects does average provide more useful information than FIFO?

P6–4B Information for Danielle Company is presented in P6–3B. Assume the same inventory data and that the company uses a perpetual inventory system. Ignore the inventory difference from P6–3B (c).

Instructions (a) Calculate the cost of goods sold and the ending inventory at June 30 using FIFO. (b) Prepare the journal entries to record the June 25 sale and June 26 sales return. (c) If the company changes from FIFO to average and prices continue to rise, would you expect the cost

of goods sold and ending inventory amounts to be higher or lower than these amounts?

TA K I N G I T F U R T H E R If Danielle Company wishes to change from FIFO to the average cost formula, what factors must it consider before making this change?

P6–5B Bennett Basketball sells a variety of basketballs and accessories. Information follows for Bennett Basketball’s purchases and sales during February and March for Up-Snap, one of its top brands of basketballs:

Purchases Sales Units Unit Cost Units Unit PriceFeb. 7 18 $32 23 50 $20 26 50 30Mar. 10 24 19 23 32 29

Bennett uses a perpetual inventory system. On February 1, Bennett had 36 units on hand at a cost of $21 each. All purchases and sales during February and March were on account.

Apply perpetual average. Record sales and inventory adjustment and calculate gross profi t. (SO 2) AP

Apply perpetual FIFOand answer questions.(SO 2, 3) AP

Apply perpetual FIFO and average. Answer questions about fi nancial statement eff ects. (SO 2, 3) AP



Problem Set B to Accompany Chapter 7: Internal Control and Cash

P7–1B Seegall Supply Company recently changed its system of internal control over its purchasing operations and cash payments to make the system more efficient. One employee is now responsible for both purchasing and receiving. For each purchase, that individual matches the purchase order with the receiving report and the supplier’s invoice. The invoice is approved for payment by this indi-vidual and sent to the accounting department. All cheques are prenumbered and kept in a safe in the controller’s offi ce. Th e combination to the safe is known only by the controller, his assistant, and the company owner. Since the bank has never made a mistake with the account, the cheque numbers are not tracked. Th e controller prepares all of the cheques and all of the journal entries. All cheques must be signed by the company owner, Stephanie Seegall. After the owner has signed the cheque, the controller stamps the invoice paid and has his assistant fi le the invoice and post the journal entry. Whenever the owner is going to be away for several days, she will leave signed blank cheques in the safe for the controller. Th e controller prepares the monthly bank reconciliation. Every month he fi nds at least three cheques that have cleared the bank but have not been recorded by the company. Th ese cheques are always properly signed by the owner. When the controller fi rst started working for the company, he would ask the owner about the cheques. Th ese cheques were always for the owner’s personal expenses, so now he always records these cheques as owner’s drawings when doing the bank reconciliation.

Instructions (a) Identify the control weaknesses over cash payments. (b) What changes should be made to improve the internal control over cash payments?

TA K I N G I T F U R T H E R Often people think internal control activities are too much work and not necessary. Explain how an improved system of internal control could help protect the individuals working for this company from being falsely accused of fraud.

P7–2B Each of the following independent situations has an internal control weakness:

1. Henry’s Lawn Care Service provides residential grass cutting services for a large number of clients who all pay cash. Henry collects the cash and keeps it in the glove compartment of his car until the end of the week, when he has time to count it and prepare a bank deposit.

2. Tasty Treats sells a variety of items including ice cream, pop, and other snack foods. A long-term employee is responsible for ordering all merchandise, checking all deliveries, and approving invoices for payment.

3. At Pop’s Pizza, there are three sales clerks on duty during busy times. All three of them use the same cash drawer.

4. Most customers at Ultimate Definition TVs use the option to pay for their televisions in 24 equal payments over two years. These customers send the company cheques or cash each month. The office manager opens the mail each day, makes a bank deposit with the cheques received in the mail that day, and prepares and posts an entry in the accounting records.

5. Trends Incorporated manufactures celebrity posters for teenagers. Naiara Mann is the custodian of the company’s $500 petty cash fund. The fund is replenished every week. Frequently people do not have a receipt for their expenses because of things like parking meter expenses. In this case, Naiara just creates a receipt for that person and gives them their cash. Naiara has been with the company for 15 years and is good friends with many of the employees. Naiara is very hard-working and never takes a vacation.

Instructions (a) Identify the internal control weaknesses in each situation. (b) Explain the problems that could occur as a result of these weaknesses.

TA K I N G I T F U R T H E R Make recommendations for correcting each situation.

Identify internal control weaknesses over cash payments and suggest improvements. (SO 1, 2, 3) C

Identify internal control weaknesses over cash receipts and cash payments. (SO 1, 2) C

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Problem Set 3northparkvikings.ca/classes/scorcia-bat4mr-f16/files/...There were 37 units on hand. What journal entry, if any, should the company make to record the difference? (d)