Page 325 - Accounting Principles (A Business Perspective)

7. Measuring and reporting inventories

2009 December 31 $96,000 $108,000
2010 December 31 91,200 84,000
Prepare a schedule that shows: (a) the reported net income for each year, (b) the amount of correction needed

for each year, and (c) the correct net income for each year.
Alternate problem B An examination of the financial records of Jersey Company on 2009 December 31,
disclosed the following with regard to merchandise inventory for 2009 and prior years:
2008 December 31, inventory was correct.
2009 December 31, inventory was understated USD 50,000.
2010 December 31, inventory was overstated USD 35,000.
2011 December 31, inventory was understated USD 30,000.
2012 December 31, inventory was correct.
The reported net income for each year was:

2009 $292,500
2010 $355,000
2011 $382,500
2012 $350,000
a. Prepare a schedule of corrected net income for each of the four years, 2009-2012.
b. What errors would have been included in each December 31 balance sheet? Assume each year's error is
independent of the other years' errors.

c. Comment on the implications of the corrected net income as contrasted with reported net income.
Alternate problem C High Surf Company sells the Ultra-Light model wind surfer and uses the specific
identification method to account for its inventory. The Ultra-Lights are identical except for identifying serial
numbers. On 2009 August 1, the company had three Ultra-Lights that cost USD 14,000 each in its inventory.
During the month, the company purchased the following:
Units Unit cost
August 3 5 @ $13,000
August 17 6 @ $14,500
August 28 6 @ 15,000
High Surf Company sold 13 Ultra-Lights in August at USD 20,000 each.
a. Compute the gross margin earned by the company in August if it shipped the units that would maximize gross
margin.
b. Repeat part (a) assuming the company shipped the units that would minimize gross margin.
c. Do you think High Surf Company should be permitted to use the specific identification method of accounting
for Ultra-Lights in view of the manipulation possible as shown by your calculations in (a) and (b)?

Alternate problem D The inventory records of Coral Company show the following:
Jan. 1 Beginning inventory consists of 12 units costing USD 48 per unit.
5 Purchased 15 units @ USD 49.92 per unit.
10 Sold 9 units @ USD 108 per unit.
12 Sold 7 units @ USD108 per unit.
20 Purchased 20 units @ USD 50.16 per unit.
22 Purchased 5 units @ USD 48 per unit.
30 Sold 20 units @ USD 110.40 per unit.
Assume all purchases and sales are made on account.

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