## Here is the original schedule of cost of goods sold

Here is the original schedule of cost of goods sold for Talladega Company for the years of 2016 through 2019:

During the preparation of its 2019 financial statements, Talladega Company discovered that its 2017 ending inventory was understated by \$400. Make the correction to the 2017 ending inventory and all other numbers in the schedule of cost of goods sold for any years affected.

1. What is the corrected cost of goods sold for 2017?

2. Did the understatement of ending inventory in 2017 cause the 2017 cost of goods sold to be overstated or understated?

3. What is the corrected cost of goods sold for 2018?

4. Did the understatement of ending inventory in 2017 cause the 2018 cost of goods sold to be overstated or understated?

5. Were any other years impacted by the 2017 \$400 understatement of ending inventory? Why or why not?

## Warner Supply’s \$3.5 million cost of inventory at the end

Warner Supply’s \$3.5 million cost of inventory at the end of last year was understated by \$1.9 million.

1. Was last year’s reported gross profit of \$3.1 million overstated, understated, or correct? What was the correct amount of gross profit last year?

2. Is this year’s gross profit of \$3.4 million overstated, understated, or correct? What is the correct amount of gross profit for the current year?

3. Was last year’s reported cost of goods sold of \$5.2 million overstated, understated, or correct? What was the correct amount of cost of goods sold last year?

4. Is this year’s cost of goods sold of \$5.3 million overstated, understated, or correct? What is the correct amount of cost of goods sold for this year?

## This exercise should be used in conjunction with S6-4. Carson

This exercise should be used in conjunction with S6-4. Carson Print Supplies, Inc., is a subject to a 25% income tax. Compute the company’s income tax expense under the average-cost, FIFO, and LIFO inventory costing methods. Which method would you select to

(a) Maximize income before tax and

(b) Minimize income tax expense?

Data from S6-4

Carson Print Supplies, Inc., sells laser printers and supplies. Assume Carson started the year with 100 containers of ink (average cost of \$8.90 each, FIFO cost of \$9.00 each, LIFO cost of \$7.80 each). During the year, the company purchased 800 containers of ink at \$9.80 and sold 600 units for \$21.50 each. Carson paid operating expenses throughout the year, a total of \$4,000. Ignore income taxes for this exercise.

## On June 30, Premier Party Planners had a \$35,000 balance

On June 30, Premier Party Planners had a \$35,000 balance in and a \$2,752 credit balance in Allowance for Uncollectible Accounts. During July, Premier made credit sales of \$193,000. July collections on account were \$164,000, and write-offs of uncollectible receivables totaled \$2,870. Uncollectible-accounts expense is estimated as 3% of credit sales. No sales returns are expected. Ignore cost of goods sold.

Requirements

1. Journalize sales, collections, write-offs of uncollectibles, and uncollectible-account expense by the allowance method during July. Explanations are not required.

2. Show the ending balances in Allowance for Uncollectible Accounts, and Net at July 31. How much does Premier expect to collect?

3. Show how Premier Party Planners will report and net sales on its July 31 and income statement for the month ended July 31.

## Perform the following accounting for the receivables of Andrews and

Perform the following accounting for the receivables of Andrews and Johnson, a law firm, at December 31, 2018.

Requirements

1. Set up T-accounts and start with the beginning balances for these T-accounts:
■ \$100,000

■ Allowance for Uncollectible Accounts, \$14,000

Post the following 2018 transactions to the T-accounts:

a. Service revenue of \$697,000, all on account

b. Collections on account, \$714,000

c. Write-offs of uncollectible accounts, \$8,000

d. Uncollectible-account expense (allowance method), \$11,000

2. What are the ending balances of and Allowance for Uncollectible Accounts?

3. Show how Andrews and Johnson will report on its at December 31, 2018.

## McGuire Industries prepares budgets to help manage the company. McGuire

McGuire Industries prepares budgets to help manage the company. McGuire is budgeting for the fiscal year ended January 31, 2018. During the preceding year ended January 31, 2017, sales totaled \$9,200 million and cost of goods sold was \$6,300 million. At January 31, 2017, inventory was \$1,700 million. During the upcoming 2018 year, suppose McGuire expects cost of goods sold to increase by 12%. The company budgets next year’s at \$2,000 million.

Requirement

1. One of the most important decisions a manager makes is how much inventory to buy. How much inventory should McGuire purchase during the upcoming year to reach its budget?

## Western Trading Company purchases inventory in crates of merchandise; each

Western Trading Company purchases inventory in crates of merchandise; each crate of inventory is a unit. The fiscal year of Western Trading ends each January 31. Assume you are dealing with a single Western Trading store in Nashville, Tennessee. The Nashville store began the year with an inventory of 20,000 units that cost a total of \$1,060,000. During the year, the store purchased merchandise on account as follows:

July (29,000 units at \$59) ………………………………. \$1,711,000
November (49,000 units at \$63) ……………………… 3,087,000
December (59,000 units at \$69) ………………………. 4,071,000
Total purchases …………………………………………….. \$8,869,000

Cash payments on account totaled \$8,541,000. During fiscal year 2018, the store sold 155,000 units of merchandise for \$15,887,500, of which \$4,900,000 was for cash and the balance was on account. Eastern Trading and all of its stores use the average-cost method for inventories. The Nashville store’s operating expenses for the year were \$2,250,000. It paid 70% in cash and accrued the rest as accrued liabilities. The store accrued income tax at the rate of 40%.

Requirements

1. Make summary journal entries to record the store’s transactions for the year ended January 31, 2018. Western Trading and all of its stores use a perpetual inventory system. Round average cost per unit to two decimal places and round all other amounts to the nearest dollar.

2. Prepare a T-account to show the activity in the Inventory account.

3. Prepare the store’s income statement for the year ended January 31, 2018. Show totals for gross profit, income before tax, and net income.

## A Swoosh Sports outlet store began December 2018 with 47

A Swoosh Sports outlet store began December 2018 with 47 pairs of running shoes that cost the store \$34 each. The sales price of these shoes was \$63. During December, the store completed these inventory transactions:

Requirements

1. The preceding data are taken from the store’s perpetual inventory records. Which cost method does the store use? Explain how you arrived at your answer.

2. Determine the store’s cost of goods sold for December. Also compute gross profit for December.

3. What is the cost of the store’s December 31 inventory of running shoes?

## SWAT Surplus began March 2018 with 100 tents that cost

SWAT Surplus began March 2018 with 100 tents that cost \$10 each. During the month, the company made the following purchases at cost:

The company sold 318 tents, and at March 31, the consisted of 52 tents. The sales price of each tent was \$52.

Requirements

1. Determine the cost of goods sold and amounts for March under the average-cost, FIFO, and LIFO costing methods. Round the average cost per unit to two decimal places, and round all other amounts to the nearest dollar.

2. Explain why cost of goods sold is highest under LIFO. Be specific.

3. Prepare the SWAT Surplus income statement for March. Report gross profit. Operating expenses totaled \$3,250. The company uses average costing for inventory. The income tax rate is 36%.

## The accounting records of Timberlake Home Store show these data

The accounting records of Timberlake Home Store show these data (in millions):

The shareholders are very happy with Timberlake’s steady increase in net income. However, auditors discovered that the ending inventory for 2016 was understated by \$5 million and that the ending inventory for 2017 was understated by \$8 million. The ending inventory at December 31, 2018, was correct.

Requirements

1. Show corrected income statements for each of the three years.

2. How much did these assumed corrections add to or take away from Timberlake’s total net income over the three-year period? How did the corrections affect the trend of net income?

3. Will Timberlake’s shareholders still be happy with the company’s trend of net income? Explain.