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 follow￾ing 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 state￾ments for the fiscal year ended May 31, 2007, and Tim Taylor, controller for T. Allen, has gathered the fol￾lowing 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 $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 deter￾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. 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