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ORIE 350 Homework #4 Due February 20, 2008 1. LIFO inventory costing is not allowed in the United Kingdom (UK). Thus, all companies based there use FIFO. You are examining the financial statements from Leicester Manufacturing, a UK firm. Inventory replenishment costs have varied somewhat over the past two years. Which will be more accurate, the Inventory account on the balance sheet, or the Cost of Goods Sold figure on the income statement? Explain briefly. With the First In, First Out (FIFO) inventory costing method, the most recently acquired merchandise is in the Inventory account. As such, the balance sheet will be more accurate. Conversely, the Cost of Goods Sold account will show items aquired some time ago, and thus may be out of date and inaccurate. 2. The Boswell Boat Supply Company has three inventory items on hand. Boswell has found that the items would need to be refurbished before they could be sold, and the replacement cost of each of these items has changed. Boswell Company may need to adjust the inventory cost of the items. Find the correct cost for each item, and provide the journal entry needed (if any) to make the adjustment in their financial records. Item Number of units on hand Historical Cost per unit Replacement Cost per unit Selling Price per unit Normal Profit per unit Refurbishing Costs per unit Tension Strap 34 \$80 \$65 \$110 \$40 5 Boat Winch 28 150 120 180 70 10 Bilge Pump 18 120 80 140 60 0 TS: NRV = 105, NAC = 65, RC = 65, pick the middle, 65. Compare to HC = 80, pick the lower one, \$65. BW: NRV = 170, NAC = 100, RC = 120, pick the middle, 120. Compare to HC = 150, pick the lower one, \$120. BP: NRV = 140, NAC = 80, RC = 80, pick the middle, 80. Compare to HC = 120, pick the lower one, \$80. Old value: (34)(80) + (28)(150) + (18)(120) = \$9,080 New value: (34)(65) + (28)(120) + (18)(80) = \$7,010 February 20, 2008 Inventory Holding Loss \$2,070 Inventory \$2,070

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3. Hilbert Industries has equipment that cost \$180,000 when purchased on January 1, 2000. It was depreciated using straight-line depreciation with a \$20,000 salvage value and a 5 year useful life. Record the journal entries for Hilbert Industry’s financial accounting records to record the following scenarios: a. The equipment was sold on January 1, 2002 for \$110,000 cash. The annual depreciation is found to be: Historical Cost Salvage Value 180,000 20,000 Annual Depreciation \$32,000 per year Useful Life 5 - - = = = Hence, the Accumulated Depreciation account associated with the equipment will have a \$64,000 credit balance. January 1, 2002 Cash \$110,000 Accum. Depreciation 64,000 Loss on Sale 6,000 Equipment \$180,000 b. The truck was sold on January 1, 2006 for \$22,000 cash. Here, the Accumulated Depreciation account associated with the equipment will have a
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