# Minutes purpose to provide the student with an

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(Time 30-35 minutes)Purpose—to provide the student with an opportunity to analyze the effect on income before taxes ofa switch from FIFO to LIFO inventory. The problem specifies exactly the procedure that must befollowed to accomplish this determination.Problem 8-8(Time 40-50 minutes)Purpose—to provide the student with an opportunity to write a memo on how a dollar value LIFOpool works. In addition, the student must explain the step by step procedure used to compute dollarvalue LIFO.Problem 8-9(Time 10-15 minutes)Purpose—to provide the student with an understanding of the lower of cost or market approach toinventory valuation, similar to Problem 9-2. The major difference between these problems is thatProblem 9-1 provides some ambiguity to the situation by changing the catalog prices near the end ofthe year.Problem 8-10(Time 30-40 minutes)Purpose—to provide the student with a problem that requires application of the FIFO method to twoitems of inventory product. After application of FIFO, the student is required to apply the lower ofcost or market rule to the ending FIFO inventory.
8-40Time and Purpose of Problems(Continued)Problem 8-11(Time 30-40 minutes)Purpose—to provide the student with a problem requiring financial statement and note disclosure ofinventories, the income disclosure of an inventory market decline, and the treatment of purchasecommitments.Problem 8-12(Time 20-30 minutes)Purpose—to provide a problem where a fire loss must be computed using the gross profit method.Certain goods remained undamaged and therefore an adjustment is necessary. In addition, theinventory was subject to an obsolescence factor which must be considered.
8-411.\$150,000 – (\$150,000 X .20) = \$120,000;\$120,000 – (\$120,000 X .10) = \$108,000, cost of goods purchased2.\$1,100,000 + \$69,000 = \$1,169,000. The \$69,000 of goods in transiton which title had passed on December 24 (f.o.b. shipping point)should be added to 12/31/03 inventory. The \$29,000 of goodsshipped (f.o.b. shipping point) on January 3, 2004, should remainpart of the 12/31/03 inventory.3.Because no date was associated with the units issued or sold, theperiodic (rather than perpetual) inventory method must beassumed.FIFO inventory cost:1,000 units at \$24\$ 24,0001,100 units at 2325,300Total\$ 49,300LIFO inventory cost:1,500 units at \$21\$ 31,500600 units at 2213,200Total\$ 44,700Average cost:1,500 at \$21\$ 31,5002,000 at 2244,0003,500 at 2380,5001,000at 2424,000Totals8,000\$180,000\$180,000 ÷8,000 = \$22.50Ending inventory (2,100 X \$22.50) is \$47,250.SOLUTIONS TO PROBLEMSPROBLEM 8-1
8-42PROBLEM 8-1 (Continued)4.Computation of price indexes:\$252,00012/31/03\$240,000= 105\$286,72012/31/04\$256,000= 112Dollar-value LIFO inventory 12/31/03:Increase \$240,000 – \$200,000 =\$ 40,00012/31/03 price indexX 1.05Increase in terms of 10542,0002003 LayerBase inventory200,000Dollar-value LIFO inventory\$242,000Dollar-value LIFO inventory 12/31/04:Increase \$256,000 – \$240,000 =\$ 16,00012/31/04 price indexX 1.12Increase in terms of 11217,9202004 Layer2003 layer42,000Base inventory200,000Dollar-value LIFO inventory\$259,920A new layer is formed when the ending inventory at base-yearprices exceeds the beginning inventory at base-year prices.
8-43PROBLEM 8-1 (Continued)5.The inventoriable costs for 2004 are:Merchandise purchased\$909,400Add: Freight-in22,000931,400Deduct: Purchase returns16,500Inventoriable cost\$914,900Note:Freight-out is a selling expense. Interest on notes payableis a period expense. Neither is an inventoriable cost.