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 indi￾cate 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 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? 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. 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