Case #1

INVENTORY
The Clayton Music Company was formed on December 1, 2010. The following information is available from Clayton's inventory
records:
Balance at January 1, 2011 ................
Purchases:
January 17, 2011 ..........................
March 12, 2011 ............................
June 23, 2011 .............................
November 15, 2011 .........................

Units

Unit Cost

4,800

$14.25

9,000
7,200
3,600
5,400

15.00
16.50
15.75
17.25

The company uses a periodic inventory system, and a physical inventory on November 30, 2011, shows 9,600 units on
hand. Prepare schedules to compute the ending inventory at November 30, 2011, under each of the following inventory
methods:
(1)
(2)
(3)

FIFO.
LIFO.
Average cost.

ANS:
(1)
Computation of inventory under FIFO method
November 15, 2011 .............
June 23, 2011 .................
March 12, 2011 ................

Units

Unit Cost

Total Cost

5,400
3,600
600
9,600

$17.25
15.75
16.50

$ 93,150
56,700
9,900
$159,750

Units

Unit Cost

Total Cost

4,800
4,800
9,600

$14.25
15.00

$ 68,400
72,000
$140,400

(2)
Computation of inventory under LIFO method
January 1, 2011 ...............
January 17, 2011 ..............

(3)
Computation of inventory under the average cost method
Units
January 1, 2011 ...............
January 17, 2011 ..............
March 12, 2011 ................
June 23, 2011 .................
November 15, 2011 .............

4,800
9,000
7,200
3,600
5,400
30,000

Average Cost: $472,050/30,000 = $15.735

November 30, 2011, inventory: 9,600 units @ $15.735 = $151,056

Unit Cost

Total Cost

$14.25
15.00
16.50
15.75
17.25

$ 68,400
135,000
118,800
56,700
93,150
$472,050

Case #2
PERPETUAL
The following information was available from the inventory records of the Brooks Company for January 2011:
Units
Balance at January 1, 2011 ......
Purchases:
January 6, 2011 ...............
January 26, 2011 ..............
Sales:
January 7, 2011 ...............
January 31, 2011 ..............
Balance at January 31, 2011 .....

Unit Cost

Total Cost

3,000

$19.55

$ 58,650

2,250
10,200

20.60
21.50

46,350
219,300

2,700
7,200
5,550

(1)

Assuming that Brooks maintains perpetual inventory records, what should be the
inventory at January 31, 2011, using the FIFO inventory method, rounded to the
nearest dollar?

(2)

Assuming that Brooks maintains perpetual inventory records, what should be the
inventory at January 31, 2011, using the LIFO inventory method, rounded to the
nearest dollar?

(3)

Assuming that Brooks does not maintain perpetual inventory records, what should
be the inventory at January 31, 2011, using the average cost inventory method,
rounded to the nearest dollar?

ANS:
(1)
Computation of ending inventory using perpetual FIFO method:
January 31, 2011 ................

Units

Unit Cost

Total Cost

5,550

$21.50

$119,325.00

(2)
Computation of ending inventory using perpetual LIFO method:
Beginning Inventory .............
January 26, 2011 ................

Units

Unit Cost

Total Cost

2,550
3,000
5,550

$19.55
21.50

$ 49,852.50
64,500.00
$114,352.50

(3)
Computation of inventory under the average cost method:
Units

Unit Cost

Total Cost

3,000
2,250
10,200
15,450

@ $19.55 =
@ 20.60 =
@ 21.50 =

$ 58,650
46,350
219,300
$324,300

$324,300/15,450 = $ 20.99
5,550 $20.99 = $116,495 (rounded)

Case #3

Alpha Construction acquired the following plant assets on January 5, 2009:

Asset
Cost
Residual Value
Useful Life
Office equipment
$175,000
$15,000
5 years
Building
$300,000
$20,000
25 years
Alpha Construction uses the double declining balance method to depreciate the office equipment & the
straight-line method to depreciate the building.
Required:
1. Calculate depreciation for 2009 & 2010 for each of the assets.
a. Office equipment

b. Building

2. Assume the building was sold at the end of 2009 for $210,000. Determine whether the company will realize
any gain or loss from the sale. How would the sale be reported in the statement of cash flow?

3. Your colleague was wondering why we need to depreciate our long-term assets.

Case #4. Two independent parts

A. Dubai Jewelry reported the following items in its financial statements. Determine the amount of net
income. Then calculate the ending balance for retained earnings.
Sales
Accounts receivables
Cost of goods sold
Marketing expenses
Gain from sale of equipment
Salaries payables
Unearned revenues
Dividends
Administrative Expenses
Prepaid insurance
Beginning retained earnings

B. Indicate which financial statement would report the following information items.
Your choices are as follows:
I/S = Income Statement.
B/S = Balance Sheet
Item
Interest Expense
Unearned Revenue
Equipment
Prepaid Insurance
Sales Revenue
Gain on sale of a fixed asset
Salaries Expense
Accumulated Depreciation
Salaries Payable
Bonds Payable
Cost of goods sold

Statement

$450,000
$85,000
$158,000
$35,000
$12,000
$11,500
$35,000
$15,000
$60,000
$8,000
$35,500

Case #5 Equity transactions.

Sands Corporation has the following capital structure at the beginning of the year:
6% Preferred stock, $50 par value, 20,000 shares authorized,
6,000 shares issued and outstanding
Common stock, $10 par value, 60,000 shares authorized,
40,000 shares issued and outstanding
Paid-in capital in excess of par

300,000
400,000
110,000

Total paid-in capital

Retained earnings
Total stockholders' equity

810,000
440,000
$1,250,000

Instructions
(a) Record the following transactions which occurred consecutively (show all calculations).
1. A total cash dividend of $90,000 was declared and payable to stockholders of record. Record dividends
payable on common and preferred stock in separate accounts.
2. A 10% common stock dividend was declared. The average market value of the common stock is $18 a
share.
3. Assume that net income for the year was $150,000 (record the closing entry) and the board of directors
appropriated $70,000 of retained earnings for plant expansion.
(b) Construct the stockholders' equity section incorporating all the above information.
Sol:
(a) 1. Retained Earnings .................................................................
Dividends PayablePreferred ($300,000 .06)..........
Dividends PayableCommon .....................................
2.

90,000
18,000
72,000

40,000 shares
10%
4,000 shares as stock dividend
$18
$72,000 total dividend
Retained Earnings .................................................................
Common Stock Dividend Distributable........................
Paid-in Capital in Excess of Par..................................

72,000

3. Income Summary ...................................................................

Retained Earnings ......................................................

150,000

Retained Earnings .................................................................

Retained Earnings Appropriated for Plant Expansion .

70,000

40,000
32,000

150,000

(b) Stockholders' equity

6% Preferred stock, $50 par value, 20,000 shares authorized,
6,000 shares issued and outstanding
Common stock, $10 par value, 60,000 shares authorized,
40,000 shares issued and outstanding
Common stock dividend distributable
Paid-in capital in excess of par
Total paid-in capital
Retained earningsunappropriated*
$358,000
Appropriated for plant expansion
70,000

70,000

$ 300,000
400,000
40,000
142,000
882,000

Total retained earnings

Total stockholders' equity
*$440,000 $90,000 $72,000 + $150,000 $70,000 = $358,000

428,000
$1,310,000