1460T_c09.qxd01:09:200609:04 AM Page450 EQA 450 Chapter 9 Inventories:Additional Valuation Issues ILLUSTRATION 9A-11 Conversion to LIFO December 31,2007,Inventory at LIFO Cost Retail Inventory Method Retail Ending inventory x Ratio LIFO $25,000 45%* =S11,250 "The cost-to-retail ratio was computed as follows: Net purchases at cost $47,250 Net purchases at retail plus $100,000+$7,000-$2,000 =45% markups less markdowns The difference of $500($11,250-$10,750)between the LIFO retail method and the conventional retail method in the ending inventory for 2007 is the amount by which the company must adjust beginning inventory for 2008.The entry to adjust the inven- tory to a cost basis is as follows. Inventory 500 Adjustment to Record Inventory at Cost 500 KEY TERMS SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 9A dollar-value LIFO retail method,446 8.Determine ending inventory by applying the LIFO retail methods.The application of LIFO retail method,445 LIFO retail is made under two assumptions:stable prices and fluctuating prices. Procedures under stable prices:(a)Because the LIFO method is a cost method,both markups and markdowns must be considered in obtaining the proper cost-to-retail per- centage.(b)Since the LIFO method is concerned only with the additional layer,or the amount that should be subtracted from the previous layer,the beginning inventory is excluded from the cost-to-retail percentage.(c)The markups and markdowns apply only to the goods purchased during the current period and not to the beginning inventory. Procedures under fluctuating prices:The steps are the same as for stable prices ex- cept that in computing the LIFO inventory under a dollar-value LIFO approach,the dollar increase in inventory is found and deflated to beginning-of-the-year prices.Do- ing so will determine whether actual increases or decreases in quantity have occurred. If quantities increase,this increase is priced at the new index to compute the new layer.If quantities decrease,the decrease is subtracted from the most recent layers to the extent necessary. Note:All asterisked Questions,Brief Exercises,Exercises,Problems,and Concepts for Analysis relate to material contained in the appendix to the chapter. QUESTIONS 1.Where there is evidence that the utility of inventory 5.In some instances accounting principles require a de- goods,as part of their disposal in the ordinary course of parture from valuing inventories at cost alone.Deter- business,will be less than cost,what is the proper ac- mine the proper unit inventory price in the following counting treatment? cases 2.Explain the rationale for the ceiling and floor in the lower-of-cost-or-market method of valuing inventories. Cases 3.Why are inventories valued at the lower-of-cost-or- 1 2 3 4 5 market?What are the arguments against the use of the Cost $15.90$16.10$15.90 $15.90$15.90 LCM method of valuing inventories? Net realizable value 14.30 19.20 15.20 10.40 16.40 Net realizable value 4.What approaches may be employed in applying the less normal profit 12.80 17.60 13.75 8.80 14.80 lower-of-cost-or-market procedure?Which approach is Market(replace- normally used and why? ment cost) 14.80 1720 12.80 9.70 16.80
1. Where there is evidence that the utility of inventory goods, as part of their disposal in the ordinary course of business, will be less than cost, what is the proper accounting treatment? 2. Explain the rationale for the ceiling and floor in the lower-of-cost-or-market method of valuing inventories. 3. Why are inventories valued at the lower-of-cost-ormarket? What are the arguments against the use of the LCM method of valuing inventories? 4. What approaches may be employed in applying the lower-of-cost-or-market procedure? Which approach is normally used and why? 5. In some instances accounting principles require a departure from valuing inventories at cost alone. Determine the proper unit inventory price in the following cases. Cases 12345 Cost $15.90 $16.10 $15.90 $15.90 $15.90 Net realizable value 14.30 19.20 15.20 10.40 16.40 Net realizable value less normal profit 12.80 17.60 13.75 8.80 14.80 Market (replacement cost) 14.80 17.20 12.80 9.70 16.80 QUESTIONS The difference of $500 ($11,250 $10,750) between the LIFO retail method and the conventional retail method in the ending inventory for 2007 is the amount by which the company must adjust beginning inventory for 2008. The entry to adjust the inventory to a cost basis is as follows. Inventory 500 Adjustment to Record Inventory at Cost 500 450 • Chapter 9 Inventories: Additional Valuation Issues ILLUSTRATION 9A-11 Conversion to LIFO Retail Inventory Method December 31, 2007, Inventory at LIFO Cost Ending inventory *The cost-to-retail ratio was computed as follows: 45% markups less markdowns $47,250 $100,000 $7,000 $2,000 Net purchases at cost Net purchases at retail plus LIFO $11,250 Ratio 45%* Retail $25,000 SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 9A 8. Determine ending inventory by applying the LIFO retail methods. The application of LIFO retail is made under two assumptions: stable prices and fluctuating prices. Procedures under stable prices: (a) Because the LIFO method is a cost method, both markups and markdowns must be considered in obtaining the proper cost-to-retail percentage. (b) Since the LIFO method is concerned only with the additional layer, or the amount that should be subtracted from the previous layer, the beginning inventory is excluded from the cost-to-retail percentage. (c) The markups and markdowns apply only to the goods purchased during the current period and not to the beginning inventory. Procedures under fluctuating prices: The steps are the same as for stable prices except that in computing the LIFO inventory under a dollar-value LIFO approach, the dollar increase in inventory is found and deflated to beginning-of-the-year prices. Doing so will determine whether actual increases or decreases in quantity have occurred. If quantities increase, this increase is priced at the new index to compute the new layer. If quantities decrease, the decrease is subtracted from the most recent layers to the extent necessary. Note: All asterisked Questions, Brief Exercises, Exercises, Problems, and Concepts for Analysis relate to material contained in the appendix to the chapter. KEY TERMS dollar-value LIFO retail method, 446 LIFO retail method, 445 1460T_c09.qxd 01:09:2006 09:04 AM Page 450
1460T_c09.qxd01:09:200609:04 AM Page451 EQA Brief Exercises·451 6.What method(s)might be used in the accounts to record 14.What conditions must exist for the retail inventory a loss due to a price decline in the inventories?Discuss. method to provide valid results? 7.What factors might call for inventory valuation at sales 15.The conventional retail inventory method yields results prices(net realizable value or market price)? that are essentially the same as those yielded by the lower- 8.Under what circumstances is relative sales value an of-cost-or-market method.Explain.Prepare an illustration appropriate basis for determining the price assigned to of how the retail inventory method reduces inventory to inventory? market. 9.At December 31,2008,Kidman Co.has outstanding pur- 16.(a)Determine the ending inventory under the conven- chase commitments for purchase of 150,000 gallons,at tional retail method for the furniture department of $6.40 per gallon,of a raw material to be used in its man- Gin Blossoms Department Stores from the following ufacturing process.The company prices its raw material data. inventory at cost or market,whichever is lower.Assum- ing that the market price as of December 31,2008,is $5.90, Cost Retail how would you treat this situation in the accounts? Inventory,Jan.1 $149,000 $283,500 10.What are the major uses of the gross profit method? Purchases 1,400,000 2,160,000 Freight-in 70,000 11.Distinguish between gross profit as a percentage of cost and Markups,net 92.000 gross profit as a percentage of sales price.Convert the fol- Markdowns,net 48.000 Sales 2,235,000 lowing gross profit percentages based on cost to gross profit percentages based on sales price:20%and 33%%.Convert (b)If the results of a physical inventory indicated an the following gross profit percentages based on sales price inventory at retail of $240,000,what inferences would to gross profit percentages based on cost:33%%and 60%. you draw? 12.Carole Lombard Co.with annual net sales of $6 million maintains a markup of 25%based on cost.Lombard's 17.Deere and Company reported inventory in its balance expenses average 15%of net sales.What is Lombard's sheet as follows: gross profit and net profit in dollars? Inventories $1,999,100,000 13.Afire destroys all of the merchandise of Rosanna Arquette What additional disclosures might be necessary to pre- Company on February 10,2008.Presented below is in- sent the inventory fairly? formation compiled up to the date of the fire. 18.Of what significance is inventory turnover to a retail Inventory,January 1,2008 $400.000 store? Sales to February 10,2008 1,750,000 Purchases to February 10,2008 1,140,000 *19.What modifications to the conventional retail method are Freight-in to February 10,2008 60.000 necessary to approximate a LIFO retail flow? Rate of gross profit on selling price 40% What is the approximate inventory on February 10,2008? BRIEF EXERCISES PLUS (L01, BE9-1 Presented below is information related to Alstott Inc.'s inventory. 2) (per unit) Skis Boots Parkas Historical cost $190.00 $106.00 $53.00 Selling price 217.00 145.00 73.75 Cost to distribute 19.00 8.00 2.50 Current replacement cost 203.00 105.00 51.00 Normal profit margin 32.00 29.00 21.25 Determine the following:(a)the two limits to market value (i.e.,the ceiling and the floor)that should be used in the lower-of-cost-or-market computation for skis;(b)the cost amount that should be used in the lower-of-cost-or-market comparison of boots;and (c)the market amount that should be used to value parkas on the basis of the lower-of-cost-or-market
Brief Exercises • 451 6. What method(s) might be used in the accounts to record a loss due to a price decline in the inventories? Discuss. 7. What factors might call for inventory valuation at sales prices (net realizable value or market price)? 8. Under what circumstances is relative sales value an appropriate basis for determining the price assigned to inventory? 9. At December 31, 2008, Kidman Co. has outstanding purchase commitments for purchase of 150,000 gallons, at $6.40 per gallon, of a raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower. Assuming that the market price as of December 31, 2008, is $5.90, how would you treat this situation in the accounts? 10. What are the major uses of the gross profit method? 11. Distinguish between gross profit as a percentage of cost and gross profit as a percentage of sales price. Convert the following gross profit percentages based on cost to gross profit percentages based on sales price: 20% and 331 ⁄3%. Convert the following gross profit percentages based on sales price to gross profit percentages based on cost: 331 ⁄3% and 60%. 12. Carole Lombard Co. with annual net sales of $6 million maintains a markup of 25% based on cost. Lombard’s expenses average 15% of net sales. What is Lombard’s gross profit and net profit in dollars? 13. Afire destroys all of the merchandise of Rosanna Arquette Company on February 10, 2008. Presented below is information compiled up to the date of the fire. Inventory, January 1, 2008 $ 400,000 Sales to February 10, 2008 1,750,000 Purchases to February 10, 2008 1,140,000 Freight-in to February 10, 2008 60,000 Rate of gross profit on selling price 40% What is the approximate inventory on February 10, 2008? 14. What conditions must exist for the retail inventory method to provide valid results? 15. The conventional retail inventory method yields results that are essentially the same as those yielded by the lowerof-cost-or-market method. Explain. Prepare an illustration of how the retail inventory method reduces inventory to market. 16. (a) Determine the ending inventory under the conventional retail method for the furniture department of Gin Blossoms Department Stores from the following data. Cost Retail Inventory, Jan. 1 $ 149,000 $ 283,500 Purchases 1,400,000 2,160,000 Freight-in 70,000 Markups, net 92,000 Markdowns, net 48,000 Sales 2,235,000 (b) If the results of a physical inventory indicated an inventory at retail of $240,000, what inferences would you draw? 17. Deere and Company reported inventory in its balance sheet as follows: Inventories $1,999,100,000 What additional disclosures might be necessary to present the inventory fairly? 18. Of what significance is inventory turnover to a retail store? *19. What modifications to the conventional retail method are necessary to approximate a LIFO retail flow? BRIEF EXERCISES BE9-1 Presented below is information related to Alstott Inc.’s inventory. (per unit) Skis Boots Parkas Historical cost $190.00 $106.00 $53.00 Selling price 217.00 145.00 73.75 Cost to distribute 19.00 8.00 2.50 Current replacement cost 203.00 105.00 51.00 Normal profit margin 32.00 29.00 21.25 Determine the following: (a) the two limits to market value (i.e., the ceiling and the floor) that should be used in the lower-of-cost-or-market computation for skis; (b) the cost amount that should be used in the lower-of-cost-or-market comparison of boots; and (c) the market amount that should be used to value parkas on the basis of the lower-of-cost-or-market. (L0 1, 2) 1460T_c09.qxd 01:09:2006 09:04 AM Page 451
1460T_c09.qxd01:19:200611:19 AM Page452 EQA 452 Chapter 9 Inventories:Additional Valuation Issues (L01, BE9-2 Robin Corporation has the following four items in its ending inventory. Replacement Net Realizable NRV Less Item Cost Cost Value (NRV) Normal Profit Margin Jokers $2.000 $1,900 $2,100 $1.600 Penguins 5.000 5,100 4,950 4,100 Riddlers 4,400 4,550 4,625 3,700 Scarecrows 3.200 2,990 3.830 3.070 Determine the final lower-of-cost-or-market inventory value for each item. (L0 1,BE9-3 Battletoads Inc.uses a perpetual inventory system.At January 1,2008,inventory was $214,000 at both 2) cost and market value.At December 31,2008,the inventory was $286,000 at cost and $269,000 at mar- ket value.Prepare the necessary December 31 entry under (a)the direct method and (b)the indirect method. (L0 3)BE9-4 PC Plus buys 1,000 computer game CDs from a distributor who is discontinuing those games The purchase price for the lot is $6,000.PC Plus will group the CDs into three price categories for resale, as indicated below. Group No.of CDs Price per CD 1 100 $5.00 2 800 10.00 100 15.00 Determine the cost per CD for each group,using the relative sales value method. (L04) BE9-5 Beavis Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2008 at a cost of $1,000,000.At December 31,2007,the raw materials to be purchased have a market value of $930,000.Prepare any necessary December 31 entry. (L0 4)BE9-6 Use the information for Beavis Company from BE9-5.In 2008,Beavis paid $1,000,000 to obtair the raw materials which were worth $930,000.Prepare the entry to record the purchase. (L05) BE9-7 Big Hurt Corporation's April 30 inventory was destroyed by fire.January 1 inventory was $150,000,and purchases for January through April totaled $500,000.Sales for the same period were $700,000.Big Hurt's normal gross profit percentage is 31%on sales.Using the gross profit method,esti- ⊕ mate Big Hurt's April 30 inventory that was destroyed by fire. (L0 6)BE9-8 Bimini Inc.had beginning inventory of $12,000 at cost and $20,000 at retail.Net purchases were $120,000 at cost and $170,000 at retail.Net markups were $10,000;net markdowns were $7,000;and sales were $157,000.Compute ending inventory at cost using the conventional retail method. (LO 7)BE9-9 In its 2004 annual report,Wal-Mart reported inventory of $26,612 million on January 31,2004, and $24,401 million on January 31,2003,cost of sales of $198,747 million for fiscal year 2004,and net sales of $256,329 million.Compute Wal-Mart's inventory turnover and the average days to sell inventory for the fiscal year 2004. (L0 8)*BE9-10 Use the information for Bimini Inc.from BE9-8.Compute ending inventory at cost using the LIFO retail method. (LO 8)BE9-11 Use the information for Bimini Inc.from BE9-8,and assume the price level increased from 100 at the beginning of the year to 120 at year-end.Compute ending inventory at cost using the dollar-value LIFO retail method. PLUS EXERCISES (L0 1,E9-1 (Lower-of-Cost-or-Market)The inventory of 3T Company on December 31,2008,consists of the 2) following items. Part No. Quantity Cost per Unit Cost to Replace per Unit 110 600 $90 $100 111 1,000 60 52 112 500 80 76 113 200 170 180 120 400 205 208 1214 1.600 16 14 122 300 240 235 Part No.121 is obsolete and has a realizable value of $0.20 each as scrap
BE9-2 Robin Corporation has the following four items in its ending inventory. Replacement Net Realizable NRV Less Item Cost Cost Value (NRV) Normal Profit Margin Jokers $2,000 $1,900 $2,100 $1,600 Penguins 5,000 5,100 4,950 4,100 Riddlers 4,400 4,550 4,625 3,700 Scarecrows 3,200 2,990 3,830 3,070 Determine the final lower-of-cost-or-market inventory value for each item. BE9-3 Battletoads Inc. uses a perpetual inventory system. At January 1, 2008, inventory was $214,000 at both cost and market value. At December 31, 2008, the inventory was $286,000 at cost and $269,000 at market value. Prepare the necessary December 31 entry under (a) the direct method and (b) the indirect method. BE9-4 PC Plus buys 1,000 computer game CDs from a distributor who is discontinuing those games. The purchase price for the lot is $6,000. PC Plus will group the CDs into three price categories for resale, as indicated below. Group No. of CDs Price per CD 1 100 $ 5.00 2 800 10.00 3 100 15.00 Determine the cost per CD for each group, using the relative sales value method. BE9-5 Beavis Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2008 at a cost of $1,000,000. At December 31, 2007, the raw materials to be purchased have a market value of $930,000. Prepare any necessary December 31 entry. BE9-6 Use the information for Beavis Company from BE9-5. In 2008, Beavis paid $1,000,000 to obtain the raw materials which were worth $930,000. Prepare the entry to record the purchase. BE9-7 Big Hurt Corporation’s April 30 inventory was destroyed by fire. January 1 inventory was $150,000, and purchases for January through April totaled $500,000. Sales for the same period were $700,000. Big Hurt’s normal gross profit percentage is 31% on sales. Using the gross profit method, estimate Big Hurt’s April 30 inventory that was destroyed by fire. BE9-8 Bimini Inc. had beginning inventory of $12,000 at cost and $20,000 at retail. Net purchases were $120,000 at cost and $170,000 at retail. Net markups were $10,000; net markdowns were $7,000; and sales were $157,000. Compute ending inventory at cost using the conventional retail method. BE9-9 In its 2004 annual report, Wal-Mart reported inventory of $26,612 million on January 31, 2004, and $24,401 million on January 31, 2003, cost of sales of $198,747 million for fiscal year 2004, and net sales of $256,329 million. Compute Wal-Mart’s inventory turnover and the average days to sell inventory for the fiscal year 2004. *BE9-10 Use the information for Bimini Inc. from BE9-8. Compute ending inventory at cost using the LIFO retail method. *BE9-11 Use the information for Bimini Inc. from BE9-8, and assume the price level increased from 100 at the beginning of the year to 120 at year-end. Compute ending inventory at cost using the dollar-value LIFO retail method. EXERCISES E9-1 (Lower-of-Cost-or-Market) The inventory of 3T Company on December 31, 2008, consists of the following items. Part No. Quantity Cost per Unit Cost to Replace per Unit 110 600 $90 $100 111 1,000 60 52 112 500 80 76 113 200 170 180 120 400 205 208 121a 1,600 16 14 122 300 240 235 a Part No. 121 is obsolete and has a realizable value of $0.20 each as scrap. 452 • Chapter 9 Inventories: Additional Valuation Issues (L0 1, 2) (L0 1, 2) (L0 3) (L0 4) (L0 4) (L0 5) (L0 6) (L0 7) (L0 8) (L0 8) (L0 1, 2) 1460T_c09.qxd 01:19:2006 11:19 AM Page 452
1460T_c09.qxd01:09:200609:04 AM Page453 EQA Exercises·453 Instructions (a)Determine the inventory as of December 31,2008,by the lower-of-cost-or-market method, applying this method directly to each item. (b)Determine the inventory by the lower-of-cost-or-market method,applying the method to the total of the inventory. (L01, E9-2 (Lower-of-Cost-or-Market)Smashing Pumpkins Company uses the lower-of-cost-or-market 2) method,on an individual-item basis,in pricing its inventory items.The inventory at December 31,2008, consists of products D,E,F,G,H,and I.Relevant per-unit data for these products appear below. Item Item Item Item D E G H Estimated selling price $120 $110 95 $90 $110 $90 Cost 75 0 80 0 Replacement cost 120 72 70 30 70 30 Estimated selling expense 30 30 30 25 30 30 Normal profit 20 20 20 20 20 20 Instructions Using the lower-of-cost-or-market rule,determine the proper unit value for balance sheet reporting pur- poses at December 31,2008,for each of the inventory items above. (L0 1,E9-3 (Lower-of-Cost-or-Market)Michael Bolton Company follows the practice of pricing its inventory 2) at the lower-of-cost-or-market,on an individual-item basis. Item ●ost Cost to Estimated Cost of Completion Normal No. Quantity per Unit Replace Selling Price and Disposal Profit 1320 1,200 $3.20 $3.00 $4.50 $0.35 $1.25 1333 900 270 2.30 3.50 0.50 0.50 1426 800 4.50 3.70 5.00 0.40 1.00 1437 1.000 3.60 3.10 3.20 0.25 0.90 1510 700 2.25 2.00 3.25 0.80 0.60 1522 500 3.00 2.70 3.80 0.40 0.50 1573 3.000 180 1.60 2.50 0.75 0.50 1626 1.000 4.70 5.20 6.00 0.50 1.00 Instructions From the information above,determine the amount of Bolton Company inventory. (L0 1,E9-4 (Lower-of-Cost-or-Market-Journal Entries)Corrs Company began operations in 2007 and de- 2) termined its ending inventory at cost and at lower-of-cost-or-market at December 31,2007,and December 31,2008.This information is presented below. Cost Lower-of-Cost-or-Market 12/31/07 $346,000 $327,000 12/31/08 410,000 395,000 Instructions (a)Prepare the journal entries required at December 31,2007,and December 31,2008,assuming that the inventory is recorded at market,and a perpetual inventory system (direct method)is used. (b)Prepare journal entries required at December 31,2007,and December 31,2008,assuming that the inventory is recorded at cost and an allowance account is adjusted at each year-end under a per- petual system. (c)Which of the two methods above provides the higher net income in each year? (L0 1.E9-5 (Lower-of-Cost-or-Market-Valuation Account)Presented below is information related to Can- 2) dlebox Enterprises. Jan.31 Feb.28 Mar.31 Apr.30 Inventory at cost $15,000 $15,100 $17,000 $13.000 Inventory at the lower-of-cost-or-market 14,500 12,600 15,600 12,300 Purchases for the month 20,000 24.000 26,500 Sales for the month 29,000 35.000 40,000 Instructions (a)From the information,prepare (as far as the data permit)monthly income statements in colum- nar form for February,March,and April.The inventory is to be shown in the statement at cost
Instructions (a) Determine the inventory as of December 31, 2008, by the lower-of-cost-or-market method, applying this method directly to each item. (b) Determine the inventory by the lower-of-cost-or-market method, applying the method to the total of the inventory. E9-2 (Lower-of-Cost-or-Market) Smashing Pumpkins Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2008, consists of products D, E, F, G, H, and I. Relevant per-unit data for these products appear below. Item Item Item Item Item Item D E FGH I Estimated selling price $120 $110 $95 $90 $110 $90 Cost 75 80 80 80 50 36 Replacement cost 120 72 70 30 70 30 Estimated selling expense 30 30 30 25 30 30 Normal profit 20 20 20 20 20 20 Instructions Using the lower-of-cost-or-market rule, determine the proper unit value for balance sheet reporting purposes at December 31, 2008, for each of the inventory items above. E9-3 (Lower-of-Cost-or-Market) Michael Bolton Company follows the practice of pricing its inventory at the lower-of-cost-or-market, on an individual-item basis. Item Cost Cost to Estimated Cost of Completion Normal No. Quantity per Unit Replace Selling Price and Disposal Profit 1320 1,200 $3.20 $3.00 $4.50 $0.35 $1.25 1333 900 2.70 2.30 3.50 0.50 0.50 1426 800 4.50 3.70 5.00 0.40 1.00 1437 1,000 3.60 3.10 3.20 0.25 0.90 1510 700 2.25 2.00 3.25 0.80 0.60 1522 500 3.00 2.70 3.80 0.40 0.50 1573 3,000 1.80 1.60 2.50 0.75 0.50 1626 1,000 4.70 5.20 6.00 0.50 1.00 Instructions From the information above, determine the amount of Bolton Company inventory. E9-4 (Lower-of-Cost-or-Market—Journal Entries) Corrs Company began operations in 2007 and determined its ending inventory at cost and at lower-of-cost-or-market at December 31, 2007, and December 31, 2008. This information is presented below. Cost Lower-of-Cost-or-Market 12/31/07 $346,000 $327,000 12/31/08 410,000 395,000 Instructions (a) Prepare the journal entries required at December 31, 2007, and December 31, 2008, assuming that the inventory is recorded at market, and a perpetual inventory system (direct method) is used. (b) Prepare journal entries required at December 31, 2007, and December 31, 2008, assuming that the inventory is recorded at cost and an allowance account is adjusted at each year-end under a perpetual system. (c) Which of the two methods above provides the higher net income in each year? E9-5 (Lower-of-Cost-or-Market—Valuation Account) Presented below is information related to Candlebox Enterprises. Jan. 31 Feb. 28 Mar. 31 Apr. 30 Inventory at cost $15,000 $15,100 $17,000 $13,000 Inventory at the lower-of-cost-or-market 14,500 12,600 15,600 12,300 Purchases for the month 20,000 24,000 26,500 Sales for the month 29,000 35,000 40,000 Instructions (a) From the information, prepare (as far as the data permit) monthly income statements in columnar form for February, March, and April. The inventory is to be shown in the statement at cost, Exercises • 453 (L0 1, 2) (L0 1, 2) (L0 1, 2) (L0 1, 2) 1460T_c09.qxd 01:09:2006 09:04 AM Page 453
1460T_c09.qxd01:09:200609:04 AM Page454 EQA 454 Chapter 9 Inventories:Additional Valuation Issues the gain or loss due to market fluctuations is to be shown separately,and a valuation account is to be set up for the difference between cost and the lower of cost or market. (b)Prepare the journal entry required to establish the valuation account at January 31 and entries to adjust it monthly thereafter. (L01, E9-6 (Lower-of-Cost-or-Market-Error Effect)Winans Company uses the lower-of-cost-or-market 2) method,on an individual-item basis,in pricing its inventory items.The inventory at December 31,2007, included product X.Relevant per-unit data for product X appear below. Estimated selling price $45 Cost 40 Replacement cost 35 Estimated selling expense 14 Normal profit 9 There were 1,000 units of product X on hand at December 31,2007.Product X was incorrectly valued at $35 per unit for reporting purposes.All 1,000 units were sold in 2008. Instructions Compute the effect of this error on net income for 2007 and the effect on net income for 2008,and indi- cate the direction of the misstatement for each year. (LO 3)E9-7 (Relative Sales Value Method)Phil Collins Realty Corporation purchased a tract of unimproved land for $55,000.This land was improved and subdivided into building lots at an additional cost of $34,460. These building lots were all of the same size but owing to differences in location were offered for sale at different prices as follows Group No.of Lots Price per Lot 1 9 $3,000 15 4,000 2,400 Operating expenses for the year allocated to this project total $18,200.Lots unsold at the year-end were as follows. ⊕ Group 1 5 lots Group 2 7 lots Group 3 2 lots Instructions At the end of the fiscal year Phil Collins Realty Corporation instructs you to arrive at the net income realized on this operation to date. (L0 3)E9-8 (Relative Sales Value Method)During 2008,Pretenders Furniture Company purchases a carload of wicker chairs.The manufacturer sells the chairs to Pretenders for a lump sum of $59,850,because it is discontinuing manufacturing operations and wishes to dispose of its entire stock.Three types of chairs are included in the carload.The three types and the estimated selling price for each are listed below. Type No.of Chairs Estimated Selling Price Each Lounge chairs 400 $90 Armchairs 300 80 Straight chairs 700 50 During 2008,Pretenders sells 200 lounge chairs,100 armchairs,and 120 straight chairs Instructions What is the amount of gross profit realized during 2008?What is the amount of inventory of unsold straight chairs on December 31,2008? (LO 4)E9-9 (Purchase Commitments)Marvin Gaye Company has been having difficulty obtaining key raw materials for its manufacturing process.The company therefore signed a long-term noncancelable pur- chase commitment with its largest supplier of this raw material on November 30,2008,at an agreed price of $400,000.At December 31,2008,the raw material had declined in price to $365,000. Instructions What entry would you make on December 31,2008,to recognize these facts? (L0 4)E9-10 (Purchase Commitments)At December 31,2008,Indigo Girls Company has outstanding non- cancelable purchase commitments for 36,000 gallons,at $3.00 per gallon,of raw material to be used in its manufacturing process.The company prices its raw material inventory at cost or market,whichever is lower
the gain or loss due to market fluctuations is to be shown separately, and a valuation account is to be set up for the difference between cost and the lower of cost or market. (b) Prepare the journal entry required to establish the valuation account at January 31 and entries to adjust it monthly thereafter. E9-6 (Lower-of-Cost-or-Market—Error Effect) Winans Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2007, included product X. Relevant per-unit data for product X appear below. Estimated selling price $45 Cost 40 Replacement cost 35 Estimated selling expense 14 Normal profit 9 There were 1,000 units of product X on hand at December 31, 2007. Product X was incorrectly valued at $35 per unit for reporting purposes. All 1,000 units were sold in 2008. Instructions Compute the effect of this error on net income for 2007 and the effect on net income for 2008, and indicate the direction of the misstatement for each year. E9-7 (Relative Sales Value Method) Phil Collins Realty Corporation purchased a tract of unimproved land for $55,000. This land was improved and subdivided into building lots at an additional cost of $34,460. These building lots were all of the same size but owing to differences in location were offered for sale at different prices as follows. Group No. of Lots Price per Lot 1 9 $3,000 2 15 4,000 3 17 2,400 Operating expenses for the year allocated to this project total $18,200. Lots unsold at the year-end were as follows. Group 1 5 lots Group 2 7 lots Group 3 2 lots Instructions At the end of the fiscal year Phil Collins Realty Corporation instructs you to arrive at the net income realized on this operation to date. E9-8 (Relative Sales Value Method) During 2008, Pretenders Furniture Company purchases a carload of wicker chairs. The manufacturer sells the chairs to Pretenders for a lump sum of $59,850, because it is discontinuing manufacturing operations and wishes to dispose of its entire stock. Three types of chairs are included in the carload. The three types and the estimated selling price for each are listed below. Type No. of Chairs Estimated Selling Price Each Lounge chairs 400 $90 Armchairs 300 80 Straight chairs 700 50 During 2008, Pretenders sells 200 lounge chairs, 100 armchairs, and 120 straight chairs. Instructions What is the amount of gross profit realized during 2008? What is the amount of inventory of unsold straight chairs on December 31, 2008? E9-9 (Purchase Commitments) Marvin Gaye Company has been having difficulty obtaining key raw materials for its manufacturing process. The company therefore signed a long-term noncancelable purchase commitment with its largest supplier of this raw material on November 30, 2008, at an agreed price of $400,000. At December 31, 2008, the raw material had declined in price to $365,000. Instructions What entry would you make on December 31, 2008, to recognize these facts? E9-10 (Purchase Commitments) At December 31, 2008, Indigo Girls Company has outstanding noncancelable purchase commitments for 36,000 gallons, at $3.00 per gallon, of raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower. 454 • Chapter 9 Inventories: Additional Valuation Issues (L0 1, 2) (L0 3) (L0 3) (L0 4) (L0 4) 1460T_c09.qxd 01:09:2006 09:04 AM Page 454
1460T_c09.qxd01:09:200609:04 AM Page455 EQA Exercises·455 Instructions (a)Assuming that the market price as of December 31,2008,is $3.30,how would this matter be treated in the accounts and statements?Explain. (b) Assuming that the market price as of December 31,2008,is $2.70,instead of $3.30,how would you treat this situation in the accounts and statements? (c)Give the entry in January 2009,when the 36,000-gallon shipment is received,assuming that the situation given in (b)above existed at December 31,2008,and that the market price in January 2009 was $2.70 per gallon.Give an explanation of your treatment. (L0 5)E9-11 (Gross Profit Method)Each of the following gross profit percentages is expressed in terms of cost. 1.20%.3.336%. 2.25%.4.50%. Instructions Indicate the gross profit percentage in terms of sales for each of the above. (L0 5)E9-12 (Gross Profit Method)Mark Price Company uses the gross profit method to estimate inventory for monthly reporting purposes.Presented below is information for the month of May. Inventory,May 1 s160.000 Purchases(gross) 640,000 Freight-in 30,000 Sales 1,000.000 Sales returns 70,000 Purchase discounts 12.000 Instructions (a)Compute the estimated inventory at May 31,assuming that the gross profit is 30%of sales. (b)Compute the estimated inventory at May 31,assuming that the gross profit is 30%of cost. (L0 5)E9-13 (Gross Profit Method)Tim Legler requires an estimate of the cost of goods lost by fire on March 9.Merchandise on hand on January 1 was $38,000.Purchases since January 1 were $72,000; freight-in,$3,400;purchase returns and allowances,$2,400.Sales are made at 33%%above cost and totaled $100,000 to March 9.Goods costing $10,900 were left undamaged by the fire;remaining goods were destroyed. Instructions (a)Compute the cost of goods destroyed. (b)Compute the cost of goods destroyed,assuming that the gross profit is 33%%of sales. (L0 5)E9-14 (Gross Profit Method)Rasheed Wallace Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken.The corporation's books disclosed the following. Beginning inventory $170.000 Sales $650,000 Purchases for the year 390,000 Sales returns 24,000 Purchase returns 30,000 Rate of gross margin on net sales 40% Merchandise with a selling price of $21,000 remained undamaged after the fire.Damaged merchandise with an original selling price of $15,000 had a net realizable value of $5,300. Instructions Compute the amount of the loss as a result of the fire,assuming that the corporation had no insurance coverage (LO 5)E9-15 (Gross Profit Method)You are called by Tim Duncan of Spurs Co.on July 16 and asked to pre- pare a claim for insurance as a result of a theft that took place the night before.You suggest that an inventory be taken immediately.The following data are available. Inventory,July 1 $38.000 Purchases-goods placed in stock July 1-15 85.000 Sales-goods delivered to customers (gross) 116,000 Sales returns-goods returned to stock 4.000 Your client reports that the goods on hand on July 16 cost $30,500,but you determine that this figure includes goods of $6,000 received on a consignment basis.Your past records show that sales are made at approximately 40%over cost.Duncan's insurance covers only goods owned. Instructions Compute the claim against the insurance company
Instructions (a) Assuming that the market price as of December 31, 2008, is $3.30, how would this matter be treated in the accounts and statements? Explain. (b) Assuming that the market price as of December 31, 2008, is $2.70, instead of $3.30, how would you treat this situation in the accounts and statements? (c) Give the entry in January 2009, when the 36,000-gallon shipment is received, assuming that the situation given in (b) above existed at December 31, 2008, and that the market price in January 2009 was $2.70 per gallon. Give an explanation of your treatment. E9-11 (Gross Profit Method) Each of the following gross profit percentages is expressed in terms of cost. 1. 20%. 3. 331 ⁄3%. 2. 25%. 4. 50%. Instructions Indicate the gross profit percentage in terms of sales for each of the above. E9-12 (Gross Profit Method) Mark Price Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May. Inventory, May 1 $ 160,000 Purchases (gross) 640,000 Freight-in 30,000 Sales 1,000,000 Sales returns 70,000 Purchase discounts 12,000 Instructions (a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales. (b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost. E9-13 (Gross Profit Method) Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Merchandise on hand on January 1 was $38,000. Purchases since January 1 were $72,000; freight-in, $3,400; purchase returns and allowances, $2,400. Sales are made at 331 ⁄3% above cost and totaled $100,000 to March 9. Goods costing $10,900 were left undamaged by the fire; remaining goods were destroyed. Instructions (a) Compute the cost of goods destroyed. (b) Compute the cost of goods destroyed, assuming that the gross profit is 331 ⁄3% of sales. E9-14 (Gross Profit Method) Rasheed Wallace Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation’s books disclosed the following. Beginning inventory $170,000 Sales $650,000 Purchases for the year 390,000 Sales returns 24,000 Purchase returns 30,000 Rate of gross margin on net sales 40% Merchandise with a selling price of $21,000 remained undamaged after the fire. Damaged merchandise with an original selling price of $15,000 had a net realizable value of $5,300. Instructions Compute the amount of the loss as a result of the fire, assuming that the corporation had no insurance coverage. E9-15 (Gross Profit Method) You are called by Tim Duncan of Spurs Co. on July 16 and asked to prepare a claim for insurance as a result of a theft that took place the night before. You suggest that an inventory be taken immediately. The following data are available. Inventory, July 1 $ 38,000 Purchases—goods placed in stock July 1–15 85,000 Sales—goods delivered to customers (gross) 116,000 Sales returns—goods returned to stock 4,000 Your client reports that the goods on hand on July 16 cost $30,500, but you determine that this figure includes goods of $6,000 received on a consignment basis. Your past records show that sales are made at approximately 40% over cost. Duncan’s insurance covers only goods owned. Instructions Compute the claim against the insurance company. Exercises • 455 (L0 5) (L0 5) (L0 5) (L0 5) (L0 5) 1460T_c09.qxd 01:09:2006 09:04 AM Page 455
1460T_c09.qxd01:09:200609:04 AM Page456 EQA 456.Chapter 9 Inventories:Additional Valuation Issues (L0 5)E9-16 (Gross Profit Method)Gheorghe Moresan Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost. Lumber 25% Millwork 30% Hardware and fittings 40% On August 18,a fire destroyed the office,lumber shed,and a considerable portion of the lumber stacked in the yard.To file a report of loss for insurance purposes,the company must know what the inventories were immediately preceding the fire.No detail or perpetual inventory records of any kind were main- tained.The only pertinent information you are able to obtain are the following facts from the general ledger,which was kept in a fireproof vault and thus escaped destruction. Lumber Millwork Hardware Inventory,Jan.1,2008 $250,000 $90,000 $45,000 Purchases to Aug.18,2008 1,500.000 375,000 160.000 Sales to Aug.18,2008 2,080.000 533,000 210.000 Instructions Submit your estimate of the inventory amounts immediately preceding the fire. (L0 5)E9-17 (Gross Profit Method) Presented below is information related to Warren Moon Corporation for the current year. Beginning inventory $600,000 Purchases 1,500,000 Total goods available for sale $2,100,000 Sales 2,500,000 Instructions Compute the ending inventory,assuming that (a)gross profit is 45%of sales;(b)gross profit is 60%of cost;(c)gross profit is 35%of sales;and (d)gross profit is 25%of cost. (L0 6)E9-18 (Retail Inventory Method)Presented below is information related to Bobby Engram Company. ⊕ Cost Retail Beginning inventory $58,000 $100,000 Purchases (net) 122.000 200,000 Net markups 10,345 Net markdowns 26,135 Sales 186,000 Instructions (a)Compute the ending inventory at retail. (b)Compute a cost-to-retail percentage(round to two decimals)under the following conditions. (1)Excluding both markups and markdowns. (2) Excluding markups but including markdowns. (3)Excluding markdowns but including markups (4)Including both markdowns and markups. (c)Which of the methods in (b)above (1,2,3,or 4)does the following? (1)Provides the most conservative estimate of ending inventory. (2)Provides an approximation of lower-of-cost-or-market. (3)Is used in the conventional retail method. (d)Compute ending inventory at lower-of-cost-or-market(round to nearest dollar). (e)Compute cost of goods sold based on (d). (f)Compute gross margin based on(d). (L0 6)E9-19 (Retail Inventory Method)Presented below is information related to Ricky Henderson Company. Cost Retail Beginning inventory $200,000 $280.000 Purchases 1.375.000 2,140.000 Markups 95.000 Markup cancellations 15.000 Markdowns 35,000 Markdown cancellations 5,000 Sales 2.200.000
E9-16 (Gross Profit Method) Gheorghe Moresan Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost. Lumber 25% Millwork 30% Hardware and fittings 40% On August 18, a fire destroyed the office, lumber shed, and a considerable portion of the lumber stacked in the yard. To file a report of loss for insurance purposes, the company must know what the inventories were immediately preceding the fire. No detail or perpetual inventory records of any kind were maintained. The only pertinent information you are able to obtain are the following facts from the general ledger, which was kept in a fireproof vault and thus escaped destruction. Lumber Millwork Hardware Inventory, Jan. 1, 2008 $ 250,000 $ 90,000 $ 45,000 Purchases to Aug. 18, 2008 1,500,000 375,000 160,000 Sales to Aug. 18, 2008 2,080,000 533,000 210,000 Instructions Submit your estimate of the inventory amounts immediately preceding the fire. E9-17 (Gross Profit Method) Presented below is information related to Warren Moon Corporation for the current year. Beginning inventory $ 600,000 Purchases 1,500,000 Total goods available for sale $2,100,000 Sales 2,500,000 Instructions Compute the ending inventory, assuming that (a) gross profit is 45% of sales; (b) gross profit is 60% of cost; (c) gross profit is 35% of sales; and (d) gross profit is 25% of cost. E9-18 (Retail Inventory Method) Presented below is information related to Bobby Engram Company. Cost Retail Beginning inventory $ 58,000 $100,000 Purchases (net) 122,000 200,000 Net markups 10,345 Net markdowns 26,135 Sales 186,000 Instructions (a) Compute the ending inventory at retail. (b) Compute a cost-to-retail percentage (round to two decimals) under the following conditions. (1) Excluding both markups and markdowns. (2) Excluding markups but including markdowns. (3) Excluding markdowns but including markups. (4) Including both markdowns and markups. (c) Which of the methods in (b) above (1, 2, 3, or 4) does the following? (1) Provides the most conservative estimate of ending inventory. (2) Provides an approximation of lower-of-cost-or-market. (3) Is used in the conventional retail method. (d) Compute ending inventory at lower-of-cost-or-market (round to nearest dollar). (e) Compute cost of goods sold based on (d). (f) Compute gross margin based on (d). E9-19 (Retail Inventory Method) Presented below is information related to Ricky Henderson Company. Cost Retail Beginning inventory $ 200,000 $ 280,000 Purchases 1,375,000 2,140,000 Markups 95,000 Markup cancellations 15,000 Markdowns 35,000 Markdown cancellations 5,000 Sales 2,200,000 456 • Chapter 9 Inventories: Additional Valuation Issues (L0 5) (L0 5) (L0 6) (L0 6) 1460T_c09.qxd 01:09:2006 09:04 AM Page 456
1460T_c09.qxd01:09:200609:04 AM Page457 EQA Exercises·457 Instructions Compute the inventory by the conventional retail inventory method. (L0 6)E9-20 (Retail Inventory Method)The records of Ellen's Boutique report the following data for the month of April. Sales $99.000 Purchases (at cost) $48.000 Sales returns 2.000 Purchases (at sales price) 88.000 Markups 10.000 Purchase returns (at cost) 2.000 Markup cancellations 1,500 Purchase returns (at sales price) 3,000 Markdowns 9.300 Beginning inventory (at cost) 30.000 Markdown cancellations 2,800 Beginning inventory (at sales price) 46,500 Freight on purchases 2,400 Instructions Compute the ending inventory by the conventional retail inventory method. (L0 7)E9-21 (Analysis of Inventories)The financial statements of General Mills,Inc's.2004 annual report disclose the following information. (in millions) May30,2004 May25,2003 May26,2002 Inventories $1,063 $1.082 $1,055 Fiscal Year 2004 2003 Sales $11,070 $10,506 Cost of goods sold 6,584 6,109 Net income 1,055 917 Instructions Compute General Mills's(a)inventory turnover and (b)the average days to sell inventory for 2004 and 2003. (L0 8)*E9-22 (Retail Inventory Method-Conventional and LIFO)Helen Keller Company began operations on January 1,2006,adopting the conventional retail inventory system.None of the company's merchan- dise was marked down in 2006 and,because there was no beginning inventory,its ending inventory for 2006 of $38,100 would have been the same under either the conventional retail system or the LIFO retail system. On December 31,2007,the store management considers adopting the LIFO retail system and desires to know how the December 31,2007,inventory would appear under both systems.All pertinent data regard- ing purchases,sales,markups,and markdowns are shown below.There has been no change in the price level. Cost Retail Inventory,Jan.1,2007 $38,100 $60,000 Markdowns (net) 13,000 Markups (net) 22.000 Purchases (net) 130,900 178.000 Sales (net) 167.000 Instructions Determine the cost of the 2007 ending inventory under both (a)the conventional retail method and (b)the LIFO retail method. (L0 8)*E9-23 (Retail Inventory Method-Conventional and LIFO)Leonard Bernstein Company began operations late in 2006 and adopted the conventional retail inventory method.Because there was no be- ginning inventory for 2006 and no markdowns during 2006,the ending inventory for 2006 was $14,000 under both the conventional retail method and the LIFO retail method.At the end of 2007,management wants to compare the results of applying the conventional and LIFO retail methods.There was no change in the price level during 2007.The following data are available for computations. Cost Retail Inventory,January 1,2007 $14.000 $20.000 Sales 80,000 Net markups 9,000 Net markdowns 1,600 Purchases 58,800 81.000 Freight-in 7,500 Estimated theft 2,000
Instructions Compute the inventory by the conventional retail inventory method. E9-20 (Retail Inventory Method) The records of Ellen’s Boutique report the following data for the month of April. Sales $99,000 Purchases (at cost) $48,000 Sales returns 2,000 Purchases (at sales price) 88,000 Markups 10,000 Purchase returns (at cost) 2,000 Markup cancellations 1,500 Purchase returns (at sales price) 3,000 Markdowns 9,300 Beginning inventory (at cost) 30,000 Markdown cancellations 2,800 Beginning inventory (at sales price) 46,500 Freight on purchases 2,400 Instructions Compute the ending inventory by the conventional retail inventory method. E9-21 (Analysis of Inventories) The financial statements of General Mills, Inc’s. 2004 annual report disclose the following information. (in millions) May 30, 2004 May 25, 2003 May 26, 2002 Inventories $1,063 $1,082 $1,055 Fiscal Year 2004 2003 Sales $11,070 $10,506 Cost of goods sold 6,584 6,109 Net income 1,055 917 Instructions Compute General Mills’s (a) inventory turnover and (b) the average days to sell inventory for 2004 and 2003. *E9-22 (Retail Inventory Method—Conventional and LIFO) Helen Keller Company began operations on January 1, 2006, adopting the conventional retail inventory system. None of the company’s merchandise was marked down in 2006 and, because there was no beginning inventory, its ending inventory for 2006 of $38,100 would have been the same under either the conventional retail system or the LIFO retail system. On December 31, 2007, the store management considers adopting the LIFO retail system and desires to know how the December 31, 2007, inventory would appear under both systems. All pertinent data regarding purchases, sales, markups, and markdowns are shown below. There has been no change in the price level. Cost Retail Inventory, Jan. 1, 2007 $ 38,100 $ 60,000 Markdowns (net) 13,000 Markups (net) 22,000 Purchases (net) 130,900 178,000 Sales (net) 167,000 Instructions Determine the cost of the 2007 ending inventory under both (a) the conventional retail method and (b) the LIFO retail method. *E9-23 (Retail Inventory Method—Conventional and LIFO) Leonard Bernstein Company began operations late in 2006 and adopted the conventional retail inventory method. Because there was no beginning inventory for 2006 and no markdowns during 2006, the ending inventory for 2006 was $14,000 under both the conventional retail method and the LIFO retail method. At the end of 2007, management wants to compare the results of applying the conventional and LIFO retail methods. There was no change in the price level during 2007. The following data are available for computations. Cost Retail Inventory, January 1, 2007 $14,000 $20,000 Sales 80,000 Net markups 9,000 Net markdowns 1,600 Purchases 58,800 81,000 Freight-in 7,500 Estimated theft 2,000 Exercises • 457 (L0 6) (L0 8) (L0 8) (L0 7) 1460T_c09.qxd 01:09:2006 09:04 AM Page 457
1460T_c09.qxd01:09:200609:04 AM Page458 EQA 458.Chapter 9 Inventories:Additional Valuation Issues Instructions Compute the cost of the 2007 ending inventory under both(a)the conventional retail method and (b)the LIFO retail method. (L0 8)*E9-24 (Dollar-Value LIFO Retail)You assemble the following information for Seneca Department Store, which computes its inventory under the dollar-value LIFO method. Cost Retail Inventory on January 1,2007 $216,000 $300,000 Purchases 364.800 480,000 Increase in price level for year 9% Instructions Compute the cost of the inventory on December 31,2007,assuming that the inventory at retail is (a)$294,300and(b)$365,150. (L0 8)*E9-25 (Dollar-Value LIFO Retail)Presented below is information related to Langston Hughes Corporation Price LIFO Index Cost Retail Inventory on December 31,2008, when dollar-value LIFO is adopted 100 $36,000 S74,500 Inventory,December 31,2009 110 100,100 Instructions Compute the ending inventory under the dollar-value LIFO method at December 31,2009.The cost-to- retail ratio for 2009 was 60%. (L0 8)*E9-26 (Conventional Retail and Dollar-Value LIFO Retail)Amiras Corporation began operations on January 1,2007,with a beginning inventory of $30,100 at cost and $50,000 at retail.The following infor- mation relates to 2007. Retail ⊕ Net purchases ($108,500 at cost) $150,000 Net markups 10,000 Net markdowns 5,000 Sales 126,900 Instructions (a)Assume Amiras decided to adopt the conventional retail method.Compute the ending inventory to be reported in the balance sheet. (b)Assume instead that Amiras decides to adopt the dollar-value LIFO retail method.The appropriate price indexes are 100 at January 1 and 110 at December 31.Compute the ending inventory to be reported in the balance sheet. (c)On the basis of the information in part (b),compute cost of goods sold. (L0 8)E9-27 (Dollar-Value LIFO Retail)Connie Chung Corporation adopted the dollar-value LIFO retail inventory method on January 1,2006.At that time the inventory had a cost of $54,000 and a retail price of $100,000.The following information is available. Year-End Inventory Current Year Year-End at Retail Cost-Retail Price Index 2006 $118,720 57% 106 2007 138.750 60% 111 2008 125350 61% 2009 162,500 58% 125 The price index at January 1,2006,is 100. Instructions Compute the ending inventory at December 31 of the years 2006-2009.Round to the nearest dollar. (LO 8)E9-28 (Change to LIFO Retail)John Olerud Ltd.,a local retailing concern in the Bronx,N.Y.,has decided to change from the conventional retail inventory method to the LIFO retail method starting on January 1,2008.The company recomputed its ending inventory for 2007 in accordance with the procedures nec- essary to switch to LIFO retail.The inventory computed was $212,600
Instructions Compute the cost of the 2007 ending inventory under both (a) the conventional retail method and (b) the LIFO retail method. *E9-24 (Dollar-Value LIFO Retail) You assemble the following information for Seneca Department Store, which computes its inventory under the dollar-value LIFO method. Cost Retail Inventory on January 1, 2007 $216,000 $300,000 Purchases 364,800 480,000 Increase in price level for year 9% Instructions Compute the cost of the inventory on December 31, 2007, assuming that the inventory at retail is (a) $294,300 and (b) $365,150. *E9-25 (Dollar-Value LIFO Retail) Presented below is information related to Langston Hughes Corporation. Price LIFO Index Cost Retail Inventory on December 31, 2008, when dollar-value LIFO is adopted 100 $36,000 $ 74,500 Inventory, December 31, 2009 110 ? 100,100 Instructions Compute the ending inventory under the dollar-value LIFO method at December 31, 2009. The cost-toretail ratio for 2009 was 60%. *E9-26 (Conventional Retail and Dollar-Value LIFO Retail) Amiras Corporation began operations on January 1, 2007, with a beginning inventory of $30,100 at cost and $50,000 at retail. The following information relates to 2007. Retail Net purchases ($108,500 at cost) $150,000 Net markups 10,000 Net markdowns 5,000 Sales 126,900 Instructions (a) Assume Amiras decided to adopt the conventional retail method. Compute the ending inventory to be reported in the balance sheet. (b) Assume instead that Amiras decides to adopt the dollar-value LIFO retail method. The appropriate price indexes are 100 at January 1 and 110 at December 31. Compute the ending inventory to be reported in the balance sheet. (c) On the basis of the information in part (b), compute cost of goods sold. *E9-27 (Dollar-Value LIFO Retail) Connie Chung Corporation adopted the dollar-value LIFO retail inventory method on January 1, 2006. At that time the inventory had a cost of $54,000 and a retail price of $100,000. The following information is available. Year-End Inventory Current Year Year-End at Retail Cost—Retail % Price Index 2006 $118,720 57% 106 2007 138,750 60% 111 2008 125,350 61% 115 2009 162,500 58% 125 The price index at January 1, 2006, is 100. Instructions Compute the ending inventory at December 31 of the years 2006–2009. Round to the nearest dollar. *E9-28 (Change to LIFO Retail) John Olerud Ltd., a local retailing concern in the Bronx, N.Y., has decided to change from the conventional retail inventory method to the LIFO retail method starting on January 1, 2008. The company recomputed its ending inventory for 2007 in accordance with the procedures necessary to switch to LIFO retail. The inventory computed was $212,600. 458 • Chapter 9 Inventories: Additional Valuation Issues (L0 8) (L0 8) (L0 8) (L0 8) (L0 8) 1460T_c09.qxd 01:09:2006 09:04 AM Page 458
1460T_c09.qxd01:09:200609:04 AM Page459 EQA Problems·459 Instructions Assuming that John Olerud Ltd.'s ending inventory for 2007 under the conventional retail inventory method was $205,000,prepare the appropriate journal entry on January 1,2008. See the book's website,www.wiley.com/college/kieso,for Additional Exercises. PROBLEMS (L01, P9-1 (Lower-of-Cost-or-Market)Grant Wood Company manufactures desks.Most of the company's 2) desks are standard models and are sold on the basis of catalog prices.At December 31,2008,the follow- ing finished desks appear in the company's inventory. Finished Desks B C D 2008 catalog selling price $450 $480 $900 $1,050 FIFO cost per inventory list 12/31/08 470 450 830 960 Estimated current cost to manufacture (at December 31,2008. and early 2009) 460 440 610 1,000 Sales commissions and estimated other costs of disposal 45 60 90 130 2009 catalog selling price 500 540 900 1,200 The 2008 catalog was in effect through November 2008 and the 2009 catalog is effective as of December 1,2008.All catalog prices are net of the usual discounts.Generally,the company attempts to obtain a 20% gross margin on selling price and has usually been successful in doing so. Instructions At what amount should each of the four desks appear in the company's December 31,2008,inventory, assuming that the company has adopted a lower-of-FIFO-cost-or-market approach for valuation of inventories on an individual-item basis? (L01, P9-2 (Lower-of-Cost-or-Market)T.Allen Home Improvement Company installs replacement siding, windows,and louvered glass doors for single family homes and condominium complexes in northern New Jersey and southern New York.The company is in the process of preparing its annual financial state- ments for the fiscal year ended May 31,2007,and Tim Taylor,controller for T.Allen,has gathered the fol- owing data concerning inventory. At May 31,2007,the balance in T.Allen's Raw Material Inventory account was $408,000,and the Allowance to Reduce Inventory to Market had a credit balance of $29,500.Taylor summarized the rele- vant inventory cost and market data at May 31,2007,in the schedule below. Taylor assigned Patricia Richardson,an intern from a local college,the task of calculating the amount that should appear on T.Allen's May 31,2007,financial statements for inventory under the lower-of-cost- or-market rule as applied to each item in inventory.Richardson expressed concern over departing from the cost principle. Replacement Sales Net Realizable Normal Cost Cost Price Value Profit Aluminum siding $70,000 $62,500 $64,000 $56.000 $5,100 Cedar shake siding 86,000 79,400 94.000 84,800 7,400 Louvered glass doors 112,000 124,000 186.400 168.300 18.500 Thermal windows 140.000 122,000 154,800 140,000 15,400 Total $408,000 $387,900 $499,200 s449,100 S46,400 Instructions (a) (1)Determine the proper balance in the Allowance to Reduce Inventory to Market at May 31,2007. (2)For the fiscal year ended May 31,2007,determine the amount of the gain or loss that would be recorded due to the change in the Allowance to Reduce Inventory to Market. (b)Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories. (CMA adapted) (L0 1,P9-3 (Entries for Lower-of-Cost-or-Market-Direct and Allowance)Mary Stuart Company deter- 2) mined its ending inventory at cost and at lower of cost or market at December 31,2006,December 31, 2007,and December 31,2008,as shown on page 460
PROBLEMS P9-1 (Lower-of-Cost-or-Market) Grant Wood Company manufactures desks. Most of the company’s desks are standard models and are sold on the basis of catalog prices. At December 31, 2008, the following finished desks appear in the company’s inventory. Finished Desks A B C D 2008 catalog selling price $450 $480 $900 $1,050 FIFO cost per inventory list 12/31/08 470 450 830 960 Estimated current cost to manufacture (at December 31, 2008, and early 2009) 460 440 610 1,000 Sales commissions and estimated other costs of disposal 45 60 90 130 2009 catalog selling price 500 540 900 1,200 The 2008 catalog was in effect through November 2008 and the 2009 catalog is effective as of December 1, 2008. All catalog prices are net of the usual discounts. Generally, the company attempts to obtain a 20% gross margin on selling price and has usually been successful in doing so. Instructions At what amount should each of the four desks appear in the company’s December 31, 2008, inventory, assuming that the company has adopted a lower-of-FIFO-cost-or-market approach for valuation of inventories on an individual-item basis? P9-2 (Lower-of-Cost-or-Market) T. Allen Home Improvement Company installs replacement siding, windows, and louvered glass doors for single family homes and condominium complexes in northern New Jersey and southern New York. The company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2007, and Tim Taylor, controller for T. Allen, has gathered the following data concerning inventory. At May 31, 2007, the balance in T. Allen’s Raw Material Inventory account was $408,000, and the Allowance to Reduce Inventory to Market had a credit balance of $29,500. Taylor summarized the relevant inventory cost and market data at May 31, 2007, in the schedule below. Taylor assigned Patricia Richardson, an intern from a local college, the task of calculating the amount that should appear on T. Allen’s May 31, 2007, financial statements for inventory under the lower-of-costor-market rule as applied to each item in inventory. Richardson expressed concern over departing from the cost principle. Replacement Sales Net Realizable Normal Cost Cost Price Value Profit Aluminum siding $ 70,000 $ 62,500 $ 64,000 $ 56,000 $ 5,100 Cedar shake siding 86,000 79,400 94,000 84,800 7,400 Louvered glass doors 112,000 124,000 186,400 168,300 18,500 Thermal windows 140,000 122,000 154,800 140,000 15,400 Total $408,000 $387,900 $499,200 $449,100 $46,400 Instructions (a) (1) Determine the proper balance in the Allowance to Reduce Inventory to Market at May 31, 2007. (2) For the fiscal year ended May 31, 2007, determine the amount of the gain or loss that would be recorded due to the change in the Allowance to Reduce Inventory to Market. (b) Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories. (CMA adapted) P9-3 (Entries for Lower-of-Cost-or-Market—Direct and Allowance) Mary Stuart Company determined its ending inventory at cost and at lower of cost or market at December 31, 2006, December 31, 2007, and December 31, 2008, as shown on page 460. Instructions Assuming that John Olerud Ltd.’s ending inventory for 2007 under the conventional retail inventory method was $205,000, prepare the appropriate journal entry on January 1, 2008. Problems • 459 See the book’s website, www.wiley.com/college/kieso, for Additional Exercises. wi el moc. y c/ ollege/kieso (L0 1, 2) (L0 1, 2) (L0 1, 2) 1460T_c09.qxd 01:09:2006 09:04 AM Page 459