Joan Holtz
Case 6-4 Joan Holtz (B)*
1) The 3 methods affect the net income.
If deducted from the cost of purchased goods it will affect the cost of good by decreasing it, which in turn will affect the net income in the period the product was sold.
If the purchase discounts are reported as other income then the net income would be higher than the other methods.
If the purchase discount not taken is reported as an expense then too the net income is high. Overall, the cost of goods sold will be affected, therefore gross margin and net income will as well.
2) The perpetual inventory method :
After identifying the amount of inventory that was spoiled, the amount would get deducted from the inventory and would be added to the COGS and would be considered as cost of sales.
The entry would be: dr. Cost of Goods Sold cr. Merchandise inventory.
3) LIFO Method
An example of an industry that uses LIFO is the mining industries.
Assuming they have a pit, they are filling it up with coal they dig up. The first coal they sell will be from the top (last coal put in the pit), and last one sold will be the ones in the bottom (first coal put in the pit), therefore LIFO. There are many other industries with a similar setting where the last one put in would be the first one sold.
4) The automobile dealer would not be wrong to use LIFO , but for tax benefits the dealer should consider FIFO.
Whereas the hardware dealer shows prices as if he was using LIFO.
Therefore we cannot consider FIFO in this case.
5) A) Valid.
B) Valid.
C) Valid in some cases. The amount of inventory cannot increase/decrease and taxes needs to be unchanged.
6) Justification for applying would be evidence of physical deterioration, drops in price level, or other causes. With these evidences, the inventory can be written down.
1) The 3 methods affect the net income.
If deducted from the cost of purchased goods it will affect the cost of good by decreasing it, which in turn will affect the net income in the period the product was sold.
If the purchase discounts are reported as other income then the net income would be higher than the other methods.
If the purchase discount not taken is reported as an expense then too the net income is high. Overall, the cost of goods sold will be affected, therefore gross margin and net income will as well.
2) The perpetual inventory method :
After identifying the amount of inventory that was spoiled, the amount would get deducted from the inventory and would be added to the COGS and would be considered as cost of sales.
The entry would be: dr. Cost of Goods Sold cr. Merchandise inventory.
3) LIFO Method
An example of an industry that uses LIFO is the mining industries.
Assuming they have a pit, they are filling it up with coal they dig up. The first coal they sell will be from the top (last coal put in the pit), and last one sold will be the ones in the bottom (first coal put in the pit), therefore LIFO. There are many other industries with a similar setting where the last one put in would be the first one sold.
4) The automobile dealer would not be wrong to use LIFO , but for tax benefits the dealer should consider FIFO.
Whereas the hardware dealer shows prices as if he was using LIFO.
Therefore we cannot consider FIFO in this case.
5) A) Valid.
B) Valid.
C) Valid in some cases. The amount of inventory cannot increase/decrease and taxes needs to be unchanged.
6) Justification for applying would be evidence of physical deterioration, drops in price level, or other causes. With these evidences, the inventory can be written down.