BE 6-1

(a) Ownership of the goods belongs to Smart. Thus, these goods should be included in Smart’s inventory. (b) The goods in transit should not be included in the inventory count because ownership by Smart does not occur until the goods reach the buyer. (c) The goods being held belong to the customer. They should not be included in Smart’s inventory. (d) Ownership of these goods rests with the other company. Thus, these goods should not be included in the physical inventory.

BE 6-2

The items that should be included in inventoriable costs are:

(a) Freight-in (b) Purchase Returns and Allowances (c) Purchases (e) Purchase Discounts

BE 6-4

Average unit cost is $6.89 computed as follows:

300 X $6 = $1,800 400 X $7 = 2,800 200 X $8 = 1,600 900 $6,200

$6,200 ÷ 900 = $6.89 (rounded).

The cost of the ending inventory is $2,480 or (360 X $6.89).

BE 6-5

(a) FIFO would result in the highest net income.
(b) FIFO would result in the highest ending inventory.
(c) LIFO would result in the lowest income tax expense (because it would result in the lowest net income).
(d) Average-cost would result in the most stable income over a number of years because it averages out any big changes in the cost of inventory.

BE 6-6

Cost of goods sold under: | | | LIFO | | FIFO | | Purchases | | $6 X 100 | | $6 X 100 | | | | $7 X 200 | | $7 X 200 | | | | $8 X 150 | | $8 X 150 | | Cost of goods available for sale | | $ 3,200 | | $ 3,200 | | Less: Ending inventory | | $ 1,160 | | $ 1,410 | | Cost of goods sold | | $ 2,040 | | $ 1,790 |

Since the cost of goods sold is $250 less under FIFO ($2,040 – $1,790) that is the amount of the phantom profit. It is referred to as “phantom profit” because FIFO matches current selling prices with old inventory costs. To