Inventories Additional Valuation Issues

Solutions Manual and Test Bank of Intermediate Accounting Kieso Weygandt Warfield 15th edition

Solutions Manual and Test Bank -- $35  Buy Now


Click here download the sample chapter





Chapter 9 Inventories Additional Valuation Issues

QUESTIONS

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-or-market? 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 1 2 3 4 5 Cost $15.90 $16.10 $15.90 $15.90 $15.90 Net realizable value 14.50 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
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, 2012, Ashley Co. has outstanding purchase commitments for 150,000 gallons, at $6.20 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, 2012, 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: 25% 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. Adriana Co., with annual net sales of $5 million, maintains a markup of 25% based on cost. Adriana’s expenses average 15% of net sales. What is Adriana’s gross profit and net profit in dollars?
13. A fire destroys all of the merchandise of Assante Company on February 10, 2012. Presented below is information compiled up to the date of the fire. Inventory, January 1, 2012 $ 400,000 Sales to February 10, 2012 1,950,000 Purchases to February 10, 2012 1,140,000 Freight-in to February 10, 2012 60,000 Rate of gross profit on selling price 40% What is the approximate inventory on February 10, 2012?
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 lower of- 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 Mayron 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 2,175,000 (b) If the results of a physical inventory indicated an inventory at retail of $295,000, 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? QUESTIONS
Note: All asterisked Questions, Exercises, and Problems relate to material in the appendix to the chapter.

BE9-1 Presented below is information related to Rembrandt Inc.’s inventory. (per unit) Skis Boots Parkas Historical cost $190.00 $106.00 $53.00 Selling price 212.00 145.00 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.
BE9-2 Floyd Corporation has the following four items in its ending inventory. Replacement Cost Net Realizable Value (NRV) NRV less Item Cost Normal Profit Margin Jokers $2,000 $2,050 $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 Kumar Inc. uses a perpetual inventory system. At January 1, 2013, inventory was $214,000 at both cost and market value. At December 31, 2013, the inventory was $286,000 at cost and $265,000 at market value. Prepare the necessary December 31 entry under (a) the cost-of-goods-sold method and (b) the loss method.
BE9-4 Bell, Inc. buys 1,000 computer game CDs from a distributor who is discontinuing those games. The purchase price for the lot is $8,000. Bell will group the CDs into three price categories for resale, as indicated below. Group No. of CDs Price per CD 1 100 $ 5 2 800 10 3 100 15 Determine the cost per CD for each group, using the relative sales value method.
BE9-5 Kemper Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2013 at a cost of $1,000,000. At December 31, 2012, the raw materials to be purchased have a market value of $950,000. Prepare any necessary December 31, 2012, entry.
BE9-6 Use the information for Kemper Company from
BE9-5. In 2013, Kemper paid $1,000,000 to obtain the raw materials which were worth $950,000. Prepare the entry to record the purchase.
BE9-7 Fosbre 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. Fosbre’s normal gross profit percentage is 35% on sales. Using the gross profit method, estimate Fosbre’s April 30 inventory that was destroyed by fire.
BE9-8 Boyne 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 $147,000. Compute ending inventory at cost using the conventional retail method.
BE9-9 In its 2010 annual report, Wal-Mart reported inventory of $33,160 million on January 31, 2010, and $34,511 million on January 31, 2009, cost of sales of $304,657 million for fiscal year 2010, and net sales of $405,046 million. Compute Wal-Mart’s inventory turnover and the average days to sell inventory for the fiscal year 2010. *
BE9-10 Use the information for Boyne Inc. from
BE9-8. Compute ending inventory at cost using the LIFO retail method. *
BE9-11 Use the information for Boyne Inc. from
BE9-8, and assume the price level increased from 100 at the beginning of the year to 115 at year-end. Compute ending inventory at cost using the dollar-value LIFO retail method. 3 EXERCI S E S
E9-1 (Lower-of-Cost-or-Market) The inventory of Oheto Company on December 31, 2013, consists of the following items. Part No. Quantity Cost per Unit Cost to Replace per Unit 110 600 $ 95 $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 aPart No. 121 is obsolete and has a realizable value of $0.50 each as scrap.
Instructions (a) Determine the inventory as of December 31, 2013, 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) Riegel Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2013, 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 F G H 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 35 35 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, 2013, for each of the inventory items above.
E9-3 (Lower-of-Cost-or-Market) Sedato Company follows the practice of pricing its inventory at the lower-of-cost-or-market, on an individual-item basis. Item No. Quantity Cost per Unit Cost to Replace Estimated Selling Price Cost of Completion and Disposal Normal Profit 1320 1,200 $3.20 $3.00 $4.50 $0.35 $1.25 1333 900 2.70 2.30 3.40 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 0.45 0.90 1510 700 2.25 2.00 3.25 0.80 0.60 1522 500 3.00 2.70 3.90 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 Sedato Company’s inventory.
E9-4 (Lower-of-Cost-or-Market—Journal Entries) Dover Company began operations in 2012 and determined its ending inventory at cost and at lower-of-cost-or-market at December 31, 2012, and December 31, 2013. This information is presented below. Cost Lower-of-Cost-or-Market 12/31/12 $346,000 $322,000 12/31/13 410,000 390,000
Instructions (a) Prepare the journal entries required at December 31, 2012, and December 31, 2013, assuming that the inventory is recorded at lower-of-cost-or-market, and a perpetual inventory system. Assume the cost-of-goods-sold method with no allowance used. (b) Prepare journal entries required at December 31, 2012, and December 31, 2013, assuming that the inventory is recorded at lower-of-cost-or-market, and a perpetual inventory system. Assume the loss method with an allowance used. (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 Knight Enterprises. J an. 31 Feb. 28 M ar. 31 A pr. 30 Inventory at cost $15,000 $15,100 $17,000 $14,000 Inventory at the lower-of-cost-or-market 14,500 12,600 15,600 13,300 Purchases for the month 17,000 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, 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) LaGreca Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2012, included product X. Relevant per-unit data for product X appear below. Estimated selling price $50 Cost 40 Replacement cost 38 Estimated selling expense 14 Normal profit 9 There were 1,000 units of product X on hand at December 31, 2012. Product X was incorrectly valued at $38 per unit for reporting purposes. All 1,000 units were sold in 2013.
Instructions Compute the effect of this error on net income for 2012 and the effect on net income for 2013, and indicate the direction of the misstatement for each year.
E9-7 (Relative Sales Value Method) Larsen 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 $30,000. 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 19 2,000 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 Larsen Realty Corporation instructs you to arrive at the net income realized on this operation to date.
E9-8 (Relative Sales Value Method) During 2013, Crawford Furniture Company purchases a carload of wicker chairs. The manufacturer sells the chairs to Crawford for a lump sum of $60,000 because it is 1 2 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 800 50 During 2013, Crawford sells 200 lounge chairs, 100 armchairs, and 120 straight chairs.
Instructions What is the amount of gross profit realized during 2013? What is the amount of inventory of unsold straight chairs on December 31, 2013?
E9-9 (Purchase Commitments) Prater 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, 2013, at an agreed price of $400,000. At December 31, 2013, the raw material had declined in price to $375,000.
Instructions What entry would you make on December 31, 2013, to recognize these facts?
E9-10 (Purchase Commitments) At December 31, 2013, Volkan Company has outstanding noncancelable purchase commitments for 40,000 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.
Instructions (a) Assuming that the market price as of December 31, 2013, 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, 2013, is $2.70, instead of $3.30, how would you treat this situation in the accounts and statements? (c) Give the entry in January 2014, when the 40,000-gallon shipment is received, assuming that the situation given in (b) above existed at December 31, 2013, and that the market price in January 2014 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. (a) 20%. (c) 331/3%. (b) 25%. (d) 50%.
Instructions Indicate the gross profit percentage in terms of sales for each of the above.
E9-12 (Gross Profit Method) Astaire 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 25% of sales. (b) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of cost.
E9-13 (Gross Profit Method) Zidek Corp. 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 $92,000; freight-in, $3,400; purchase returns and allowances, $2,400. Sales are made at 331/3% above cost and totaled $120,000 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) Castlevania 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 450,000 Sales returns 24,000 Purchase returns 30,000 Rate of gross profit on net sales 30% 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 Kevin Garnett of Celtic 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 90,000 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 25% over cost. Garnett’s insurance covers only goods owned.
Instructions Compute the claim against the insurance company.
E9-16 (Gross Profit Method) Sliver Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost. Lumber 25% Millwork 30% Hardware 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, 2013 $ 250,000 $ 90,000 $ 45,000 Purchases to Aug. 18, 2013 1,500,000 375,000 160,000 Sales to Aug. 18, 2013 2,050,000 533,000 245,000
Instructions Submit your estimate of the inventory amounts immediately preceding the fire.
E9-17 (Gross Profit Method) Presented below is information related to Jerrold Corporation for the current year. Beginning inventory $ 600,000 Purchases 1,500,000 Total goods available for sale $2,100,000 Sales 2,300,000
Instructions Compute the ending inventory, assuming that (a) gross profit is 40% 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 McKenna Company. Cost Retail Beginning inventory $ 58,000 $100,000 Purchases (net) 122,000 200,000 Net markups 20,000 Net markdowns 30,000 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. 5  (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 profit based on (d).
E9-19 (Retail Inventory Method) Presented below is information related to Kuchinsky Company. Cost Retail Beginning inventory $ 200,000 $ 280,000 Purchases 1,425,000 2,140,000 Markups 95,000 Markup cancellations 15,000 Markdowns 35,000 Markdown cancellations 5,000 Sales 2,250,000
Instructions Compute the inventory by the conventional retail inventory method.
E9-20 (Retail Inventory Method) The records of Mandy’s Boutique report the following data for the month of April. Sales $95,000 Purchases (at cost) $55,000 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 2010 annual report disclose the following information. (in millions) May 30, 2010 May 31, 2009 May 25, 2008 Inventories $1,344 $1,347 $1,367 Fiscal Year 2010 2009 Sales $14,797 $14,691 Cost of goods sold 8,923 9,458 Net income 1,535 1,314
Instructions Compute General Mills’s (a) inventory turnover and (b) the average days to sell inventory for 2010 and 2009. *
E9-22 (Retail Inventory Method—Conventional and LIFO) Brewster Company began operations on January 1, 2012, adopting the conventional retail inventory system. None of the company’s merchandise was marked down in 2012 and, because there was no beginning inventory, its ending inventory for 2012 of $41,100 would have been the same under either the conventional retail system or the LIFO retail system. On December 31, 2013, the store management considers adopting the LIFO retail system and desires to know how the December 31, 2013, inventory would appear under both systems. All pertinent data regarding purchases, sales, markups, and markdowns are shown on the next page. There has been no change in the price level. 6 6 7 8  Cost Retail Inventory, Jan. 1, 2013 $ 41,100 $ 60,000 Markdowns (net) 13,000 Markups (net) 22,000 Purchases (net) 150,000 191,000 Sales (net) 167,000
Instructions Determine the cost of the 2013 ending inventory under both (a) the conventional retail method and (b) the LIFO retail method. *E 9-23 (Retail Inventory Method—Conventional and LIFO) Robinson Company began operations late in 2012 and adopted the conventional retail inventory method. Because there was no beginning inventory for 2012 and no markdowns during 2012, the ending inventory for 2012 was $14,000 under both the conventional retail method and the LIFO retail method. At the end of 2013, management wants to compare the results of applying the conventional and LIFO retail methods. There was no change in the price level during 2013. The following data are available for computations. Cost Retail Inventory, January 1, 2013 $14,000 $20,000 Sales 75,000 Net markups 9,000 Net markdowns 2,500 Purchases 55,500 81,000 Freight-in 7,500 Estimated theft 2,000
Instructions Compute the cost of the 2013 ending inventory under both (a) the conventional retail method and (b) the LIFO retail method. *E 9-24 (Dollar-Value LIFO Retail) You assemble the following information for Dillon Department Store, which computes its inventory under the dollar-value LIFO method. Cost Retail Inventory on January 1, 2012 $222,000 $300,000 Purchases 364,800 480,000 Increase in price level for year 9%
Instructions Compute the cost of the inventory on December 31, 2012, assuming that the inventory at retail is (a) $294,300 and (b) $359,700. *E 9-25 (Dollar-Value LIFO Retail) Presented below is information related to Atrium Corporation. Price Index LIFO Cost Retail Inventory on December 31, 2012, when dollar-value LIFO is adopted 100 $36,000 $74,500 Inventory, December 31, 2013 110 ? 95,150
Instructions Compute the ending inventory under the dollar-value LIFO method at December 31, 2013. The cost-toretail ratio for 2013 was 55%. *
E9-26 (Conventional Retail and Dollar-Value LIFO Retail) Mander Corporation began operations on January 1, 2012, with a beginning inventory of $34,300 at cost and $50,000 at retail. The following information relates to 2012. Retail Net purchases ($108,500 at cost) $150,000 Net markups 10,000 Net markdowns 5,000 Sales 128,000
Instructions (a) Assume Mander decided to adopt the conventional retail method. Compute the ending inventory to be reported in the balance sheet. 8  (b) Assume instead that Mander 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. 
*E 9-27 (Dollar-Value LIFO Retail) Springsteen Corporation adopted the dollar-value LIFO retail inventory method on January 1, 2011. 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 at Retail Current Year Cost—Retail % Year End Price Index 2011 $121,900 57% 106 2012 138,750 60% 111 2013 126,500 61% 115 2014 162,500 58% 125 The price index at January 1, 2011, is 100.
Instructions Compute the ending inventory at December 31 of the years 2011–2014. Round to the nearest dollar. 
*E 9-28 (Change to LIFO Retail) Mueller 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, 2013. The company recomputed its ending inventory for 2012 in accordance with the procedures necessary to switch to LIFO retail. The inventory computed was $210,600.
Instructions Assuming that Mueller Ltd.’s ending inventory for 2012 under the conventional retail inventory method was $205,000, prepare the appropriate journal entry on January 1, 2013. 8 8 PROBLEMS
P9-1 (Lower-of-Cost-or-Market) Remmers Company manufactures desks. Most of the company’s desks are standard models and are sold on the basis of catalog prices. At December 31, 2012, the following finished desks appear in the company’s inventory. Finished Desks A B C D 2012 catalog selling price $450 $480 $900 $1,050 FIFO cost per inventory list 12/31/12 470 450 830 960 Estimated current cost to manufacture (at December 31, 2012, and early 2013) 460 430 610 1,000 Sales commissions and estimated other costs of disposal 50 60 80 130 2013 catalog selling price 500 540 900 1,200 The 2012 catalog was in effect through November 2012, and the 2013 catalog is effective as of December 1, 2012. All catalog prices are net of the usual discounts. Generally, the company attempts to obtain a 20% gross profit 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, 2012, inventory, assuming that the company has adopted a lower-of-FIFO-cost-or-market approach for valuation of inventories on an individual-item basis? 1 2

P9-2 (Lower-of-Cost-or-Market) Garcia 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, 2012, and Jim Alcide, controller for Garcia, has gathered the following data concerning inventory. At May 31, 2012, the balance in Garcia’s Raw Materials Inventory account was $408,000, and the Allowance to Reduce Inventory to Market had a credit balance of $27,500. Alcide summarized the relevant inventory cost and market data at May 31, 2012, in the schedule below. Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Garcia’s May 31, 2012, financial statements for inventory under the lower-of-costor- market rule as applied to each item in inventory. Devereaux expressed concern over departing from the cost principle. Cost Replacement Cost Sales Price Net Realizable Value Normal 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 140,000 126,000 154,800 140,000 15,400 Total $408,000 $391,900 $499,200 $449,100 $46,400
Instructions (a) (1) Determine the proper balance in the Allowance to Reduce Inventory to Market at May 31, 2012. (2) For the fiscal year ended May 31, 2012, 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—Cost-of-Goods-Sold and Loss) Malone Company determined its ending inventory at cost and at lower-of-cost-or-market at December 31, 2011, December 31, 2012, and December 31, 2013, as shown below. Cost Lower-of-Cost-or-Market 12/31/11 $650,000 $650,000 12/31/12 780,000 712,000 12/31/13 905,000 830,000
Instructions (a) Prepare the journal entries required at December 31, 2012, and at December 31, 2013, assuming that a perpetual inventory system and the cost-of-goods-sold method of adjusting to lower-of-cost-ormarket is used. (b) Prepare the journal entries required at December 31, 2012, and at December 31, 2013, assuming that a perpetual inventory is recorded at cost and reduced to lower-of-cost-or-market using the loss method.
P9-4 (Gross Profit Method) Eastman Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. Corporate records disclose the following. Inventory (beginning) $ 80,000 Sales $415,000 Purchases 290,000 Sales returns 21,000 Purchase returns 28,000 Gross profit % based on net selling price 35% Merchandise with a selling price of $30,000 remained undamaged after the fire, and damaged merchandise has a salvage value of $8,150. The company does not carry fire insurance on its inventory.
Instructions Prepare a formal labeled schedule computing the fire loss incurred. (Do not use the retail inventory method.)
P9-5 (Gross Profit Method) On April 15, 2013, fire damaged the office and warehouse of Stanislaw Corporation. The only accounting record saved was the general ledger, from which the trial balance on page 534 was prepared. 1 2 STANISLAW CORPORATION TRIAL BALANCE MARCH 31, 2013 Cash $ 20,000 Accounts receivable 40,000 Inventory, December 31, 2012 75,000 Land 35,000 Buildings 110,000 Accumulated depreciation $ 41,300 Equipment 3,600 Accounts payable 23,700 Other accrued expenses 10,200 Common stock 100,000 Retained earnings 52,000 Sales revenue 135,000 Purchases 52,000 Miscellaneous expense 26,600 . $362,200 $362,200 The following data and information have been gathered. 1. The fiscal year of the corporation ends on December 31. 2. An examination of the April bank statement and canceled checks revealed that checks written during the period April 1–15 totaled $13,000: $5,700 paid to accounts payable as of March 31, $3,400 for April merchandise shipments, and $3,900 paid for other expenses. Deposits during the same period amounted to $12,950, which consisted of receipts on account from customers with the exception of a $950 refund from a vendor for merchandise returned in April. 3. Correspondence with suppliers revealed unrecorded obligations at April 15 of $15,600 for April merchandise shipments, including $2,300 for shipments in transit (f.o.b. shipping point) on that date. 4. Customers acknowledged indebtedness of $46,000 at April 15, 2013. It was also estimated that customers owed another $8,000 that will never be acknowledged or recovered. Of the acknowledged indebtedness, $600 will probably be uncollectible. 5. The companies insuring the inventory agreed that the corporation’s fire-loss claim should be based on the assumption that the overall gross profit rate for the past 2 years was in effect during the current year. The corporation’s audited financial statements disclosed this information: Year Ended December 31 2012 2011 Net sales $530,000 $390,000 Net purchases 280,000 235,000 Beginning inventory 50,000 66,000 Ending inventory 75,000 50,000 6. Inventory with a cost of $7,000 was salvaged and sold for $3,500. The balance of the inventory was a total loss.
Instructions Prepare a schedule computing the amount of inventory fire loss. The supporting schedule of the computation of the gross profit should be in good form. (AICPA adapted)
P9-6 (Retail Inventory Method) The records for the Clothing Department of Sharapova’s Discount Store are summarized below for the month of January. Inventory, January 1: at retail $25,000; at cost $17,000 Purchases in January: at retail $137,000; at cost $82,500 Freight-in: $7,000 Purchase returns: at retail $3,000; at cost $2,300 Transfers in from suburban branch: at retail $13,000; at cost $9,200 Net markups: $8,000 Net markdowns: $4,000 Inventory losses due to normal breakage, etc.: at retail $400 Sales at retail: $95,000 Sales returns: $2,400 6 Problems 535
Instructions (a) Compute the inventory for this department as of January 31, at retail prices. (b) Compute the ending inventory using lower-of-average-cost-or-market.
P9-7 (Retail Inventory Method) Presented below is information related to Waveland Inc. Cost Retail Inventory, 12/31/12 $250,000 $ 390,000 Purchases 914,500 1,460,000 Purchase returns 60,000 80,000 Purchase discounts 18,000 — Gross sales (after employee discounts) — 1,410,000 Sales returns — 97,500 Markups — 120,000 Markup cancellations — 40,000 Markdowns — 45,000 Markdown cancellations — 20,000 Freight-in 42,000 — Employee discounts granted — 8,000 Loss from breakage (normal) — 4,500
Instructions Assuming that Waveland Inc. uses the conventional retail inventory method, compute the cost of its ending inventory at December 31, 2013.
P9-8 (Retail Inventory Method) Fuque Inc. uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October 2013. Inventory, October 1, 2013 At cost $ 52,000 At retail 78,000 Purchases (exclusive of freight and returns) At cost 272,000 At retail 423,000 Freight-in 16,600 Purchase returns At cost 5,600 At retail 8,000 Markups 9,000 Markup cancellations 2,000 Markdowns (net) 3,600 Normal spoilage and breakage 10,000 Sales 390,000
Instructions (a) Using the conventional retail method, prepare a schedule computing estimated lower-of-cost-ormarket inventory for October 31, 2013. (b) A department store using the conventional retail inventory method estimates the cost of its ending inventory as $60,000. An accurate physical count reveals only $47,000 of inventory at lower-of-costor- market. List the factors that may have caused the difference between the computed inventory and the physical count.
P9-9 (Statement and Note Disclosure, LCM, and Purchase Commitment) Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1988, Maddox has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Maddox’s fiscal year, November 30, 2012, are shown below. The inventories are stated at cost before any year-end adjustments. Finished goods $647,000 Work in process 112,500 Raw materials 264,000 Factory supplies 69,000 The following information, shown on page 536, relates to Maddox’s inventory and operations. 6 1. The finished goods inventory consists of the items analyzed below. Cost Market Down tube shifter Standard model $ 67,500 $ 67,000 Click adjustment model 94,500 89,000 Deluxe model 108,000 110,000 Total down tube shifters 270,000 266,000 Bar end shifter Standard model 83,000 90,050 Click adjustment model 99,000 97,550 Total bar end shifters 182,000 187,600 Head tube shifter Standard model 78,000 77,650 Click adjustment model 117,000 119,300 Total head tube shifters 195,000 196,950 Total fi nished goods $647,000 $650,550 2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment. 3. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan. 4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20 percent above the current market price. The market value of the rest of the raw materials is $127,400. 5. The total market value of the work in process inventory is $108,700. 6. Included in the cost of factory supplies are obsolete items with an historical cost of $4,200. The market value of the remaining factory supplies is $65,900. 7. Maddox applies the lower-of-cost-or-market method to each of the three types of shifters in finished goods inventory. For each of the other three inventory accounts, Maddox applies the lower-of-costor- market method to the total of each inventory account. 8. Consider all amounts presented above to be material in relation to Maddox’s financial statements taken as a whole.
Instructions (a) Prepare the inventory section of Maddox’s balance sheet as of November 30, 2012, including any required note(s). (b) Without prejudice to your answer to (a), assume that the market value of Maddox’s inventories is less than cost. Explain how this decline would be presented in Maddox’s income statement for the fiscal year ended November 30, 2012. (c) Assume that Maddox has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2012, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Maddox after November 30, 2012. Discuss the impact, if any, that this purchase commitment would have on Maddox’s financial statements prepared for the fiscal year ended November 30, 2012. (CMA adapted)
P9-10 (Lower-of-Cost-or-Market) Fiedler Co. follows the practice of valuing its inventory at the lower-of-cost-or-market. The following information is available from the company’s inventory records as of December 31, 2012. Item Quantity Unit Cost Replacement Cost/Unit Estimated Selling Price/Unit Completion & Disposal Cost/Unit Normal Profit Margin/Unit A 1,100 $7.50 $8.40 $10.50 $1.50 $1.80 B 800 8.20 7.90 9.40 0.90 1.20 C 1,000 5.60 5.40 7.20 1.15 0.60 D 1,000 3.80 4.20 6.30 0.80 1.50 E 1,400 6.40 6.30 6.70 0.70 1.00
Instructions Greg Forda is an accounting clerk in the accounting department of Fiedler Co., and he cannot understand why the market value keeps changing from replacement cost to net realizable value to something that he cannot even figure out. Greg is very confused, and he is the one who records inventory purchases and calculates ending inventory. You are the manager of the department and an accountant. (a) Calculate the lower-of-cost-or-market using the “individual item” approach. (b) Show the journal entry he will need to make in order to write down the ending inventory from cost to market. (c) Then write a memo to Greg explaining what designated market value is as well as how it is computed. Use your calculations to aid in your explanation.
P 9-11 (Conventional and Dollar-Value LIFO Retail) As of January 1, 2012, Aristotle Inc. installed the retail method of accounting for its merchandise inventory. To prepare the store’s financial statements at June 30, 2012, you obtain the following data. Cost Selling Price Inventory, January 1 $ 30,000 $ 43,000 Markdowns 10,500 Markups 9,200 Markdown cancellations 6,500 Markup cancellations 3,200 Purchases 104,800 155,000 Sales 154,000 Purchase returns 2,800 4,000 Sales returns and allowances 8,000
Instructions (a) Prepare a schedule to compute Aristotle’s June 30, 2012, inventory under the conventional retail method of accounting for inventories. (b) Without prejudice to your solution to part (a), assume that you computed the June 30, 2012, inventory to be $59,400 at retail and the ratio of cost to retail to be 70%. The general price level has increased from 100 at January 1, 2012, to 108 at June 30, 2012. Prepare a schedule to compute the June 30, 2012, inventory at the June 30 price level under the dollar-value LIFO retail method. (AICPA adapted)
*P 9-12 (Retail, LIFO Retail, and Inventory Shortage) Late in 2009, Joan Seceda and four other investors took the chain of Becker Department Stores private, and the company has just completed its third year of operations under the ownership of the investment group. Andrea Selig, controller of Becker Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Becker Department Stores contain the following amounts on November 30, 2012, the end of the fiscal year. Cost Retail Beginning inventory $ 68,000 $100,000 Purchases 255,000 400,000 Net markups 50,000 Net markdowns 110,000 Sales revenue 320,000 According to the November 30, 2012, physical inventory, the actual inventory at retail is $115,000.
Instructions (a) Describe the circumstances under which the retail inventory method would be applied and the advantages of using the retail inventory method. (b) Assuming that prices have been stable, calculate the value, at cost, of Becker Department Stores’ ending inventory using the last-in, first-out (LIFO) retail method. Be sure to furnish supporting calculations. (c) Estimate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended November 30, 2012. (d) Complications in the retail method can be caused by such items as (1) freight-in costs, (2) purchase returns and allowances, (3) sales returns and allowances, and (4) employee discounts. Explain how each of these four special items is handled in the retail inventory method. (CMA adapted)
* P9-13 (Change to LIFO Retail) Diderot Stores Inc., which uses the conventional retail inventory method, wishes to change to the LIFO retail method beginning with the accounting year ending December 31, 2012. 8 Amounts as shown below appear on the store’s books before adjustment. At Cost At Retail Inventory, January 1, 2012 $ 15,800 $ 24,000 Purchases in 2012 116,200 184,000 Markups in 2012 12,000 Markdowns in 2012 5,500 Sales in 2012 175,000 You are to assume that all markups and markdowns apply to 2012 purchases, and that it is appropriate to treat the entire inventory as a single department.
Instructions Compute the inventory at December 31, 2012, under the following methods. (a) The conventional retail method. (b) The last-in, first-out retail method, effecting the change in method as of January 1, 2012. Assume that the cost-to-retail percentage for 2011 was recomputed correctly in accordance with procedures necessary to change to LIFO. This ratio was 59%. (AICPA adapted)
*P 9-14 (Change to LIFO Retail; Dollar-Value LIFO Retail) Davenport Department Store converted from the conventional retail method to the LIFO retail method on January 1, 2012, and is now considering converting to the dollar-value LIFO inventory method. During your examination of the financial statements for the year ended December 31, 2013, management requested that you furnish a summary showing certain computations of inventory cost for the past 3 years. Here is the available information. 1. The inventory at January 1, 2011, had a retail value of $56,000 and cost of $29,800 based on the conventional retail method. 2. Transactions during 2011 were as follows. Cost Retail Gross purchases $311,000 $554,000 Purchase returns 5,200 10,000 Purchase discounts 6,000 Gross sales (after employee discounts) 551,000 Sales returns 9,000 Employee discounts 3,000 Freight-in 17,600 Net markups 20,000 Net markdowns 12,000 3. The retail value of the December 31, 2012, inventory was $75,600, the cost ratio for 2012 under the LIFO retail method was 61%, and the regional price index was 105% of the January 1, 2012, price level. 4. The retail value of the December 31, 2013, inventory was $62,640, the cost ratio for 2013 under the LIFO retail method was 60%, and the regional price index was 108% of the January 1, 2012, price level.
Instructions (a) Prepare a schedule showing the computation of the cost of inventory on hand at December 31, 2011, based on the conventional retail method. (b) Prepare a schedule showing the recomputation of the inventory to be reported on December 31, 2011, in accordance with procedures necessary to convert from the conventional retail method to the LIFO retail method beginning January 1, 2012. Assume that the retail value of the December 31, 2011, inventory was $60,000. (c) Without prejudice to your solution to part (b), assume that you computed the December 31, 2011, inventory (retail value $60,000) under the LIFO retail method at a cost of $33,300. Prepare a schedule showing the computations of the cost of the store’s 2012 and 2013 year-end inventories under the dollar-value LIFO method. (AICPA adapted) 8

Concepts for Analysis 539
CA9-1 (Lower-of-Cost-or-Market) You have been asked by the financial vice president to develop a short presentation on the lower-of-cost-or-market method for inventory purposes. The financial VP needs to explain this method to the president because it appears that a portion of the company’s inventory has declined in value.
Instructions The financial VP asks you to answer the following questions. (a) What is the purpose of the lower-of-cost-or-market method? (b) What is meant by “market”? (Hint: Discuss the ceiling and floor constraints.) (c) Do you apply the lower-of-cost-or-market method to each individual item, to a category, or to the total of the inventory? Explain. (d) What are the potential disadvantages of the lower-of-cost-or-market method?
CA9-2 (Lower-of-Cost-or-Market) The market value of Lake Corporation’s inventory has declined below its cost. Sheryl Conan, the controller, wants to use the loss method to write down inventory because it more clearly discloses the decline in market value and does not distort the cost of goods sold. Her supervisor, financial vice president Dick Wright, prefers the cost-of-goods-sold method to write down inventory because it does not call attention to the decline in market value.
Instructions Answer the following questions. (a) What, if any, is the ethical issue involved? (b) Is any stakeholder harmed if Dick Wright’s preference is used? (c) What should Sheryl Conan do?
CA9-3 (Lower-of-Cost-or-Market) Ogala Corporation purchased a significant amount of raw materials inventory for a new product that it is manufacturing. Ogala uses the lower-of-cost-or-market rule for these raw materials. The replacement cost of the raw materials is above the net realizable value, and both are below the original cost. Ogala uses the average cost inventory method for these raw materials. In the last 2 years, each purchase has been at a lower price than the previous purchase, and the ending inventory quantity for each period has been higher than the beginning inventory quantity for that period.
Instructions (a) (1) At which amount should Ogala’s raw materials inventory be reported on the balance sheet? Why? (2) In general, why is the lower-of-cost-or-market rule used to report inventory? (b) What would have been the effect on ending inventory and cost of goods sold had Ogala used the LIFO inventory method instead of the average-cost inventory method for the raw materials? Why?
CA9-4 (Retail Inventory Method) Saurez Company, your client, manufactures paint. The company’s president, Maria Saurez, has decided to open a retail store to sell Saurez paint as well as wallpaper and other supplies that would be purchased from other suppliers. She has asked you for information about the conventional retail method of pricing inventories at the retail store.
Instructions Prepare a report to the president explaining the retail method of pricing inventories. Your report should include the following points. (a) Description and accounting features of the method. (b) The conditions that may distort the results under the method. (c) A comparison of the advantages of using the retail method with those of using cost methods of inventory pricing. (d) The accounting theory underlying the treatment of net markdowns and net markups under the method. (AICPA adapted)
CA9-5 (Cost Determination, LCM, Retail Method) Olson Corporation, a retailer and wholesaler of national brand-name household lighting fixtures, purchases its inventories from various suppliers.
Instructions (a) (1) What criteria should be used to determine which of Olson’s costs are inventoriable? (2) Are Olson’s administrative costs inventoriable? Defend your answer. (b) (1) Olson uses the lower-of-cost-or-market rule for its wholesale inventories. What are the theoretical arguments for that rule? (2) The replacement cost of the inventories is below the net realizable value less a normal profit margin, which, in turn, is below the original cost. What amount should be used to value the inventories? Why? (c) Olson calculates the estimated cost of its ending inventories held for sale at retail using the conventional retail inventory method. How would Olson treat the beginning inventories and net markdowns in calculating the cost ratio used to determine its ending inventories? Why? (AICPA adapted)
CA9-6 (Purchase Commitments) Prophet Company signed a long-term purchase contract to buy timber from the U.S. Forest Service at $300 per thousand board feet. Under these terms, Prophet must cut and pay $6,000,000 for this timber during the next year. Currently, the market value is $250 per thousand board feet. At this rate, the market price is $5,000,000. Jerry Herman, the controller, wants to recognize the loss in value on the year-end financial statements, but the financial vice president, Billie Hands, argues that the loss is temporary and should be ignored. Herman notes that market value has remained near $250 for many months, and he sees no sign of significant change.
Instructions (a) What are the ethical issues, if any? (b) Is any particular stakeholder harmed by the financial vice president’s decision? (c) What should the controller do? *C A9-7 (Retail Inventory Method and LIFO Retail) Presented below are a number of items that may be encountered in computing the cost to retail percentage when using the conventional retail method or the LIFO retail method. FINANCIAL REPORTING Financial Reporting Problem 
The Procter & Gamble Company (P&G)
The financial statements of P&G are presented in Appendix 5B or can be accessed at the book’s companion website, www.wiley.com/college/kieso.
Instructions Refer to P&G’s financial statements and the accompanying notes to answer the following questions. (a) How does P&G value its inventories? Which inventory costing method does P&G use as a basis for reporting its inventories? (b) How does P&G report its inventories in the balance sheet? In the notes to its financial statements, what three descriptions are used to classify its inventories? (c) What costs does P&G include in Inventory and Cost of Products Sold?
1. Markdowns. 2. Markdown cancellations. 3. Cost of items transferred in from other departments. 4. Retail value of items transferred in from other departments. 5. Sales discounts. 6. Purchases discounts (purchases recorded gross). 7. Estimated retail value of goods broken or stolen. 8. Cost of beginning inventory. 9. Retail value of beginning inventory. 10. Cost of purchases. 11. Retail value of purchases. 12. Markups. 13. Markup cancellations. 14. Employee discounts (sales recorded net).
Instructions For each of the items listed above, indicate whether this item would be considered in the cost to retail percentage under (a) conventional retail and (b) LIFO retail. Using Your Judgment 541 (d) What was P&G’s inventory turnover ratio in 2009? What is its gross profit percentage? Evaluate P&G’s inventory turnover ratio and its gross profit percentage.
Comparative Analysis Case
The Coca-Cola Company and PepsiCo, Inc.
Instructions Go to the book’s companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc. (a) What is the amount of inventory reported by Coca-Cola at December 31, 2009, and by PepsiCo at December 26, 2009? What percent of total assets is invested in inventory by each company? (b) What inventory costing methods are used by Coca-Cola and PepsiCo? How does each company value its inventories? (c) In the notes, what classifications (description) are used by Coca-Cola and PepsiCo to categorize their inventories? (d) Compute and compare the inventory turnover ratios and days to sell inventory for Coca-Cola and PepsiCo for 2009. Indicate why there might be a significant difference between the two companies.
Financial Statement Analysis Cases
Case 1 Prab Robots, Inc. Prab Robots, Inc., reported the following information regarding 2011–2012 inventory. Prab Robots, Inc. 2012 2011 Current assets Cash $ 153,010 $ 538,489 Accounts receivable, net of allowance for doubtful accounts of $46,000 in 2012 and $160,000 in 2011 1,627,980 2,596,291 Inventories (Note 2) 1,340,494 1,734,873 Other current assets 123,388 90,592 Assets of discontinued operations — 32,815 Total current assets 3,244,872 4,993,060 Notes to Consolidated Financial Statements Note 1 (in part): Nature of Business and Signifi cant Accounting Policies Inventories—Inventories are stated at the lower-of-cost-or-market. Cost is determined by the last-in, fi rst-out (LIFO) method by the parent company and by the fi rst-in, fi rst-out (FIFO) method by its subsidiaries. Note 2: Inventories Inventories consist of the following. 2012 2011 Raw materials $1,264,646 $2,321,178 Work in process 240,988 171,222 Finished goods and display units 129,406 711,252 Total inventories 1,635,040 3,203,652 Less: Amount classifi ed as long-term 294,546 1,468,779 Current portion $1,340,494 $1,734,873 Inventories are stated at the lower of cost determined by the LIFO method or market for Prab Robots, Inc. Inventories for the two wholly-owned subsidiaries, Prab Command, Inc. (U.S.) and Prab Limited (U.K.) are stated on the FIFO method which amounted to $566,000 at October 31, 2011. No inventory is stated on the FIFO method at October 31, 2012. Included in inventory stated at FIFO cost was $32,815 at October 31, 2011, of Prab Command inventory classifi ed as an asset from discontinued operations (see Note 14). If the FIFO method had been used for the entire consolidated group, inventories after an adjustment to the lower-of-cost-or-market, would have been approximately $2,000,000 and $3,800,000 at October 31, 2012 and 2011, respectively.
Instructions (a) Why might Prab Robots, Inc., use two different methods for valuing inventory? (b) Comment on why Prab Robots, Inc., might disclose how its LIFO inventories would be valued under FIFO. (c) Why does the LIFO liquidation reduce operating costs? (d) Comment on whether Prab would report more or less income if it had been on a FIFO basis for all its inventory.
Case 2 Barrick Gold Corporation Barrick Gold Corporation, with headquarters in Toronto, Canada, is the world’s most profitable and largest gold mining company outside South Africa. Part of the key to Barrick’s success has been due to its ability to maintain cash flow while improving production and increasing its reserves of gold-containing property. In the most recent year, Barrick achieved record growth in cash flow, production, and reserves. The company maintains an aggressive policy of developing previously identified target areas that have the possibility of a large amount of gold ore, and that have not been previously developed. Barrick limits the riskiness of this development by choosing only properties that are located in politically stable regions, and by the company’s use of internally generated funds, rather than debt, to finance growth. Barrick’s inventories are as follows. Inventory has been written down to estimated net realizable value, and results of operations for 2012, 2011, and 2010 include a corresponding charge of approximately $868,000, $960,000, and $273,000, respectively, which represents the excess of LIFO cost over market. Inventory of $294,546 and $1,468,779 at October 31, 2012 and 2011, respectively, shown on the balance sheet as a noncurrent asset represents that portion of the inventory that is not expected to be sold currently. Reduction in inventory quantities during the years ended October 31, 2012, 2011, and 2010 resulted in liquidation of LIFO inventory quantities carried at a lower cost prevailing in prior years as compared with the cost of fi scal 2009 purchases. The effect of these reductions was to decrease the net loss by approximately $24,000, $157,000 and $90,000 at October 31, 2012, 2011, and 2010, respectively. Barrick Gold Corporation Inventories (in millions, US dollars) Current Gold in process $133 Mine operating supplies 82 $215 Non-current (included in Other assets) Ore in stockpiles $65
Instructions (a) Why do you think that there are no finished goods inventories? Why do you think the raw material, ore in stockpiles, is considered to be a non-current asset? (b) Consider that Barrick has no finished goods inventories. What journal entries are made to record a sale? (c) Suppose that gold bullion that cost $1.8 million to produce was sold for $2.4 million. The journal entry was made to record the sale, but no entry was made to remove the gold from the gold in process inventory. How would this error affect the following? Balance Sheet Income Statement Inventory ? Cost of goods sold ? Retained earnings ? Net income ? Accounts payable ? Working capital ? Current ratio ?

Accounting, Analysis, and Principles Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residential swimming pools. The following inventory data is available for the month of March. Units Price per Unit Total Residential Pumps Inventory at Feb. 28: 200 $ 400 $ 80,000 Purchases: March 10 500 $ 450 $225,000 March 20 400 $ 475 $190,000 March 30 300 $ 500 $150,000 Sales: March 15 500 $ 540 $270,000 March 25 400 $ 570 $228,000 Inventory at March 31: 500 Commercial Pumps Inventory at Feb. 28: 600 $ 800 $480,000 Purchases: March 3 600 $ 900 $540,000 March 12 300 $ 950 $285,000 March 21 500 $1,000 $500,000 Sales: March 18 900 $1,080 $972,000 March 29 600 $1,140 $684,000 Inventory at March 31: 500 In addition to the above information, due to a downturn in the economy that has hit Englehart’s commercial customers especially hard, Englehart expects commercial pump prices from March 31 onward to be considerably different (and lower) than at the beginning of and during March. Englehart has developed the following additional information. Commercial Pumps Residential Pumps Expected selling price (per unit, net of costs to sell) $1,050 $580 Replacement cost $ 900 $550 The normal profit margin is 16.67 percent of cost. Englehart uses the FIFO accounting method.
Accounting (a) Determine the dollar amount that Englehart should report on its March 31 balance sheet for inventory. Assume Englehart applies lower-of-cost-or-market at the individual product level. (b) Repeat part (a) but assume Englehart applies lower-of-cost-or-market at the major category level. Englehart places both commercial and residential pumps into the same (and only) category.
Analysis Which of the two approaches above (individual product level or major categories) for applying LCM do you think gives the financial statement reader better information?
Principles Assume that during April, the replacement cost of commercial pumps rebounds to $1,050 (assume this will be designated market value). (a) Briefly describe how Englehart will report in its April financial statements the inventory remaining from March 31. (b) Briefly describe the conceptual trade-offs inherent in the accounting in part (a).






Solutions Manual and Test Bank of Intermediate Accounting Kieso Weygandt Warfield 15th edition

Solutions Manual and Test Bank -- $35  Buy Now


Click here download the sample chapter