Inventories Additional Valuation Issues

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Chapter 9 Inventories Additional Valuation Issues
QUESTIONSS
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 lowerof- 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.
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, 2014, 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, 2014, is $5.90, how would you treat this situation in the accounts?
1
0. What are the major uses of the gross profit method?
1
1. 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%.
1
2. 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?
1
3. A fire destroys all of the merchandise of Assante Company on February 10, 2014. Presented below is information compiled up to the date of the fire.
I
nventory, January 1, 2014 $ 400,000
Sales revenue to February 10, 2014 1,950,000
Purchases to February 10, 2014 1,140,000
Freight-in to February 10, 2014 60,000
Rate of gross profi t on selling price 40%
W
hat is the approximate inventory on February 10, 2014?
1
4. What conditions must exist for the retail inventory method to provide valid results?
1
5. 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.
1
6. (a) Determine the ending inventory under the conventional retail method for the furniture department of
Mayron Department Stores from the following data.
(
b) If the results of a physical inventory indicated an inventory at retail of $295,000, what inferences would you draw?
1
7. Deere and Company reported inventory in its balance sheet as follows.
I
nventories $1,999,100,000
W
hat additional disclosures might be necessary to present the inventory fairly?
1
8. 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 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 profi t margin 32.00 29.00 21.25
D
etermine 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.
R
eplacement
Cost
Net Realizable
Value (NRV)
NRV Less
Item Cost Normal Profi t 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
D
etermine the final lower-of-cost-or-market inventory value for each item.

BE9-
3 Kumar Inc. uses a perpetual inventory system. At January 1, 2014, inventory was $214,000 at both cost and market value. At December 31, 2014, 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
D
etermine 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 2015 at a cost of $1,000,000. At December 31, 2014, the raw materials to be purchased have a market value of $950,000. Prepare any necessary December 31, 2014, entry.

BE9-
6 Use the information for Kemper Company from BE9-5. In 2015, 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 revenue 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 revenue was $147,000. Compute ending inventory at cost using the conventional retail method.

BE9-
9 In its 2012 annual report, Gap Inc. reported inventory of $1,615 million on January 25, 2012, and $1,620 million on January 29, 2011, cost of sales of $9,275 million for fiscal year 2012, and net sales of $14,549 million. Compute Gap’s inventory turnover and the average days to sell inventory for the fiscal year 2012.
* 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. 
EXERCISES


E9-
1 (Lower-of-Cost-or-Market) The inventory of 3T Company on December 31, 2014, 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 Part No. 121 is obsolete and has a realizable value of $0.20 each as scrap.
I
nstructions
(
a)
Determine the inventory as of December 31, 2014, 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, 2014, consists of products D, E, F, G, H, and I. Relevant per-unit data for these products appear below.
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 profi t 20 20 20 20 20 20
I
nstructions
U
sing the lower-of-cost-or-market rule, determine the proper unit value for balance sheet reporting purposes at December 31, 2014, 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.
Instructions
F
rom the information above, determine the amount of Bolton Company inventory.

E9-
4 (Lower-of-Cost-or-Market—Journal Entries) Corrs Company began operations in 2013 and determined its ending inventory at cost and at lower-of-cost-or-market at December 31, 2013, and December 31,
2014. This information is presented below.
Cost Lower-of-Cost-or-Market
12/31/13 $346,000 $327,000
12/31/14 410,000 395,000
Item
No. Quantity
Cost per Unit
Cost to
Replace
Estimated
Selling Price
Cost of Completion and Disposal
Normal
Profi t
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
(
a)
Prepare the journal entries required at December 31, 2013, and December 31, 2014, 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, 2013, and December 31, 2014, 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.
J an. 31 Feb. 28 M ar. 31 A pr. 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 revenue for the month 29,000 35,000 40,000
I
nstructions
(
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) 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, 2013, 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 profi t 9
T
here were 1,000 units of product X on hand at December 31, 2013. Product X was incorrectly valued at $35 per unit for reporting purposes. All 1,000 units were sold in 2014.
I
nstructions
C
ompute the effect of this error on net income for 2013 and the effect on net income for 2014, 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.
3

G
roup No. of Lots Price per Lot
1 9 $3,000
2 15 4,000
3 17 2,400
O
perating expenses for the year allocated to this project total $18,200. Lots unsold at the year-end were as follows.
G
roup 1 5 lots
Group 2 7 lots
Group 3 2 lots
I
nstructions
A
t 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 2014, 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.
3

T
ype No. of Chairs Estimated Selling Price Each
Lounge chairs 400 $90
Armchairs 300 80
Straight chairs 700 50
Inventory, May 1 $ 160,000
Purchases (gross) 640,000
Freight-in 30,000
Sales revenue 1,000,000
Sales returns 70,000
Purchase discounts 12,000
I
nstructions
(
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.
I
nstructions
(
a)
Compute the cost of goods destroyed.
(
b) Compute the cost of goods destroyed, assuming that the gross profit is 331/3% of sales.
During 2014, Pretenders sells 200 lounge chairs, 100 armchairs, and 120 straight chairs.
I
nstructions
W
hat is the amount of gross profit realized during 2014? What is the amount of inventory of unsold straight chairs on December 31, 2014?

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, 2014, at an agreed price of $400,000. At December 31, 2014, the raw material had declined in price to $365,000.
I
nstructions
W
hat entry would you make on December 31, 2014, to recognize these facts?

E9-
10 (Purchase Commitments) At December 31, 2014, 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.
I
nstructions
(
a)
Assuming that the market price as of December 31, 2014, 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, 2014, is $2.70, instead of $3.30, how would you treat this situation in the accounts and statements?
(
c) Give the entry in January 2015, when the 36,000-gallon shipment is received, assuming that the situation given in (b) above existed at December 31, 2014, and that the market price in January 2015 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%.
I
nstructions
I
ndicate 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.


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.

M
erchandise 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.
I
nstructions
C
ompute 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 revenue—goods delivered to customers (gross) 116,000
Sales returns—goods returned to stock 4,000
Y
our 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.
I
nstructions
C
ompute the claim against the insurance company.

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 fi ttings 40%
O
n 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.
L
umber Millwork Hardware
Inventory, Jan. 1, 2014 $ 250,000 $ 90,000 $ 45,000
Purchases to Aug. 18, 2014 1,500,000 375,000 160,000
Sales revenue to Aug. 18, 2014 2,080,000 533,000 210,000
I
nstructions
S
ubmit your estimate of the inventory amounts immediately preceding the fire.

E9-
17 (Gross Profit Method) Presented below is information related to Aaron Rodgers Corporation for the current year.
Instructions
C
ompute 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.
B
eginning inventory $ 600,000
Purchases 1,500,000
Total goods available for sale $2,100,000
Sales revenue 2,500,000
Beginning inventory $170,000 Sales revenue $650,000
Purchases for the year 390,000 Sales returns 24,000
Purchase returns 30,000 Rate of gross profi t on net sales 40%
6
E9-18 (Retail Inventory Method) Presented below is information related to Bobby Engram Company.
C
ost Retail
Beginning inventory $ 58,000 $100,000
Purchases (net) 122,000 200,000
Net markups 10,345
Net markdowns 26,135
Sales revenue 186,000
I
nstructions
(
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).
6
E9-19 (Retail Inventory Method) Presented below is information related to Ricky Henderson Company.
C
ost 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 revenue 2,200,000
I
nstructions
C
ompute 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.
6

S
ales revenue $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
I
nstructions
C
ompute the ending inventory by the conventional retail inventory method.

E9-
21 (Analysis of Inventories) The financial statements of ConAgra Foods, Inc.’s 2012 annual report disclose the following information.
7

(
in millions) May 27, 2012 May 29, 2011 May 30, 2010
Inventories $1,870 $1,803 $1,598
Fiscal Year
2012 2011
Net sales $13,263 $12,303
Cost of goods sold 10,436 9,390
Net income 474 818
Instructions
C
ompute ConAgra’s (a) inventory turnover and (b) the average days to sell inventory for 2012 and 2011. 

*E 9-22 (Retail Inventory Method—Conventional and LIFO) Helen Keller Company began operations on
January 1, 2013, adopting the conventional retail inventory system. None of the company’s merchandise was marked down in 2013 and, because there was no beginning inventory, its ending inventory for 2013 of $38,100 would have been the same under either the conventional retail system or the LIFO retail system.
On December 31, 2014, the store management considers adopting the LIFO retail system and desires to know how the December 31, 2014, 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, 2014 $ 38,100 $ 60,000
Markdowns (net) 13,000
Markups (net) 22,000
Purchases (net) 130,900 178,000
Sales (net) 167,000
I
nstructions
D
etermine the cost of the 2014 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 2013 and adopted the conventional retail inventory method. Because there was no beginning inventory for 2013 and no markdowns during 2013, the ending inventory for 2013 was $14,000 under both the conventional retail method and the LIFO retail method. At the end of 2014, management wants to compare the results of applying the conventional and LIFO retail methods. There was no change in the price level during 2014. The following data are available for computations.
Cost Retail
Inventory, January 1, 2014 $14,000 $20,000
Sales revenue 80,000
Net markups 9,000
Net markdowns 1,600
Purchases 58,800 81,000
Freight-in 7,500
Estimated theft 2,000
I
nstructions
C
ompute the cost of the 2014 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.
Instructions
C
ompute the cost of the inventory on December 31, 2014, assuming that the inventory at retail is
(
a) $294,300 and (b) $365,150.


*E 9-25 (Dollar-Value LIFO Retail) Presented below is information related to Langston Hughes Corporation.
P
rice Index LIFO Cost Retail
Inventory on December 31, 2014, when dollar-value LIFO is adopted 100 $36,000 $ 74,500
Inventory, December 31, 2015 110 ? 100,100
Cost Retail
Inventory on January 1, 2014 $216,000 $300,000
Purchases 364,800 480,000
Increase in price level for year 9%
I
nstructions
C
ompute the ending inventory under the dollar-value LIFO method at December 31, 2015. The cost-toretail ratio for 2015 was 60%. 

* E9-26 (Conventional Retail and Dollar-Value LIFO Retail) Amiras Corporation began operations on
January 1, 2014, with a beginning inventory of $30,100 at cost and $50,000 at retail. The following information relates to 2014.
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. 

*E 9-27 (Dollar-Value LIFO Retail) Connie Chung Corporation adopted the dollar-value LIFO retail inventory method on January 1, 2013. 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
2013 $118,720 57% 106
2014 138,750 60% 111
2015 125,350 61% 115
2016 162,500 58% 125
T
he price index at January 1, 2013, is 100.
I
nstructions
C
ompute the ending inventory at December 31 of the years 2013–2016. (Round to the nearest dollar.) 

* E9-28 (Change to LIFO Retail) John Olerud Ltd., a local retailing concern in the Bronx, New York, has decided to change from the conventional retail inventory method to the LIFO retail method starting on
January 1, 2015. The company recomputed its ending inventory for 2014 in accordance with the procedures necessary to switch to LIFO retail. The inventory computed was $212,600.
I
nstructions
A
ssuming that John Olerud Ltd.’s ending inventory for 2014 under the conventional retail inventory method was $205,000, prepare the appropriate journal entry on January 1, 2015.

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