Assume 007 Inc. made sales of $964.4 million during 2016

Question 1:
Assume 007 Inc. made sales of $964.4 million during 2016. Cost of goods sold for the year
totaled $655.3 million. At the end of 2015, 007 Inc. inventories stood at $200.7 million, and the
company ended 2016 with inventory of $240 million. Compute 007’s gross profit percentage and
rate of inventory turnover for 2016.

Question 2:
Determine the effect on cost of goods sold, total assets, and gross margin for 2015 and 2016 if
the following inventory errors are not corrected. Indicate your answer with (+) for overstated, (­)
for understated, and (0) for no effect.
a.

Beginning inventory for 2015 is understated

b.

Ending inventory for 2015 is understated

c.

Cost of Goods Sold

Effect in 2015 on Total
Assets

Gross Margin

Cost of Goods Sold

Effect in 2016 on Total
Assets

Gross Margin

a.
b.
d.



a.
b.
e.




Question 3:
Oak Tree Ltd. Inventory records for a particular development program show the following at
October 31, 2016:



Oct 1 Beginning inventory







5 units @

$150 =

$750

15 Purchase

11 units @

160 =

1,760

26 Purchase

5 units @

170 =

850


At October 31, 10 units of these programs are on hand. Oak Tree Ltd. uses the perpetual
inventory system.
Requirements:

1.

Compute cost of goods sold and ending inventory, using each of the following methods:
a.

2.

Specific unit cost, with two $150 units, three $160 units, and five $170 units still
on hand at the end.

b.

Weighted­average cost

c.

First­in, first out cost

Which method produces the highest cost of goods sold? Which method produces the
lowest cost of goods sold? What causes the difference in cost of goods sold?


Question 4:
Prepare journal entries for 2016 for the following independent situations. Assume each
organization has a December 31st year end.
1.

Keepers Inc. purchases a patent for $225,000 on January 1 st. Keepers estimates this
patent to have a 5 year useful life.

2.

Blue Bat Corporation purchases one of their main competitors on March 31. Blue Bat
paid $160,000 for this purchase which included assets of $120,000 and liabilities of $10,000.
The goodwill is believed to have an indefinite benefit.


Question 5:
Assume Interstellar Communications Ltd’s balance sheet includes the following assets under
Property, Plant, and Equipment: Land, Buildings, and Motor­Carrier Equipment. Interstellar
Communications has a separate accumulated depreciation account for each of these assets
except land. Further, assume that Interstellar completed the following transactions:
Jan 2: Sold motor­carrier equipment with accumulated depreciation of $67,000 (cost of
$130,000) for $70,000 cash. Purchased similar new equipment with a cash price of
$176,000.
July 3: Sold a building that had cost $650,000 and had accumulated depreciation of
$145,000 through December 31 of the preceding year. Depreciation is computed on a
straight­line basis. The building had a 40­year useful life and a residual value of $250,000.
Interstellar received $100,000 cash and a $400,000 note receivable.
Oct 29 Purchased land and a building for a single price of $420,000. An independent
appraisal valued the land at $150,000 and the building at $300,000.
Dec 31: Recorded depreciation as follows:
New motor­carrier equipment has an expected useful life of six years and an estimated residual
value of 5% of cost. Depreciation is computed on the double­diminishing­balance method.

Depreciation on buildings is computed by the straight­line method. The new building carries a 40­
year useful life and a residual value equal to 10% of its cost.
Required: Please journalize each of the transactions from Jan 2nd – Dec 31st.