Question

The following information pertains to Hague Corp.’s Year 2 cost of goods sold:

Inventory, 12/31/Year 1
Year 2 purchases
Year 2 write-off of obsolete inventory Inventory, 12/31/Year 2

$180,000 248,000 68,000 60,000

The inventory written off became obsolete because of an unexpected and unusual technological advance by a competitor. In its Year 2 income statement, what amount should Hague report as cost of goods sold?

A. $436,000 B. $368,000 C. $300,000 D. $248,000

[2] During December of Year 1, Nile Co. incurred special insurance costs but did not record these costs until payment was made during the following year. These insurance costs related to inventory that had been sold by December 31, Year 1. What is the effect of the omission on Nile’s accrued liabilities and retained earnings at December 31, Year 1?

A. B. C. D.

Accrued Liabilities

No effect

No effect Understated Understated

Retained Earnings

No effect Overstated Overstated No effect

[3] The following information applied to Atlas Co. for the current year:

Merchandise purchased for resale Freight-in
Freight-out
Purchase returns

$800,000 20,000 10,000 4,000

The company’s current-year inventoriable cost was

A. $800,000 B. $806,000 C. $816,000 D. $826,000

© 2019 Gleim Publications Inc. Inventory 0219 1

[4] Heidelberg Co.’s beginning inventory at January 1 was understated by $52,000, and its ending inventory was overstated by $104,000. As a result, Heidelberg’s cost of goods sold for the year was

A. Understated by $52,000. B. Overstated by $52,000. C. Understated by $156,000. D. Overstated by $156,000.

[5] Lew Co. sold 200,000 corrugated boxes for $2 each. Lew’s cost was $1 per unit. The sales agreement gave the customer the right to return up to 60% of the boxes within the first 6 months, provided an appropriate reason was given. It was reasonably estimated that 5% of the boxes would be returned. Lew expects an additional $3,000 of costs to recover those boxes. What amount should Lew report as gross profit from this transaction?

A. $380,000 B. $190,000 C. $187,000 D. $200,000

[6] On January 2 of the current year, LTTI Co. entered into a 3-year, noncancelable contract to buy up to 1 million units of a product each year at $.10 per unit with a minimum annual guarantee purchase of 200,000 units. At year end, LTTI had only purchased 80,000 units and decided to cancel sales of the product. What amount should LTTI report as a loss related to the purchase commitment as of December 31 of the current year?

A. $0
B. $8,000 C. $12,000 D. $52,000

Answer 1

ANSWER (1) is C

The  amount should Hague report as cost of goods sold is $300.000

EXPLANATION :- As indicated in the T account analysis where the cost of goods sold equals purchases plus any decrease in inventory or minus any increase in inventory ( purhases minus the change in inventary ). The write-off of obsolete inventory is a loss,not a components of cost of goods sold.

Thus,cost of goods sold is $300,000.

ANSWER (2) is C

The effect of the omission on Nile’s accrued liabilities and retained earnings at December 31, Year 1 is understated overstated.

EXPLANATION :- A liability must be recognized as :-

1) An item meets the definition of a liability probable future sacrifice of economic benefits arising from a current obligation of the entity as a result of a past event or tansaction.

2) It is measurable one.

3) The information about it is relevant and reliable.The insurance is a cost of inventory and theoretically should be accounted for as a product cost.

Thus,the entry in year 1 should have been to debit inventory and credit a liability.The omission of this entry understand accured liabilities .Given that the related inventory was sold in year 1,it is also overstated net income and retained earnings by understanding cost of goods sold.Moreover,the same effects would occur if the insurance costs were chargeable to expense as a period cost.

ANSWER (3) is C

The company’s current-year inventoriable cost was $816,000

EXPLANATION :- Inventoriable cost is the sum of the applicable expenditure and charges directly or indirectly incurred in bringing all items of inventory to their existing condition and location.

Thus, inventoriable cost includes the $800,000 cost of merchandise purchased,plus the $20,000 of freight-in ,minus the $4000 of purchase returns.Freight out is not a cost incurred in bringing the inventory to a salable condition.

The inventoriable cost for Atlas during the current year is -

$800,000+$20,000-4000 = $816,000

ANSWER (4) is C

Heidelberg’s cost of goods sold for the year was  Understated by $156,000.

EXPLANATION :- When the beginning inventory is understated,cost of goods sold will be understated.When ending inventory is overstated ,cost of goods sold will be understated.Thus,Heidelberg company's inventory is understated by,

= $52,000+$104,000 = $156,000.

ANSWER (5) is C

The amount should Lew report as gross profit from this transaction is $187,000

EXPLANATION :-

1) Lew company's revenues were $200,000 x $2 = $400,000.

2) Cost of goods sold was $ 200,000x$1 = $200,000

3) Gross profit = $ 400,000 - $200,000 = $200,0000 (step 1 - step 2)

4) Cost of goods sold equals cost of goods manufactured or purchased for a retailer adjusted for the change in finished goods inventory.Because a reasonable estimate of return could be made.

5) Lew substract 5% allowance, $200,000x5% = $100,00 to arrive at operting profit.

6) Lew will also incur an additional cost $3000 given to process the returns.Thus ,operting profit is

= $200,000 gross profit - $3000 additional cost - $10,000 allowance for returns = $187,000

ANSWER (6) is D

The  amount should LTTI report as a loss related to the purchase commitment as of December 31 of the current year is $52,000

EXPLANATION :- The cancellation of a firm purchase commitment to purchase commtment to purchase goods results in an ineffective hedge and requires recognition of the total liability when the contract is cancelled.

Because LTTI purchased 80,000 units during year 1,it is liable for purchasing an additional 120,000 units in year 1,as well as 200,000 units in each of the next two years.

$120,000 year 1+ 400,000 for year 2 and 3 x $0.10 per unit = $52,000.