A variety of depreciation methods are used to allocate the cost of an asset to all of the accounting periods benefited by the use of the asset. Your client has just purchased a piece of equipment for $100,000. Explain the concept of depreciation. Which of the following depreciation methods would you recommend: straight-line depreciation, double declining balance method, or an alternative method?
Week Three Exercise Assignment
1. Inventory. Inventory valuation methods: Basic computations. The January beginning inventory of the White Company consisted of 300 units costing $40 each. During the first quarter, the company purchased two batches of goods: 700 units at $44 on February 21 and 800 units at $50 on March 28. Sales during the first quarter were 1,400 units at $75 per unit. The White Company uses a periodic inventory system.
Using the White Company data, fill in the chart that follows to compare the results obtained under the FIFO, LIFO, and weighted-average inventory methods.
FIFO LIFO Weighted Average
Goods available for sale $ $ $
Ending inventory, March 31
Cost of goods sold
2. Analysis of LIFO versus FIFO. Indicate whether LIFO or FIFO best describes each of the following:
a. Gives highest profits when prices fall.
b. Yields lowest income taxes when prices rise.
c. Generates an ending inventory valuation that somewhat approximates replacement cost.
d. Matches recent costs against current selling prices on the income stateÂ¬ment.
e. Comes closest to approximating the physical flow of goods of a fruit and vegetable dealer.
f. Results in lowest cost of goods sold in inflationary periods.
3. Inventory Errors. The income statements of Diamond Company for the years ended Decem-ber 31, 19X1, and 19X2 follow.
Cost of goods sold
Add: Net purchases
$ 95,000 380,000 $440,000
$109,000 404,000 $483,000
Goods available for
Less: Ending inventory
Cost of goods sold 366,000 386,000
Operating expenses $ 74,000 58,000 $ 97,000 67,000
Net income $ 16,000 $ 30,000
Diamond uses a periodic inventory system. A detailed review of the accounting records disclosed the following:
a. A review of 19X1 purchase invoices revealed that a clerk had incorÂ¬rectly recorded a $12,600 purchase as $1,260.
b. A $4,800 purchase was made on December 30, 19X2, terms F.O.B. shipÂ¬ping point. The invoice was not recorded in 19X2 nor were the goods included in the 19X2 ending physical inventory count. Both the goods and invoice were received in early 19X3, with the invoice being reÂ¬corded at that time.
c. Goods costing $3,000 were accidentally excluded from the 19X1 ending physical inventory count. These goods were sold during 19X2, and all aspects of the sale were properly recorded.
Prepare corrected income statements for 19X1 and 19X2.
Determine the impact of the preceding errors on the December 31, 19X2, owner’s equity balance.
4. Inventory valuation methods. Computations and concepts. Wave Riders Surf Board Company began business on January 1 of the current year. Purchases of surf boards were as follows:
Jan. 3 100 boards <& $125
Mar. 17 50 boards @ $130
May 9 246 boards @ $140
July 3 400 boards @ $150
Oct. 23 74 boards @ $160
Wave Riders sold 710 boards at an average price of $250 per board. The company uses a periodic inventory system.
Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods: First-in, first-out