Chapter 8 - problems

Question 1

P8-6

• FIFO - ending inventory FIFO
• if prices are falling. COGS? Net income
• weighted average
• calculate inventory
• 1/5; 1/10
• gross profit percentage formula and the difference between FIFO and weighted average

Answer 1

• take the remaining inventory and multiply it the price of the last in. Ai grija ca probabil va trebui sa te duci la second last purchase. Ai grija de asemenea daca au avut discount to calculate price/unit
• COGS is higher (pt ca ending inventory are preturi mici) => Net income - lower - nu calcula la fiecare tranzactie (ala e moving weighted average) ci calculeaza total purchases (less discounts!) si total units si apoi afla pretul average.
• Ai grija ca 1/5 si 1/10 le-ai calculat prima oara ca 10% off. Merge sa le inmultesc cu 0.99
• Gross profit % = Net Income / Net Sales

Because if the prices are falling, COGS e mai mic cu weighted average, net income mai mare, then Gross profit % is bigger with weighted average

Question 2

P8-2 - rebates receivable

1. confidence in receiving it
2. what if it is discretionary?

Answer 2

1. If management is sure they will receive that rebate => meets the definition of the recognition criteria“if you can estimate = you can recognize it” (=record it with a journal entry)
2. if the rebate is discretionary (=not very sure you will receive it) - no accrual entry => you don’t recognize it

Question 3

P8-2 - journal entries

rebate receivable - steps

IFRS vs ASPE

Answer 3

1. calculeaza cu grija cat ar fi suma de rebate (how many units you will buy x rebate promised)
2. divide by the number of units to come to the rebate per unit
3. if you have the number of sold units => COGS (rebate)
4. Unsold = ending inventory

Dr. Rebate Receivable (the units you have, not the units you will have)

Cr. COGS (the rebate reduces the COGS)

Cr. Inventory (unsold item amount) => rebates reduce the cost of inventory - that’s why the credit entry.

• no difference between IFRS and ASPE for rebates receivable

Question 4

FIFO

• prices are rising - COGS? Net income?
• disclosure?

-

Answer 4

1. FIFO - prices are rising = smaller COGS, bigger Net Income
   - you need to disclose policies so reader will know how the number are calculated

Question 5

P8-10

• estimation method of calculating the inventory

(gross profit method)

Answer 5

• you need to estimate inventory only for the companies that use periodic inventory method (perpetual is…perpetual! calculated)
• if the gross profit percentage is given and you have the sale, the difference is COGS

Sales - Gross Profit (and I have the %) = COGS. If I have COGS I will be able to calculate the estimated inventory

Question 6

P8-10- estimation method - journal entry to record the loss and COGS

Answer 6

Dr. Damaged Inventory

Dr. Loss from Fire (most likely you have to find this one out)

Dr. COGS

Dr. Ending Inventory

Dr. Purchase returns

Cr. Purchases

Cr. Inventory

Question 7

P8-9 - methods of adjusting inventory

1. direct method
2. allowance method

Answer 7

1. the direct method buries the loss in COGS (the entries are only for the Inventory acc and COGS acc.)

2. uses a separate contra acc to Inventory - Allowance to reduce Inventory to NRV (similar to A/R and Allownace for DA acc)

Question 8

direct method of adjusting inventory

(two entries per year - 2 years example)

Answer 8

FIRST YEAR

1. to close the beginning inventory:

Dr. COGS

Cr. Inventory (at LC & NRV) - is usually the same

2. to record ending Inventory:

dr. Inventory (at the LC&NRV of next year)
cr. COGS

SECOND YEAR

1. to close beginning Inventory:

dr. COGS ( the previous year balance)
cr. Inventory

2. to record ending Inventory:

dr. Inv
cr. COGS (at LC&NRV)
- so again, no other entry, the loss is recorded directly in COGS/Inventory

Question 9

Indirect/Allowance method to adjust Inventory

3 entries per year - 1styear example

HAVE AN T ACCOUNT FOR ALLOWANCE TO DETERMINE WHAT BALANCE YOU NEED

Answer 9

FIRST YEAR

1. to close beginning Inventory:

dr. COGS
cr. Inventory (LC&NRV)

2. to record ending Inventory

dr. Inventory (at the full/normal price)
cr. COGS

3. write down the Inventory

dr. Loss on Inventory (the diference between the cost and LC&NRV)
cr. Allowance to reduce inventory

Question 10

Indirect/Allownace method to adjust Inventory

3 entries per year - 2nd yearexample

Answer 10

• ai grija la adjusting entry! daca e iara loss, subtract the previous adjustment. Daca e gain, ai grija sa nu record over the original cost
  1. to close beginning Invetory:
  dr. COGS
  cr. Inventory
  2. to record ending inventory
  dr. Inv (full amount)
  cr. COGS
  3. write down:
  dr. Loss on Inventory
  cr. Allowance to reduce Inv (the difference in cost for that year!)

Question 11

P8-1 - purchase discounts - gross & net method

• storage cost not included in the cost of Inventory! (only wine)

Answer 11

1. Gross method - used the purchase discount acc - a contra acc for the Purchases Acc. Normal entry for invoice paid WITHIN the discount period:
   dr. A/P 1,000
   cr. Purchase discounts 100
   cr. Cash 900
2. Net method - records the purchases and A/P at an amount NET OF DISCOUNT

Purchases 900

A/P 900

• if the invoice is paid within the discount period, then A/P and CASH will have the same amount.

A/P 900

Cash 900

• if the invoice is paid after the discount period:
  dr. A/P (the amount credited) 900
  dr. Purchase Discount Lost 100 (other expenses)
  cr. Cash (for the full amount) 1,000

Question 12

P8-12

1. How you calculate NRV?
2. How do you account for inventory at LC & NRV

Answer 12

• 1. NRV* = estimated selling price (if they give a catalog price is good enough, be careful about the date the catalog is in effect!) - expected costs to complete the sell of goods
     
     2. Each item’s (or group if they are grouped together) cost and NRV are compared and the LOWER value is chosen

Question 13

Items that might not be valued at LC & NRV

Answer 13

• biological assets related to agricultural activity (they are presented separately under IFRS)
• construction contract work in process
• financial instruments
• agricultural produce
• mineral products
• inventories of commodity broker-traders

Question 14

gross profit method of estimating inventory

Answer 14

100% - gross profit percentage = COGS percentage