1. Lab/Quiz Problems With Solutions
BUA111: Week 14
Lab/Quiz Problems
With Solutions

2. P6-30A
P6-30A Accounting principles for inventory and applying the lower-of-cost- or-market rule Some of E and S Electronics’s merchandise is gathering dust. It is now December 31, 2016, and the current replacement cost of the ending merchandise inventory is $20,000 below the business’s cost of the goods, which was $105,000. Before any adjustments at the end of the period, the company’s Cost of Goods Sold account has a balance of $400,000. Requirements Journalize any required entries. At what amount should the company report merchandise inventory on the balance sheet? At what amount should the company report cost of goods sold on the income statement? Which accounting principle or concept is most relevant to this situation?

3. Accounts and Explanation
Solution: P6-30A
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Cost of Goods Sold
20,000
Merchandise Inventory
To write merchandise inventory down to market value.

4. Solution: P6-30A (con’t.) Requirement 2
Merchandise inventory should be reported at $85,000 on the balance sheet.
Calculations:
$ 105,000
Merchandise inventory prior to adjustment
(20,000)
Adjustment
$ 85,000
Merchandise inventory, adjusted

5. Solution: P6-30A (con’t.) Requirement 3
Cost of goods sold should be reported at $420,000 on the income statement.
Calculations:
Requirement 4
The conservatism principle is most relevant to this situation.
$ 400,000
Cost of goods sold prior to adjustment
20,000
Adjustment
$ 420,000
Cost of goods sold, adjusted

6. Exercise 6-25
E6-25 Computing inventory turnover and days’ sales in inventory
New Home reported the following income statement for the year ended December 31, 2017 (see next slide).
Requirements
Compute New Home’s inventory turnover rate for the year. (Round to two decimal places.)
Compute New Home’s days’ sales in inventory for the year. (Round to two decimal places.)

7. Exercise 6-25 (con’t.)

8. Average merchandise inventory
Solution: Exercise 6-25
Requirement 1 Inventory turnover is 6.04 times for the year.
Calculations:
Average merchandise inventory =
(Beginning merchandise inventory
+ Ending merchandise inventory) / 2
($8,800 + $13,000) / 2
$10,900
Inventory turnover
Cost of goods sold / Average merchandise inventory
$65,800 / $10,900
6.04 times for the year

9. Solution: Exercise 6-25 (con’t.)
Requirement 2
Days’ sales in inventory is days for the year.
Calculations:
* Calculated in Requirement 1.
Days’ sales in inventory =
365 days / Inventory turnover
365 days / 6.04 times*
60.43 days