Could i have some help answering 1-8 please.
Case 6-4 Joan Holtz (B)* Because an earlier visit with the accounting instructor first. Can a method based on such an unrealistic [see Case 5-3, Joan Holtz (A)] had cleared up some assumption be supported, other than as a tax puzzling matters, Joan Holtz decided to prepare a new gimmick? list of problems as a basis for a second discussion. As before, Holtz knew that the instructor expected that 4. A certain automobile dealer bases its selling prices tentative answers to these questions be worked out on the actual invoice cost of each automobile. In a prior to the meeting. The instructor also wanted Holtz given model year, the invoice cost for similar auto- using numbers of her own choosing, to illustrate the is- mobiles may be increased once or twice to reflect sues she was raising and her tentative answers with increased manufacturing costs. Would this automo- simple numerical illustrations whenever possible. The bile dealer be wrong if it used the LIFO method? list follows: By contrast, a certain hardware dealer changes its selling prices whenever the wholesale price of its 1. Evidently, there are three ways of handling purchase goods changes as reported in wholesalers' price discounts: They can be deducted from the cost of lists. Would this hardware dealer be wrong if it used the purchased goods, they can be reported as other the FIFO method? income, or purchase discounts not taken can be re-- '5. Are the following generalizations valid? ported as an expense of the period. But isn't the a. The difference between LIFO and FIFO is rela- effect on net income the same under all these meth- tively small if inventory turnover is relatively ods? If so, why argue about which is preferable? high. 2. It is said that the perpetual inventory method iden- b. The average cost method will result in net tifies the amount of inventory shrinkage from pil- income that is somewhere between that pro- ferage, spoilage, and the like, an amount that is not duced by the LIFO method and that produced by revealed by the periodic inventory method. Having the FIFO method. identified this shrinkage amount, however, how should it be recorded in the accounts? c. If prices rise in one year and fall by an equal amount the next year, the total income for the 3. People have said that the LIFO method assumes two years is the same under the FIFO method as that the goods purchased last are sold first. If this is under the LIFO method. so, the assumption is clearly unrealistic because companies ordinarily sell their oldest merchandise 6. If the LIFO method is used and prices are rising, ending inventory will normally be significantly below prevailing market prices. Therefore, what justification is there for applying the lower-of-cost- * Copyright @ Professor Robert N. Anthony. or-market rule to LIFO inventories?Chapter 6 Cost of Sales and Inventories 171 7. A certain distillery manufactured bourbon whiskey, 8. A company produced a "made for TV" movie at a which it aged in charred, white oak barrels for four total cost of $1 million. It sold the rights to the initial years before bottling and selling it. Whiskey was showing to a network for $1 million, and fully ex- carried in inventory at approximately $1 per gallon, pected to sell the rights for a repeat showing the fol- which was the cost of ingredients, labor, and fac- lowing year for $300,000. It thought that in future tory overhead of the manufacturing process. Bar- years, additional reruns would generate at least rels, which could not be reused, cost $0.70 per gal- another $300,000 of revenue. Disregarding any lon. The distillery incurred $0.20 of warehousing GAAP dealing with this issue, how much should the costs per gallon per year, including costs involved company report as cost of sales for the first year? in moving and testing the barrels. It also incurred Would the answer be different if in the first year the $0.10 per gallon of interest costs per year. The costs producing company agreed to pay $100,000 for of barrels, warehousing, and interest were charged advertising and promoting the initial showing? directly to expense. If the distillery had consistently earned pretax profit of $600,000 per year on annual production and sale of 1 million gallons, what Question would happen to profits if it increased production to. 1.2 million gallons per year? At what amounts Give your "tentative answers" to the above issues. Illus- should it carry its whiskey in inventory? trate the issue and your answer whenever possible
