1460T_c09.qxd01:09:200609:04 AM Page450 EQA 450 Chapter 9 Inventories:Additional Valuation Issues ILLUSTRATION 9A-11 Conversion to LIFO December 31,2007,Inventory at LIFO Cost Retail Inventory Method Retail Ending inventory x Ratio LIFO $25,000 45%* =S11,250 "The cost-to-retail ratio was computed as follows: Net purchases at cost $47,250 Net purchases at retail plus $100,000+$7,000-$2,000 =45% markups less markdowns The difference of $500($11,250-$10,750)between the LIFO retail method and the conventional retail method in the ending inventory for 2007 is the amount by which the company must adjust beginning inventory for 2008.The entry to adjust the inven- tory to a cost basis is as follows. Inventory 500 Adjustment to Record Inventory at Cost 500 KEY TERMS SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 9A dollar-value LIFO retail method,446 8.Determine ending inventory by applying the LIFO retail methods.The application of LIFO retail method,445 LIFO retail is made under two assumptions:stable prices and fluctuating prices. Procedures under stable prices:(a)Because the LIFO method is a cost method,both markups and markdowns must be considered in obtaining the proper cost-to-retail per- centage.(b)Since the LIFO method is concerned only with the additional layer,or the amount that should be subtracted from the previous layer,the beginning inventory is excluded from the cost-to-retail percentage.(c)The markups and markdowns apply only to the goods purchased during the current period and not to the beginning inventory. Procedures under fluctuating prices:The steps are the same as for stable prices ex- cept that in computing the LIFO inventory under a dollar-value LIFO approach,the dollar increase in inventory is found and deflated to beginning-of-the-year prices.Do- ing so will determine whether actual increases or decreases in quantity have occurred. If quantities increase,this increase is priced at the new index to compute the new layer.If quantities decrease,the decrease is subtracted from the most recent layers to the extent necessary. Note:All asterisked Questions,Brief Exercises,Exercises,Problems,and Concepts for Analysis relate to material contained in the appendix to the chapter. QUESTIONS 1.Where there is evidence that the utility of inventory 5.In some instances accounting principles require a de- goods,as part of their disposal in the ordinary course of parture from valuing inventories at cost alone.Deter- business,will be less than cost,what is the proper ac- mine the proper unit inventory price in the following counting treatment? cases 2.Explain the rationale for the ceiling and floor in the lower-of-cost-or-market method of valuing inventories. Cases 3.Why are inventories valued at the lower-of-cost-or- 1 2 3 4 5 market?What are the arguments against the use of the Cost $15.90$16.10$15.90 $15.90$15.90 LCM method of valuing inventories? Net realizable value 14.30 19.20 15.20 10.40 16.40 Net realizable value 4.What approaches may be employed in applying the less normal profit 12.80 17.60 13.75 8.80 14.80 lower-of-cost-or-market procedure?Which approach is Market(replace- normally used and why? ment cost) 14.80 1720 12.80 9.70 16.80
1. Where there is evidence that the utility of inventory goods, as part of their disposal in the ordinary course of business, will be less than cost, what is the proper accounting treatment? 2. Explain the rationale for the ceiling and floor in the lower-of-cost-or-market method of valuing inventories. 3. Why are inventories valued at the lower-of-cost-ormarket? What are the arguments against the use of the LCM method of valuing inventories? 4. What approaches may be employed in applying the lower-of-cost-or-market procedure? Which approach is normally used and why? 5. In some instances accounting principles require a departure from valuing inventories at cost alone. Determine the proper unit inventory price in the following cases. Cases 12345 Cost $15.90 $16.10 $15.90 $15.90 $15.90 Net realizable value 14.30 19.20 15.20 10.40 16.40 Net realizable value less normal profit 12.80 17.60 13.75 8.80 14.80 Market (replacement cost) 14.80 17.20 12.80 9.70 16.80 QUESTIONS The difference of $500 ($11,250 $10,750) between the LIFO retail method and the conventional retail method in the ending inventory for 2007 is the amount by which the company must adjust beginning inventory for 2008. The entry to adjust the inventory to a cost basis is as follows. Inventory 500 Adjustment to Record Inventory at Cost 500 450 • Chapter 9 Inventories: Additional Valuation Issues ILLUSTRATION 9A-11 Conversion to LIFO Retail Inventory Method December 31, 2007, Inventory at LIFO Cost Ending inventory *The cost-to-retail ratio was computed as follows: 45% markups less markdowns $47,250 $100,000 $7,000 $2,000 Net purchases at cost Net purchases at retail plus LIFO $11,250 Ratio 45%* Retail $25,000 SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 9A 8. Determine ending inventory by applying the LIFO retail methods. The application of LIFO retail is made under two assumptions: stable prices and fluctuating prices. Procedures under stable prices: (a) Because the LIFO method is a cost method, both markups and markdowns must be considered in obtaining the proper cost-to-retail percentage. (b) Since the LIFO method is concerned only with the additional layer, or the amount that should be subtracted from the previous layer, the beginning inventory is excluded from the cost-to-retail percentage. (c) The markups and markdowns apply only to the goods purchased during the current period and not to the beginning inventory. Procedures under fluctuating prices: The steps are the same as for stable prices except that in computing the LIFO inventory under a dollar-value LIFO approach, the dollar increase in inventory is found and deflated to beginning-of-the-year prices. Doing so will determine whether actual increases or decreases in quantity have occurred. If quantities increase, this increase is priced at the new index to compute the new layer. If quantities decrease, the decrease is subtracted from the most recent layers to the extent necessary. Note: All asterisked Questions, Brief Exercises, Exercises, Problems, and Concepts for Analysis relate to material contained in the appendix to the chapter. KEY TERMS dollar-value LIFO retail method, 446 LIFO retail method, 445 1460T_c09.qxd 01:09:2006 09:04 AM Page 450
1460T_c09.qxd01:09:200609:04 AM Page451 EQA Brief Exercises·451 6.What method(s)might be used in the accounts to record 14.What conditions must exist for the retail inventory a loss due to a price decline in the inventories?Discuss. method to provide valid results? 7.What factors might call for inventory valuation at sales 15.The conventional retail inventory method yields results prices(net realizable value or market price)? that are essentially the same as those yielded by the lower- 8.Under what circumstances is relative sales value an of-cost-or-market method.Explain.Prepare an illustration appropriate basis for determining the price assigned to of how the retail inventory method reduces inventory to inventory? market. 9.At December 31,2008,Kidman Co.has outstanding pur- 16.(a)Determine the ending inventory under the conven- chase commitments for purchase of 150,000 gallons,at tional retail method for the furniture department of $6.40 per gallon,of a raw material to be used in its man- Gin Blossoms Department Stores from the following ufacturing process.The company prices its raw material data. inventory at cost or market,whichever is lower.Assum- ing that the market price as of December 31,2008,is $5.90, Cost Retail how would you treat this situation in the accounts? Inventory,Jan.1 $149,000 $283,500 10.What are the major uses of the gross profit method? Purchases 1,400,000 2,160,000 Freight-in 70,000 11.Distinguish between gross profit as a percentage of cost and Markups,net 92.000 gross profit as a percentage of sales price.Convert the fol- Markdowns,net 48.000 Sales 2,235,000 lowing gross profit percentages based on cost to gross profit percentages based on sales price:20%and 33%%.Convert (b)If the results of a physical inventory indicated an the following gross profit percentages based on sales price inventory at retail of $240,000,what inferences would to gross profit percentages based on cost:33%%and 60%. you draw? 12.Carole Lombard Co.with annual net sales of $6 million maintains a markup of 25%based on cost.Lombard's 17.Deere and Company reported inventory in its balance expenses average 15%of net sales.What is Lombard's sheet as follows: gross profit and net profit in dollars? Inventories $1,999,100,000 13.Afire destroys all of the merchandise of Rosanna Arquette What additional disclosures might be necessary to pre- Company on February 10,2008.Presented below is in- sent the inventory fairly? formation compiled up to the date of the fire. 18.Of what significance is inventory turnover to a retail Inventory,January 1,2008 $400.000 store? Sales to February 10,2008 1,750,000 Purchases to February 10,2008 1,140,000 *19.What modifications to the conventional retail method are Freight-in to February 10,2008 60.000 necessary to approximate a LIFO retail flow? Rate of gross profit on selling price 40% What is the approximate inventory on February 10,2008? BRIEF EXERCISES PLUS (L01, BE9-1 Presented below is information related to Alstott Inc.'s inventory. 2) (per unit) Skis Boots Parkas Historical cost $190.00 $106.00 $53.00 Selling price 217.00 145.00 73.75 Cost to distribute 19.00 8.00 2.50 Current replacement cost 203.00 105.00 51.00 Normal profit margin 32.00 29.00 21.25 Determine the following:(a)the two limits to market value (i.e.,the ceiling and the floor)that should be used in the lower-of-cost-or-market computation for skis;(b)the cost amount that should be used in the lower-of-cost-or-market comparison of boots;and (c)the market amount that should be used to value parkas on the basis of the lower-of-cost-or-market
Brief Exercises • 451 6. What method(s) might be used in the accounts to record a loss due to a price decline in the inventories? Discuss. 7. What factors might call for inventory valuation at sales prices (net realizable value or market price)? 8. Under what circumstances is relative sales value an appropriate basis for determining the price assigned to inventory? 9. At December 31, 2008, Kidman Co. has outstanding purchase commitments for purchase of 150,000 gallons, at $6.40 per gallon, of a raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower. Assuming that the market price as of December 31, 2008, is $5.90, how would you treat this situation in the accounts? 10. What are the major uses of the gross profit method? 11. Distinguish between gross profit as a percentage of cost and gross profit as a percentage of sales price. Convert the following gross profit percentages based on cost to gross profit percentages based on sales price: 20% and 331 ⁄3%. Convert the following gross profit percentages based on sales price to gross profit percentages based on cost: 331 ⁄3% and 60%. 12. Carole Lombard Co. with annual net sales of $6 million maintains a markup of 25% based on cost. Lombard’s expenses average 15% of net sales. What is Lombard’s gross profit and net profit in dollars? 13. Afire destroys all of the merchandise of Rosanna Arquette Company on February 10, 2008. Presented below is information compiled up to the date of the fire. Inventory, January 1, 2008 $ 400,000 Sales to February 10, 2008 1,750,000 Purchases to February 10, 2008 1,140,000 Freight-in to February 10, 2008 60,000 Rate of gross profit on selling price 40% What is the approximate inventory on February 10, 2008? 14. What conditions must exist for the retail inventory method to provide valid results? 15. The conventional retail inventory method yields results that are essentially the same as those yielded by the lowerof-cost-or-market method. Explain. Prepare an illustration of how the retail inventory method reduces inventory to market. 16. (a) Determine the ending inventory under the conventional retail method for the furniture department of Gin Blossoms Department Stores from the following data. Cost Retail Inventory, Jan. 1 $ 149,000 $ 283,500 Purchases 1,400,000 2,160,000 Freight-in 70,000 Markups, net 92,000 Markdowns, net 48,000 Sales 2,235,000 (b) If the results of a physical inventory indicated an inventory at retail of $240,000, what inferences would you draw? 17. Deere and Company reported inventory in its balance sheet as follows: Inventories $1,999,100,000 What additional disclosures might be necessary to present the inventory fairly? 18. Of what significance is inventory turnover to a retail store? *19. What modifications to the conventional retail method are necessary to approximate a LIFO retail flow? BRIEF EXERCISES BE9-1 Presented below is information related to Alstott Inc.’s inventory. (per unit) Skis Boots Parkas Historical cost $190.00 $106.00 $53.00 Selling price 217.00 145.00 73.75 Cost to distribute 19.00 8.00 2.50 Current replacement cost 203.00 105.00 51.00 Normal profit margin 32.00 29.00 21.25 Determine the following: (a) the two limits to market value (i.e., the ceiling and the floor) that should be used in the lower-of-cost-or-market computation for skis; (b) the cost amount that should be used in the lower-of-cost-or-market comparison of boots; and (c) the market amount that should be used to value parkas on the basis of the lower-of-cost-or-market. (L0 1, 2) 1460T_c09.qxd 01:09:2006 09:04 AM Page 451
1460T_c09.qxd01:19:200611:19 AM Page452 EQA 452 Chapter 9 Inventories:Additional Valuation Issues (L01, BE9-2 Robin Corporation has the following four items in its ending inventory. Replacement Net Realizable NRV Less Item Cost Cost Value (NRV) Normal Profit Margin Jokers $2.000 $1,900 $2,100 $1.600 Penguins 5.000 5,100 4,950 4,100 Riddlers 4,400 4,550 4,625 3,700 Scarecrows 3.200 2,990 3.830 3.070 Determine the final lower-of-cost-or-market inventory value for each item. (L0 1,BE9-3 Battletoads Inc.uses a perpetual inventory system.At January 1,2008,inventory was $214,000 at both 2) cost and market value.At December 31,2008,the inventory was $286,000 at cost and $269,000 at mar- ket value.Prepare the necessary December 31 entry under (a)the direct method and (b)the indirect method. (L0 3)BE9-4 PC Plus buys 1,000 computer game CDs from a distributor who is discontinuing those games The purchase price for the lot is $6,000.PC Plus will group the CDs into three price categories for resale, as indicated below. Group No.of CDs Price per CD 1 100 $5.00 2 800 10.00 100 15.00 Determine the cost per CD for each group,using the relative sales value method. (L04) BE9-5 Beavis Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2008 at a cost of $1,000,000.At December 31,2007,the raw materials to be purchased have a market value of $930,000.Prepare any necessary December 31 entry. (L0 4)BE9-6 Use the information for Beavis Company from BE9-5.In 2008,Beavis paid $1,000,000 to obtair the raw materials which were worth $930,000.Prepare the entry to record the purchase. (L05) BE9-7 Big Hurt Corporation's April 30 inventory was destroyed by fire.January 1 inventory was $150,000,and purchases for January through April totaled $500,000.Sales for the same period were $700,000.Big Hurt's normal gross profit percentage is 31%on sales.Using the gross profit method,esti- ⊕ mate Big Hurt's April 30 inventory that was destroyed by fire. (L0 6)BE9-8 Bimini Inc.had beginning inventory of $12,000 at cost and $20,000 at retail.Net purchases were $120,000 at cost and $170,000 at retail.Net markups were $10,000;net markdowns were $7,000;and sales were $157,000.Compute ending inventory at cost using the conventional retail method. (LO 7)BE9-9 In its 2004 annual report,Wal-Mart reported inventory of $26,612 million on January 31,2004, and $24,401 million on January 31,2003,cost of sales of $198,747 million for fiscal year 2004,and net sales of $256,329 million.Compute Wal-Mart's inventory turnover and the average days to sell inventory for the fiscal year 2004. (L0 8)*BE9-10 Use the information for Bimini Inc.from BE9-8.Compute ending inventory at cost using the LIFO retail method. (LO 8)BE9-11 Use the information for Bimini Inc.from BE9-8,and assume the price level increased from 100 at the beginning of the year to 120 at year-end.Compute ending inventory at cost using the dollar-value LIFO retail method. PLUS EXERCISES (L0 1,E9-1 (Lower-of-Cost-or-Market)The inventory of 3T Company on December 31,2008,consists of the 2) following items. Part No. Quantity Cost per Unit Cost to Replace per Unit 110 600 $90 $100 111 1,000 60 52 112 500 80 76 113 200 170 180 120 400 205 208 1214 1.600 16 14 122 300 240 235 Part No.121 is obsolete and has a realizable value of $0.20 each as scrap
BE9-2 Robin Corporation has the following four items in its ending inventory. Replacement Net Realizable NRV Less Item Cost Cost Value (NRV) Normal Profit Margin Jokers $2,000 $1,900 $2,100 $1,600 Penguins 5,000 5,100 4,950 4,100 Riddlers 4,400 4,550 4,625 3,700 Scarecrows 3,200 2,990 3,830 3,070 Determine the final lower-of-cost-or-market inventory value for each item. BE9-3 Battletoads Inc. uses a perpetual inventory system. At January 1, 2008, inventory was $214,000 at both cost and market value. At December 31, 2008, the inventory was $286,000 at cost and $269,000 at market value. Prepare the necessary December 31 entry under (a) the direct method and (b) the indirect method. BE9-4 PC Plus buys 1,000 computer game CDs from a distributor who is discontinuing those games. The purchase price for the lot is $6,000. PC Plus will group the CDs into three price categories for resale, as indicated below. Group No. of CDs Price per CD 1 100 $ 5.00 2 800 10.00 3 100 15.00 Determine the cost per CD for each group, using the relative sales value method. BE9-5 Beavis Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2008 at a cost of $1,000,000. At December 31, 2007, the raw materials to be purchased have a market value of $930,000. Prepare any necessary December 31 entry. BE9-6 Use the information for Beavis Company from BE9-5. In 2008, Beavis paid $1,000,000 to obtain the raw materials which were worth $930,000. Prepare the entry to record the purchase. BE9-7 Big Hurt Corporation’s April 30 inventory was destroyed by fire. January 1 inventory was $150,000, and purchases for January through April totaled $500,000. Sales for the same period were $700,000. Big Hurt’s normal gross profit percentage is 31% on sales. Using the gross profit method, estimate Big Hurt’s April 30 inventory that was destroyed by fire. BE9-8 Bimini Inc. had beginning inventory of $12,000 at cost and $20,000 at retail. Net purchases were $120,000 at cost and $170,000 at retail. Net markups were $10,000; net markdowns were $7,000; and sales were $157,000. Compute ending inventory at cost using the conventional retail method. BE9-9 In its 2004 annual report, Wal-Mart reported inventory of $26,612 million on January 31, 2004, and $24,401 million on January 31, 2003, cost of sales of $198,747 million for fiscal year 2004, and net sales of $256,329 million. Compute Wal-Mart’s inventory turnover and the average days to sell inventory for the fiscal year 2004. *BE9-10 Use the information for Bimini Inc. from BE9-8. Compute ending inventory at cost using the LIFO retail method. *BE9-11 Use the information for Bimini Inc. from BE9-8, and assume the price level increased from 100 at the beginning of the year to 120 at year-end. Compute ending inventory at cost using the dollar-value LIFO retail method. EXERCISES E9-1 (Lower-of-Cost-or-Market) The inventory of 3T Company on December 31, 2008, consists of the following items. Part No. Quantity Cost per Unit Cost to Replace per Unit 110 600 $90 $100 111 1,000 60 52 112 500 80 76 113 200 170 180 120 400 205 208 121a 1,600 16 14 122 300 240 235 a Part No. 121 is obsolete and has a realizable value of $0.20 each as scrap. 452 • Chapter 9 Inventories: Additional Valuation Issues (L0 1, 2) (L0 1, 2) (L0 3) (L0 4) (L0 4) (L0 5) (L0 6) (L0 7) (L0 8) (L0 8) (L0 1, 2) 1460T_c09.qxd 01:19:2006 11:19 AM Page 452
1460T_c09.qxd01:09:200609:04 AM Page453 EQA Exercises·453 Instructions (a)Determine the inventory as of December 31,2008,by the lower-of-cost-or-market method, applying this method directly to each item. (b)Determine the inventory by the lower-of-cost-or-market method,applying the method to the total of the inventory. (L01, E9-2 (Lower-of-Cost-or-Market)Smashing Pumpkins Company uses the lower-of-cost-or-market 2) method,on an individual-item basis,in pricing its inventory items.The inventory at December 31,2008, consists of products D,E,F,G,H,and I.Relevant per-unit data for these products appear below. Item Item Item Item D E G H Estimated selling price $120 $110 95 $90 $110 $90 Cost 75 0 80 0 Replacement cost 120 72 70 30 70 30 Estimated selling expense 30 30 30 25 30 30 Normal profit 20 20 20 20 20 20 Instructions Using the lower-of-cost-or-market rule,determine the proper unit value for balance sheet reporting pur- poses at December 31,2008,for each of the inventory items above. (L0 1,E9-3 (Lower-of-Cost-or-Market)Michael Bolton Company follows the practice of pricing its inventory 2) at the lower-of-cost-or-market,on an individual-item basis. Item ●ost Cost to Estimated Cost of Completion Normal No. Quantity per Unit Replace Selling Price and Disposal Profit 1320 1,200 $3.20 $3.00 $4.50 $0.35 $1.25 1333 900 270 2.30 3.50 0.50 0.50 1426 800 4.50 3.70 5.00 0.40 1.00 1437 1.000 3.60 3.10 3.20 0.25 0.90 1510 700 2.25 2.00 3.25 0.80 0.60 1522 500 3.00 2.70 3.80 0.40 0.50 1573 3.000 180 1.60 2.50 0.75 0.50 1626 1.000 4.70 5.20 6.00 0.50 1.00 Instructions From the information above,determine the amount of Bolton Company inventory. (L0 1,E9-4 (Lower-of-Cost-or-Market-Journal Entries)Corrs Company began operations in 2007 and de- 2) termined its ending inventory at cost and at lower-of-cost-or-market at December 31,2007,and December 31,2008.This information is presented below. Cost Lower-of-Cost-or-Market 12/31/07 $346,000 $327,000 12/31/08 410,000 395,000 Instructions (a)Prepare the journal entries required at December 31,2007,and December 31,2008,assuming that the inventory is recorded at market,and a perpetual inventory system (direct method)is used. (b)Prepare journal entries required at December 31,2007,and December 31,2008,assuming that the inventory is recorded at cost and an allowance account is adjusted at each year-end under a per- petual system. (c)Which of the two methods above provides the higher net income in each year? (L0 1.E9-5 (Lower-of-Cost-or-Market-Valuation Account)Presented below is information related to Can- 2) dlebox Enterprises. Jan.31 Feb.28 Mar.31 Apr.30 Inventory at cost $15,000 $15,100 $17,000 $13.000 Inventory at the lower-of-cost-or-market 14,500 12,600 15,600 12,300 Purchases for the month 20,000 24.000 26,500 Sales for the month 29,000 35.000 40,000 Instructions (a)From the information,prepare (as far as the data permit)monthly income statements in colum- nar form for February,March,and April.The inventory is to be shown in the statement at cost
Instructions (a) Determine the inventory as of December 31, 2008, by the lower-of-cost-or-market method, applying this method directly to each item. (b) Determine the inventory by the lower-of-cost-or-market method, applying the method to the total of the inventory. E9-2 (Lower-of-Cost-or-Market) Smashing Pumpkins Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2008, consists of products D, E, F, G, H, and I. Relevant per-unit data for these products appear below. Item Item Item Item Item Item D E FGH I Estimated selling price $120 $110 $95 $90 $110 $90 Cost 75 80 80 80 50 36 Replacement cost 120 72 70 30 70 30 Estimated selling expense 30 30 30 25 30 30 Normal profit 20 20 20 20 20 20 Instructions Using the lower-of-cost-or-market rule, determine the proper unit value for balance sheet reporting purposes at December 31, 2008, for each of the inventory items above. E9-3 (Lower-of-Cost-or-Market) Michael Bolton Company follows the practice of pricing its inventory at the lower-of-cost-or-market, on an individual-item basis. Item Cost Cost to Estimated Cost of Completion Normal No. Quantity per Unit Replace Selling Price and Disposal Profit 1320 1,200 $3.20 $3.00 $4.50 $0.35 $1.25 1333 900 2.70 2.30 3.50 0.50 0.50 1426 800 4.50 3.70 5.00 0.40 1.00 1437 1,000 3.60 3.10 3.20 0.25 0.90 1510 700 2.25 2.00 3.25 0.80 0.60 1522 500 3.00 2.70 3.80 0.40 0.50 1573 3,000 1.80 1.60 2.50 0.75 0.50 1626 1,000 4.70 5.20 6.00 0.50 1.00 Instructions From the information above, determine the amount of Bolton Company inventory. E9-4 (Lower-of-Cost-or-Market—Journal Entries) Corrs Company began operations in 2007 and determined its ending inventory at cost and at lower-of-cost-or-market at December 31, 2007, and December 31, 2008. This information is presented below. Cost Lower-of-Cost-or-Market 12/31/07 $346,000 $327,000 12/31/08 410,000 395,000 Instructions (a) Prepare the journal entries required at December 31, 2007, and December 31, 2008, assuming that the inventory is recorded at market, and a perpetual inventory system (direct method) is used. (b) Prepare journal entries required at December 31, 2007, and December 31, 2008, assuming that the inventory is recorded at cost and an allowance account is adjusted at each year-end under a perpetual system. (c) Which of the two methods above provides the higher net income in each year? E9-5 (Lower-of-Cost-or-Market—Valuation Account) Presented below is information related to Candlebox Enterprises. Jan. 31 Feb. 28 Mar. 31 Apr. 30 Inventory at cost $15,000 $15,100 $17,000 $13,000 Inventory at the lower-of-cost-or-market 14,500 12,600 15,600 12,300 Purchases for the month 20,000 24,000 26,500 Sales for the month 29,000 35,000 40,000 Instructions (a) From the information, prepare (as far as the data permit) monthly income statements in columnar form for February, March, and April. The inventory is to be shown in the statement at cost, Exercises • 453 (L0 1, 2) (L0 1, 2) (L0 1, 2) (L0 1, 2) 1460T_c09.qxd 01:09:2006 09:04 AM Page 453
1460T_c09.qxd01:09:200609:04 AM Page454 EQA 454 Chapter 9 Inventories:Additional Valuation Issues the gain or loss due to market fluctuations is to be shown separately,and a valuation account is to be set up for the difference between cost and the lower of cost or market. (b)Prepare the journal entry required to establish the valuation account at January 31 and entries to adjust it monthly thereafter. (L01, E9-6 (Lower-of-Cost-or-Market-Error Effect)Winans Company uses the lower-of-cost-or-market 2) method,on an individual-item basis,in pricing its inventory items.The inventory at December 31,2007, included product X.Relevant per-unit data for product X appear below. Estimated selling price $45 Cost 40 Replacement cost 35 Estimated selling expense 14 Normal profit 9 There were 1,000 units of product X on hand at December 31,2007.Product X was incorrectly valued at $35 per unit for reporting purposes.All 1,000 units were sold in 2008. Instructions Compute the effect of this error on net income for 2007 and the effect on net income for 2008,and indi- cate the direction of the misstatement for each year. (LO 3)E9-7 (Relative Sales Value Method)Phil Collins Realty Corporation purchased a tract of unimproved land for $55,000.This land was improved and subdivided into building lots at an additional cost of $34,460. These building lots were all of the same size but owing to differences in location were offered for sale at different prices as follows Group No.of Lots Price per Lot 1 9 $3,000 15 4,000 2,400 Operating expenses for the year allocated to this project total $18,200.Lots unsold at the year-end were as follows. ⊕ Group 1 5 lots Group 2 7 lots Group 3 2 lots Instructions At the end of the fiscal year Phil Collins Realty Corporation instructs you to arrive at the net income realized on this operation to date. (L0 3)E9-8 (Relative Sales Value Method)During 2008,Pretenders Furniture Company purchases a carload of wicker chairs.The manufacturer sells the chairs to Pretenders for a lump sum of $59,850,because it is discontinuing manufacturing operations and wishes to dispose of its entire stock.Three types of chairs are included in the carload.The three types and the estimated selling price for each are listed below. Type No.of Chairs Estimated Selling Price Each Lounge chairs 400 $90 Armchairs 300 80 Straight chairs 700 50 During 2008,Pretenders sells 200 lounge chairs,100 armchairs,and 120 straight chairs Instructions What is the amount of gross profit realized during 2008?What is the amount of inventory of unsold straight chairs on December 31,2008? (LO 4)E9-9 (Purchase Commitments)Marvin Gaye Company has been having difficulty obtaining key raw materials for its manufacturing process.The company therefore signed a long-term noncancelable pur- chase commitment with its largest supplier of this raw material on November 30,2008,at an agreed price of $400,000.At December 31,2008,the raw material had declined in price to $365,000. Instructions What entry would you make on December 31,2008,to recognize these facts? (L0 4)E9-10 (Purchase Commitments)At December 31,2008,Indigo Girls Company has outstanding non- cancelable purchase commitments for 36,000 gallons,at $3.00 per gallon,of raw material to be used in its manufacturing process.The company prices its raw material inventory at cost or market,whichever is lower
the gain or loss due to market fluctuations is to be shown separately, and a valuation account is to be set up for the difference between cost and the lower of cost or market. (b) Prepare the journal entry required to establish the valuation account at January 31 and entries to adjust it monthly thereafter. E9-6 (Lower-of-Cost-or-Market—Error Effect) Winans Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2007, included product X. Relevant per-unit data for product X appear below. Estimated selling price $45 Cost 40 Replacement cost 35 Estimated selling expense 14 Normal profit 9 There were 1,000 units of product X on hand at December 31, 2007. Product X was incorrectly valued at $35 per unit for reporting purposes. All 1,000 units were sold in 2008. Instructions Compute the effect of this error on net income for 2007 and the effect on net income for 2008, and indicate the direction of the misstatement for each year. E9-7 (Relative Sales Value Method) Phil Collins Realty Corporation purchased a tract of unimproved land for $55,000. This land was improved and subdivided into building lots at an additional cost of $34,460. These building lots were all of the same size but owing to differences in location were offered for sale at different prices as follows. Group No. of Lots Price per Lot 1 9 $3,000 2 15 4,000 3 17 2,400 Operating expenses for the year allocated to this project total $18,200. Lots unsold at the year-end were as follows. Group 1 5 lots Group 2 7 lots Group 3 2 lots Instructions At the end of the fiscal year Phil Collins Realty Corporation instructs you to arrive at the net income realized on this operation to date. E9-8 (Relative Sales Value Method) During 2008, Pretenders Furniture Company purchases a carload of wicker chairs. The manufacturer sells the chairs to Pretenders for a lump sum of $59,850, because it is discontinuing manufacturing operations and wishes to dispose of its entire stock. Three types of chairs are included in the carload. The three types and the estimated selling price for each are listed below. Type No. of Chairs Estimated Selling Price Each Lounge chairs 400 $90 Armchairs 300 80 Straight chairs 700 50 During 2008, Pretenders sells 200 lounge chairs, 100 armchairs, and 120 straight chairs. Instructions What is the amount of gross profit realized during 2008? What is the amount of inventory of unsold straight chairs on December 31, 2008? E9-9 (Purchase Commitments) Marvin Gaye Company has been having difficulty obtaining key raw materials for its manufacturing process. The company therefore signed a long-term noncancelable purchase commitment with its largest supplier of this raw material on November 30, 2008, at an agreed price of $400,000. At December 31, 2008, the raw material had declined in price to $365,000. Instructions What entry would you make on December 31, 2008, to recognize these facts? E9-10 (Purchase Commitments) At December 31, 2008, Indigo Girls Company has outstanding noncancelable purchase commitments for 36,000 gallons, at $3.00 per gallon, of raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower. 454 • Chapter 9 Inventories: Additional Valuation Issues (L0 1, 2) (L0 3) (L0 3) (L0 4) (L0 4) 1460T_c09.qxd 01:09:2006 09:04 AM Page 454