Ch09 Additional Valuation Issues

CHAPTER 9
INVENTORIES: ADDITIONAL VALUATION ISSUES

TRUE-FALSEConceptual
Anse! No" Desc!#pt#on
T 1. When to use lower-of-cost-or-market.
F 2. Lower-of-cost-or-market and conservatism.
F 3. Purpose of the floor in L!".
T #. Lower-of-cost-or-market and consistenc$.
F %. &eportin' inventor$ at net reali(a)le value.
T *. +aluin' inventor$ at net reali(a)le value.
T ,. +aluation usin' relative sales value.
F -. .efinition of a )asket purchase.
F /. &ecordin' purchase commitments.
T 10. Loss on purchase commitments.
F 11. &ecordin' noncancela)le purchase contract.
T 12. 1ross profit method.
F 13. 1ross profit percenta'e.
T 1#. .isadvanta'e of 'ross profit method.
F 1%. !onventional retail method.
F 1*. .efinition of markup.
T 1,. 2ccountin' for a)normal shorta'es.
F 1-. !omputin' inventor$ turnover ratio.
T 1/. 2vera'e da$s to sell inventor$.
T 20 L3F4 retail method.
$ULTIPLE CHOICEConceptual
d 21. 5nowled'e of lower-of-cost-or-market valuations.
d 22. 2ppropriate use of L!" valuation.
c 23. .efinition of 6market6 under L!".
) 2#. .efinition of 6ceilin'.6
a 2%. .efinition of 6desi'nated market value.6
c 2*. 2pplication of lower-of-cost-or-market valuation.
d 2,. 7ffect of inventor$ write-down.
d
8
2-. &ecordin' inventor$ loss under direct method.
c
8
2/. &ecordin' inventor$ at net reali(a)le value.
) 30. 9et reali(a)le value under L!".
d 31. .efinition of 6net reali(a)le value.6
a 32. +aluation of inventor$ at net reali(a)le value.
d 33. 2ppropriate use of net reali(a)le value.
a 3#. "aterial purchase commitments.
a 3%. Loss reco'nition on purchase commitments.
)
P
3*. &eportin' purchase commitments loss.
Test %an& 'o! Inte!(e)#ate Account#n*+ Tel't, E)#t#on
$ULTIPLE CHOICEConceptual -cont".
d
8
3,. 1ross profit method assumptions.
d 3-. 2ppropriate use of the 'ross profit method.
) 3/. 2ppropriate use of the 'ross profit method.
d #0. 2dvanta'e of retail inventor$ method.
c #1. !onventional retail inventor$ method.
a #2. 2ssumptions of the retail inventor$ method.
d #3. 2ppropriate use of the retail inventor$ method.
) ##. "arkdowns and the conventional retail method.
a #%. "arkups and the conventional retail method.
) :#*. 5nowled'e of the cost ratio for retail inventor$ methods.
a
8
#,. 3nformation needed in retail inventor$ method.
d
8
#-. &easons for usin' retail inventor$ method.
)
P
#/. 3nventor$ cost flow assumptions.
a
P
%0. !omputin' avera'e da$s to sell inventor$.
c %1. 3nventor$ turnover ratio.
c :%2. .ollar-value L3F4 retail method.
$ULTIPLE CHOICECo(putat#onal
a %3. +alue inventor$ at L!".
) %#. Lower-of-cost-or-market.
) %%. Lower-of-cost-or-market.
c %*. .eterminin' net reali(a)le value.
c %,. .eterminin' net reali(a)le value.
) %-. &elative sales value method.
) %/. &elative sales value method.
c *0. &elative sales method of inventor$ valuation.
c *1. 7ntr$ for purchase commitment loss.
c *2. &eco'ni(in' loss on purchase commitments.
) *3. &eco'ni(in' loss on purchase commitments.
a *#. 7stimatin' endin' inventor$ usin' 'ross profit method.
a *%. 7stimatin' endin' inventor$ usin' 'ross profit method.
d **. !alculate cost of 'oods sold 'iven a markup on cost.
d *,. !alculate merchandise purchases 'iven a markup on cost.
a *-. !alculate total sales from cost information.
a */. "arkup on cost e;uivalent to a markup on sellin' price.
) ,0. 7stimate endin' inventor$ usin' 'ross profit method.
c ,1. !alculate endin' inventor$ usin' 'ross profit method
. ) ,2. !alculate endin' inventor$ usin' 'ross profit method.
a ,3. 7stimate cost of inventor$ destro$ed )$ fire.
a ,#. .etermine items to )e included in inventor$.
) ,%. !alculate cost of retail ratio to appro<imate L!".
) ,*. !alculate endin' inventor$ at retail.
a ,,. !alculate cost to retail ratio appro<imatin' L!".
) ,-. !alculate cost of inventor$ lost usin' retail method.
) :,/. !alculate endin' inventor$ at cost usin' L3F4 retail.
c :-0. .etermine cost to retail ratio usin' L3F4 retail.
a -1. !alculate endin' inventor$ at retail.
9 - /
3nventories= 2dditional +aluation 3ssues
$ULTIPLE CHOICECo(putat#onal -cont".
a -2. !alculate endin' inventor$ at retail.
c -3. 2vera'e da$s to sell inventor$.
c -#. 2vera'e da$s to sell inventor$.
) -%. !alculate inventor$ turnover ratio.
d -*. .etermine cost to retail ratio to appro<imate L!".
d -,. !alculate endin' inventor$ at retail.
a --. !alculate endin' inventor$ usin' conventional retail.
c :-/. .etermine cost to retail ratio usin' L3F4 cost.
a :/0. !alculate endin' inventor$ cost usin' dollar-value L3F4.
) :/1. !alculate cost of endin' inventor$ usin' L3F4 retail.
a :/2. !alculate endin' inventor$ cost usin' dollar-value L3F4.
P
These ;uestions also appear in the Pro)lem-8olvin' 8urvival 1uide.
8
These ;uestions also appear in the 8tud$ 1uide.
: This topic is dealt with in an 2ppendi< to the chapter.
$ULTIPLE CHOICECPA A)apte)
d /3. &eco'ni(in' a loss due to L!".
) /#. 2ppropriate use of replacement costs in L!".
) /%. 3dentification of the desi'nated market value.
a /*. 7stimate cost of inventor$ lost )$ theft.
a /,. .etermine cost of endin' inventor$ usin' retail method.
d /-. .etermine cost of endin' inventor$ usin' retail method.
a ://. !alculate endin' inventor$ usin' L3F4 retail.
E0ERCISES
Ite( Desc!#pt#on
7/-100 Lower-of-cost-or-market.
7/-10# Lower-of-cost-or-market.
7/-10% &elative sales value method.
7/-10* 1ross profit method.
7/-10, 1ross profit method.
7/-10- 1ross profit method.
7/-10/ !omparison of inventor$ methods.
9 - 1
PRO%LE$S
Ite( Desc!#pt#on
P/-110 1ross profit method.
P/-111 &etail inventor$ method.
:P/-112 &etail inventor$ method.
:P/-113 L3F4 retail inventor$ method> fluctuatin' prices.
:P/-11# L3F4 retail inventor$ method> sta)le prices.
:P/-11% .ollar-value L3F4 retail method.
:P/-11* &etail L3F4.
CHAPTER LEARNIN2 O%3ECTIVES
1. .escri)e and appl$ the lower-of-cost-or-market rule.
2. 7<plain when companies value inventories at net reali(a)le value.
3. 7<plain when companies use the relative sales value method to value inventories.
#. .iscuss accountin' issues related to purchase commitments.
%. .etermine endin' inventor$ )$ appl$in' the 'ross profit method.
*. .etermine endin' inventor$ )$ appl$in' the retail inventor$ method.
,. 7<plain how to report and anal$(e inventor$.
:-. .etermine endin' inventor$ )$ appl$in' the L3F4 retail methods.
9 - 4
5SU$$AR6 OF LEARNIN2 O%3ECTIVES %6 7UESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Lea!n#n* O89ect#:e ;
1. TF 21. "! 2%. "! %3. "! /#. "! 102. 7
2. TF 22. "! 2*. "! %#. "! /%. "! 103. 7
3. TF 23. "! 2,. "! %%. "! 100. 7 10#. 7
#. TF 2#. "!
8
2-. "! /3. "! 101. 7 10/. 7
Lea!n#n* O89ect#:e /
%. TF
8
2/. "! 31. "! 33. "! %,. "!
*. TF 30. "! 32. "! %*. "!
Lea!n#n* O89ect#:e 1
,. TF -. TF %-. "! %/. "! *0. "! 10%. 7
Lea!n#n* O89ect#:e 4
/. TF 11. TF 3%. "! *1. "! *3. "!
10. TF 3#. "!
P
3*. "! *2. "!
Lea!n#n* O89ect#:e <
12. TF 3-. "! **. "! ,0. "! ,#. "! 10-. 7
13. TF 3/. "! *,. "! ,1. "! /*. "! 110. P
1#. TF *#. "! *-. "! ,2. "! 10*. 7
8
3,. "! *%. "! */. "! ,3. "! 10,. 7
Lea!n#n* O89ect#:e =
1%. TF #1. "! #%. "! ,%. "! -1. "! --. "! 111. P
1*. TF #2. "! #*. "! ,*. "! -2. "! /,. "!
1,. TF #3. "!
8
#,. "! ,,. "! -*. "! /-. "!
#0. "! ##. "!
8
#-. "! ,-. "! -,. "! 10/. 7
Lea!n#n* O89ect#:e >
1-. TF
P
#/. "! %1. "! -#. "!
1/. TF
P
%0. "! -3. "! -%. "!
Lea!n#n* O89ect#:e 5?
20. TF ,/. "! /0. "! //. "! 113. P 11*. P
#*. "! -0. "! /1. "! 10/. 7 11#. P
%2. "! -/. "! /2. "! 112. P 11%. P
9ote= TF ? True-False
"! ? "ultiple !hoice
7 ? 7<ercise
P ? Pro)lem
9 - <
TRUE-FALSEConceptual
1. 2 compan$ should a)andon the historical cost principle when the future utilit$ of the
inventor$ item falls )elow its ori'inal cost.
2. The lower-of-cost-or-market method is used for inventor$ despite )ein' less conservative
than valuin' inventor$ at market value.
3. The purpose of the floor in lower-of-cost-or-market considerations is to avoid overstatin'
inventor$.
#. 2pplication of the lower-of-cost-or-market rule results in inconsistenc$ )ecause a
compan$ ma$ value inventor$ at cost in one $ear and at market in the ne<t $ear.
%. 122P re;uires reportin' inventor$ at net reali(a)le value> even if a)ove cost> whenever
there is a controlled market with a ;uoted price applica)le to all ;uantities.
*. 2 reason for valuin' inventor$ at net reali(a)le value is that sometimes it is too difficult to
o)tain the cost fi'ures.
,. 3n a )asket purchase> the cost of the individual assets ac;uired is determined on the )asis
of their relative sales value.
-. 2 )asket purchase occurs when a compan$ a'rees to )u$ inventor$ weeks or months in
advance.
/. "ost purchase commitments must )e recorded as a lia)ilit$.
10. 3f the contract price on a noncancela)le purchase commitment e<ceeds the market price>
the )u$er should record an$ e<pected losses on the commitment in the period in which
the market decline takes place.
11. When a )u$er enters into a formal> noncancela)le purchase contract> an asset and a
lia)ilit$ are recorded at the inception of the contract.
12. The 'ross profit method can )e used to appro<imate the dollar amount of inventor$ on
hand.
13. 3n most situations> the 'ross profit percenta'e is stated as a percenta'e of cost.
1#. 2 disadvanta'e of the 'ross profit method is that it uses past percenta'es in determinin'
the markup.
1%. When the conventional retail method includes )oth net markups and net markdowns in the
cost-to-retail ratio> it appro<imates a lower-of-cost-or-market valuation.
1*. 3n the retail inventor$ method> the term markup means a markup on the ori'inal cost of an
inventor$ item.
1,. 3n the retail inventor$ method> a)normal shorta'es are deducted from )oth the cost and
retail amounts and reported as a loss.
9 - =
1-. The inventor$ turnover ratio is computed )$ dividin' the cost of 'oods sold )$ the endin'
inventor$ on hand.
1/. The avera'e da$s to sell inventor$ represents the avera'e num)er of da$s@ sales for
which a compan$ has inventor$ on hand.
:20. The L3F4 retail method assumes that markups and markdowns appl$ onl$ to the 'oods
purchased durin' the period.
T!ue False Anse!sConceptual
Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans"
1. T *. T 11. F 1*. F
2. F ,. T 12. T 1,. T
3. F -. F 13. F 1-. F
#. T /. F 1#. T 1/. T
%. F 10. T 1%. F 20. T
$ULTIPLE CHOICEConceptual
21. Which of the followin' is true a)out lower-of-cost-or-marketA
a. 3t is inconsistent )ecause losses are reco'ni(ed )ut not 'ains.
). 3t usuall$ understates assets.
c. 3t can increase future income.
d. 2ll of these.
22. The primar$ )asis of accountin' for inventories is cost. 2 departure from the cost )asis of
pricin' the inventor$ is re;uired where there is evidence that when the 'oods are sold in
the ordinar$ course of )usiness their
a. sellin' price will )e less than their replacement cost.
). replacement cost will )e more than their net reali(a)le value.
c. cost will )e less than their replacement cost.
d. future utilit$ will )e less than their cost.
23. When valuin' raw materials inventor$ at lower-of-cost-or-market> what is the meanin' of
the term 6market6A
a. 9et reali(a)le value
). 9et reali(a)le value less a normal profit mar'in
c. !urrent replacement cost
d. .iscounted present value
2#. 3n no case can 6market6 in the lower-of-cost-or-market rule )e more than
a. estimated sellin' price in the ordinar$ course of )usiness.
). estimated sellin' price in the ordinar$ course of )usiness less reasona)l$ predicta)le
costs of completion and disposal.
c. estimated sellin' price in the ordinar$ course of )usiness less reasona)l$ predicta)le
costs of completion and disposal and an allowance for an appro<imatel$ normal profit
mar'in.
d. estimated sellin' price in the ordinar$ course of )usiness less reasona)l$ predicta)le
costs of completion and disposal> an allowance for an appro<imatel$ normal profit
mar'in> and an ade;uate reserve for possi)le future losses.
9 - >
2%. .esi'nated market value
a. is alwa$s the middle value of replacement cost> net reali(a)le value> and net reali(a)le
value less a normal profit mar'in.
). should alwa$s )e e;ual to net reali(a)le value.
c. ma$ sometimes e<ceed net reali(a)le value.
d. should alwa$s )e e;ual to net reali(a)le value less a normal profit mar'in.
2*. Lower-of-cost-or-market
a. is most conservative if applied to the total inventor$.
). is most conservative if applied to maBor cate'ories of inventor$.
c. is most conservative if applied to individual items of inventor$.
d. must )e applied to maBor cate'ories for ta<es.
2,. 2n item of inventor$ purchased this period for C1%.00 has )een incorrectl$ written down to
its current replacement cost of C10.00. 3t sells durin' the followin' period for C30.00> its
normal sellin' price> with disposal costs of C3.00 and normal profit of C12.00. Which of
the followin' statements is not trueA
a. The cost of sales of the followin' $ear will )e understated.
). The current $earDs income is understated.
c. The closin' inventor$ of the current $ear is understated.
d. 3ncome of the followin' $ear will )e understated.
8
2-. When the direct method is used to record inventor$ at market
a. there is a direct reduction in the sellin' price of the product that results in a loss )ein'
recorded on the income statement prior to the sale.
). a loss is recorded directl$ in the inventor$ account )$ creditin' inventor$ and de)itin'
loss on inventor$ decline.
c. onl$ the portion of the loss attri)uta)le to inventor$ sold durin' the period is recorded
in the financial statements.
d. the market value fi'ure for endin' inventor$ is su)stituted for cost and the loss is
)uried in cost of 'oods sold.
8
2/. &ecordin' inventor$ at net reali(a)le value is permitted> even if it is a)ove cost> when
there are no si'nificant costs of disposal involved and
a. the endin' inventor$ is determined )$ a ph$sical inventor$ count.
). a normal profit is not anticipated.
c. there is a controlled market with a ;uoted price applica)le to all ;uantities.
d. the internal revenue service is assured that the practice is not used onl$ to distort
reported net income.
30. When inventor$ declines in value )elow ori'inal EhistoricalF cost> and this decline is
considered other than temporar$> what is the ma<imum amount that the inventor$ can )e
valued atA
a. 8ales price
). 9et reali(a)le value
c. Gistorical cost
d. 9et reali(a)le value reduced )$ a normal profit mar'in
9 - ?
31. 9et reali(a)le value is
a. ac;uisition cost plus costs to complete and sell.
). sellin' price.
c. sellin' price plus costs to complete and sell.
d. sellin' price less costs to complete and sell.
32. 3f a unit of inventor$ has declined in value )elow ori'inal cost> )ut the market value
e<ceeds net reali(a)le value> the amount to )e used for purposes of inventor$ valuation is
a. net reali(a)le value.
). ori'inal cost.
c. market value.
d. net reali(a)le value less a normal profit mar'in.
33. 3nventor$ ma$ )e recorded at net reali(a)le value if
a. there is a controlled market with a ;uoted price.
). there are no si'nificant costs of disposal.
c. the inventor$ consists of precious metals or a'ricultural products.
d. all of these.
3#. 3f a material amount of inventor$ has )een ordered throu'h a formal purchase contract at
the )alance sheet date for future deliver$ at firm prices>
a. this fact must )e disclosed.
). disclosure is re;uired onl$ if prices have declined since the date of the order.
c. disclosure is re;uired onl$ if prices have since risen su)stantiall$.
d. an appropriation of retained earnin's is necessar$.
3%. The credit )alance that arises when a net loss on a purchase commitment is reco'ni(ed
should )e
a. presented as a current lia)ilit$.
). su)tracted from endin' inventor$.
c. presented as an appropriation of retained earnin's.
d. presented in the income statement.
P
3*. 3n 200*> Lucas "anufacturin' si'ned a contract with a supplier to purchase raw materials
in 200, for C,00>000. Hefore the .ecem)er 31> 200* )alance sheet date> the market price
for these materials dropped to C%10>000. The Bournal entr$ to record this situation at
.ecem)er 31> 200* will result in a credit that should )e reported
a. as a valuation account to 3nventor$ on the )alance sheet.
). as a current lia)ilit$.
c. as an appropriation of retained earnin's.
d. on the income statement.
8
3,. Which of the followin' is not a )asic assumption of the 'ross profit methodA
a. The )e'innin' inventor$ plus the purchases e;ual total 'oods to )e accounted for.
). 1oods not sold must )e on hand.
c. 3f the sales> reduced to the cost )asis> are deducted from the sum of the openin'
inventor$ plus purchases> the result is the amount of inventor$ on hand.
d. The total amount of purchases and the total amount of sales remain relativel$
unchan'ed from the compara)le previous period.
9 - 9
3-. The 'ross profit method of inventor$ valuation is invalid when
a. a portion of the inventor$ is destro$ed.
). there is a su)stantial increase in inventor$ durin' the $ear.
c. there is no )e'innin' inventor$ )ecause it is the first $ear of operation.
d. none of these.
3/. Which statement is not true a)out the 'ross profit method of inventor$ valuationA
a. 3t ma$ )e used to estimate inventories for interim statements.
). 3t ma$ )e used to estimate inventories for annual statements.
c. 3t ma$ )e used )$ auditors.
d. 9one of these.
#0. 2 maBor advanta'e of the retail inventor$ method is that it
a. provides relia)le results in cases where the distri)ution of items in the inventor$ is
different from that of items sold durin' the period.
). hides costs from competitors and customers.
c. 'ives a more accurate statement of inventor$ costs than other methods.
d. provides a method for inventor$ control and facilitates determination of the periodic
inventor$ for certain t$pes of companies.
#1. 2n inventor$ method which is desi'ned to appro<imate inventor$ valuation at the lower of
cost or market is
a. last-in> first-out.
). first-in> first-out.
c. conventional retail method.
d. specific identification.
#2. The retail inventor$ method is )ased on the assumption that the
a. final inventor$ and the total of 'oods availa)le for sale contain the same proportion of
hi'h-cost and low-cost ratio 'oods.
). ratio of 'ross mar'in to sales is appro<imatel$ the same each period.
c. ratio of cost to retail chan'es at a constant rate.
d. proportions of markups and markdowns to sellin' price are the same.
#3. Which statement is true a)out the retail inventor$ methodA
a. 3t ma$ not )e used to estimate inventories for interim statements.
). 3t ma$ not )e used to estimate inventories for annual statements.
c. 3t ma$ not )e used )$ auditors.
d. 9one of these.
##. When the conventional retail inventor$ method is used> markdowns are commonl$ i'nored
in the computation of the cost to retail ratio )ecause
a. there ma$ )e no markdowns in a 'iven $ear.
). this tends to 'ive a )etter appro<imation of the lower of cost or market.
c. markups are also i'nored.
d. this tends to result in the showin' of a normal profit mar'in in a period when no
markdown 'oods have )een sold.
9 - ;@
#%. To produce an inventor$ valuation which appro<imates the lower of cost or market usin'
the conventional retail inventor$ method> the computation of the ratio of cost to retail
should
a. include markups )ut not markdowns.
). include markups and markdowns.
c. i'nore )oth markups and markdowns.
d. include markdowns )ut not markups.
:#*. When calculatin' the cost ratio for the retail inventor$ method>
a. if it is the conventional method> the )e'innin' inventor$ is included and markdowns
are deducted.
). if it is the L3F4 method> the )e'innin' inventor$ is e<cluded and markdowns are
deducted.
c. if it is the L3F4 method> the )e'innin' inventor$ is included and markdowns are not
deducted.
d. if it is the conventional method> the )e'innin' inventor$ is e<cluded and markdowns
are not deducted.
8
#,. Which of the followin' is not re;uired when usin' the retail inventor$ methodA
a. 2ll inventor$ items must )e cate'ori(ed accordin' to the retail markup percenta'e
which reflects the itemDs sellin' price.
). 2 record of the total cost and retail value of 'oods purchased.
c. 2 record of the total cost and retail value of the 'oods availa)le for sale.
d. Total sales for the period.
8
#-. Which of the followin' is not a reason the retail inventor$ method is used widel$A
a. 2s a control measure in determinin' inventor$ shorta'es
). For insurance information
c. To permit the computation of net income without a ph$sical count of inventor$
d. To defer income ta< lia)ilit$
P
#/. Which of the followin' statements is false re'ardin' an assumption of inventor$ cost flowA
a. The cost flow assumption need not correspond to the actual ph$sical flow of 'oods.
). The assumption selected ma$ )e chan'ed each accountin' period.
c. The F3F4 assumption uses the earliest ac;uired prices to cost the items sold durin' a
period.
d. The L3F4 assumption uses the earliest ac;uired prices to cost the items on hand at
the end of an accountin' period.
P
%0. The avera'e da$s to sell inventor$ is computed )$ dividin'
a. 3*% da$s )$ the inventor$ turnover ratio.
). the inventor$ turnover ratio )$ 3*% da$s.
c. net sales )$ the inventor$ turnover ratio.
d. 3*% da$s )$ cost of 'oods sold.
%1. The inventor$ turnover ratio is computed )$ dividin' the cost of 'oods sold )$
a. )e'innin' inventor$.
). endin' inventor$.
c. avera'e inventor$.
d. num)er of da$s in the $ear.
9 - ;;
:%2. When usin' dollar-value L3F4> if the incremental la$er was added last $ear> it should )e
multiplied )$
a. last $earDs cost ratio and this $earDs inde<.
). this $earDs cost ratio and this $earDs inde<.
c. last $earDs cost ratio and last $earDs inde<.
d. this $earDs cost ratio and last $earDs inde<.
$ult#ple C,o#ce Anse!sConceptual
Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans"
21. d 2*. c 31. d 3*. ) #1. c :#*. ) %1. c
22. d 2,. d 32. a 3,. d #2. a #,. a :%2. c
23. c 2-. d 33. d 3-. d #3. d #-. d
2#. ) 2/. c 3#. a 3/. ) ##. ) #/. )
2%. a 30. ) 3%. a #0. d #%. a %0. a
8olutions to those "ultiple !hoice ;uestions for which the answer is none of these.
3-. The 'ross profit percenta'e applica)le to the 'oods in endin' inventor$ is different from
the percenta'e applica)le to the 'oods sold durin' the period.
#3. "an$ answers are possi)le.
$ULTIPLE CHOICECo(putat#onal
%3. "arr !orporation has two products in its endin' inventor$> each accounted for at the lower
of cost or market. 2 profit mar'in of 30I on sellin' price is considered normal for each
product. 8pecific data with respect to each product follows=
Product J1 Product J2
Gistorical cost C#0.00 C ,0.00
&eplacement cost #%.00 %#.00
7stimated cost to dispose 10.00 2*.00
7stimated sellin' price -0.00 130.00
3n pricin' its endin' inventor$ usin' the lower-of-cost-or-market> what unit values should
"arr use for products J1 and J2> respectivel$A
a. C#0.00 and C*%.00.
). C#*.00 and C*%.00.
c. C#*.00 and C*0.00.
d. C#%.00 and C%#.00.
%#. Paul 5onerko !ompan$ sells product 200%W8! for C20 per unit. The cost of one unit of
200%W8! is C1-> and the replacement cost is C1,. The estimated cost to dispose of a unit
is C#> and the normal profit is #0I. 2t what amount per unit should product 200%W8! )e
reported> appl$in' lower-of-cost-or-marketA
a. C-.
). C1*.
c. C1,.
d. C1-.
9 - ;/
%%. &emin'ton !ompan$ sells product 1/,*9L! for C#0 per unit. The cost of one unit of
1/,*9L! is C3*> and the replacement cost is C3#. The estimated cost to dispose of a unit
is C-> and the normal profit is #0I. 2t what amount per unit should product 1/,*9L! )e
reported> appl$in' lower-of-cost-or-marketA
a. C1*.
). C32.
c. C3#.
d. C3*.
%*. Koe !rede !orporation sells its product> a rare metal> in a controlled market with a ;uoted
price applica)le to all ;uantities. The total cost of %>000 pounds of the metal now held in
inventor$ is C2%0>000. The total sellin' price is C*00>000> and estimated costs of disposal
are C10>000. 2t what amount should the inventor$ of %>000 pounds )e reported in the
)alance sheetA
a. C2#0>000.
). C2%0>000.
c. C%/0>000.
d. C*00>000.
%,. Petten'al !orporation sells its product> a rare metal> in a controlled market with a ;uoted
price applica)le to all ;uantities. The total cost of %>000 pounds of the metal now held in
inventor$ is C1%0>000. The total sellin' price is C3%0>000> and estimated costs of disposal
are C%>000. 2t what amount should the inventor$ of %>000 pounds )e reported in the
)alance sheetA
a. C1#%>000.
). C1%0>000.
c. C3#%>000.
d. C3%0>000.
%-. Kermaine .$e !orporation ac;uired two inventor$ items at a lump-sum cost of C%0>000.
The ac;uisition included 3>000 units of product LF> and ,>000 units of product 1H. LF
normall$ sells for C1% per unit> and 1H for C% per unit. 3f .$e sells 1>000 units of LF> what
amount of 'ross profit should it reco'ni(eA
a. C1>-,%
). C%>*2%.
c. C10>000.
d. C11>-,%.
%/. Williamson !orporation ac;uired two inventor$ items at a lump-sum cost of C#0>000. The
ac;uisition included 3>000 units of product !F> and ,>000 units of product 3H. !F normall$
sells for C12 per unit> and 3H for C# per unit. 3f Williamson sells 1>000 units of !F> what
amount of 'ross profit should it reco'ni(eA
a. C1>%00.
). C#>%00.
c. C->000.
d. C/>%00.
9 - ;1
*0. 2t a lump-sum cost of C#->000> 8eal$ !ompan$ recentl$ purchased the followin' items for
resale=
3tem 9o. of 3tems Purchased &esale Price Per Lnit
" #>000 C2.%0
9 2>000 -.00
4 *>000 #.00
The appropriate cost per unit of inventor$ is=
" 9 4
a. C2.%0 C-.00 C#.00
). C2.0, C13.2# C2.21
c. C2.#0 C,.*- C3.-#
d. C#.00 C#.00 C#.00
*1. .urin' 200*> &eese !o.> a manufacturer of chocolate candies> contracted to purchase
100>000 pounds of cocoa )eans at C#.00 per pound> deliver$ to )e made in the sprin' of
200,. Hecause a record harvest is predicted for 200,> the price per pound for cocoa
)eans had fallen to C3.10 )$ .ecem)er 31> 200*.
4f the followin' Bournal entries> the one which would properl$ reflect in 200* the effect of
the commitment of &eese !o. to purchase the 100>000 pounds of cocoa is
a. !ocoa 3nventor$............................................................. #00>000
2ccounts Pa$a)le............................................... #00>000
). !ocoa 3nventor$............................................................. 310>000
Loss on Purchase !ommitments................................... /0>000
2ccounts Pa$a)le............................................... #00>000
c. 7stimated Loss on Purchase !ommitments................... /0>000
7stimated Lia)ilit$ on Purchase !ommitments... /0>000
d. 9o entr$ would )e necessar$ in 200*
*2. 2K !orporation> a manufacturer of ethnic foods> contracted in 200, to purchase %00
pounds of a spice mi<ture at C%.00 per pound> deliver$ to )e made in sprin' of 200-. H$
12M31M0,> the price per pound of the spice mi<ture had risen to C%.*0 per pound. 3n 200,>
2K should reco'ni(e
a. a loss of C2>%00.
). a loss of C300.
c. no 'ain or loss.
d. a 'ain of C300.
*3. .T !orporation> a manufacturer of "e<ican foods> contracted in 200, to purchase 1>000
pounds of a spice mi<ture at C%.00 per pound> deliver$ to )e made in sprin' of 200-. H$
12M31M0,> the price per pound of the spice mi<ture had dropped to C#.*0 per pound. 3n
200,> .T should reco'ni(e
a a loss of C%>000.
). a loss of C#00.
c. no 'ain or loss.
d. a 'ain of C#00.
9 - ;4
*#. The followin' information is availa)le for 4cto)er for Kordan !ompan$.
He'innin' inventor$ C %0>000
9et purchases 1%0>000
9et sales 300>000
Percenta'e markup on cost **.*,I
2 fire destro$ed Kordan@s 4cto)er 31 inventor$> leavin' undama'ed inventor$ with a cost
of C3>000. Lsin' the 'ross profit method> the estimated endin' inventor$ destro$ed )$ fire
is
a. C1,>000.
). C,,>000.
c. C-0>000.
d. C100>000.
*%. The followin' information is availa)le for 4cto)er for Gorton !ompan$.
He'innin' inventor$ C100>000
9et purchases 300>000
9et sales *00>000
Percenta'e markup on cost **.*,I
2 fire destro$ed Gorton@s 4cto)er 31 inventor$> leavin' undama'ed inventor$ with a cost
of C*>000. Lsin' the 'ross profit method> the estimated endin' inventor$ destro$ed )$ fire
is
a. C3#>000.
). C1%#>000.
c. C1*0>000.
d. C200>000.
Lse the followin' information for ;uestions ** and *,.
8loan !ompan$> a wholesaler> )ud'eted the followin' sales for the indicated months=
Kune Kul$ 2u'ust
8ales on account C1>-00>000 C1>-#0>000 C1>/00>000
!ash sales 1-0>000 200>000 2*0>000
Total sales C1>/-0>000 C2>0#0>000 C2>1*0>000
2ll merchandise is marked up to sell at its invoice cost plus 20I. "erchandise inventories at the
)e'innin' of each month are at 30I of that monthDs proBected cost of 'oods sold.
**. The cost of 'oods sold for the month of Kune is anticipated to )e
a. C1>##0>000.
). C1>%00>000.
c. C1>%20>000.
d. C1>*%0>000.
*,. "erchandise purchases for Kul$ are anticipated to )e
a. C1>*32>000.
). C2>0,*>000.
c. C1>,00>000.
d. C1>,30>000.
9 - ;<
*-. 1ome( !ompan$ had a 'ross profit of C3*0>000> total purchases of C#20>000> and an
endin' inventor$ of C2#0>000 in its first $ear of operations as a retailer. 1ome(@s sales in
its first $ear must have )een
a. C%#0>000.
). C**0>000.
c. C1-0>000.
d. C*00>000.
*/. 2 markup of #0I on cost is e;uivalent to what markup on sellin' priceA
a. 2/I
). #0I
c. *0I
d. ,1I
,0. "iller> 3nc. estimates the cost of its ph$sical inventor$ at "arch 31 for use in an interim
financial statement. The rate of markup on cost is 2%I. The followin' account )alances
are availa)le=
3nventor$> "arch 1 C220>000
Purchases 1,2>000
Purchase returns ->000
8ales durin' "arch 300>000
The estimate of the cost of inventor$ at "arch 31 would )e
a. C-#>000.
). C1##>000.
c. C1%/>000.
d. C112>000.
,1. 4n Kanuar$ 1> 200,> the merchandise inventor$ of !olaw> 3nc. was C-00>000. .urin' 200,
!olaw purchased C1>*00>000 of merchandise and recorded sales of C2>000>000. The
'ross profit rate on these sales was 2%I. What is the merchandise inventor$ of !olaw at
.ecem)er 31> 200,A
a. C#00>000.
). C%00>000.
c. C/00>000.
d. C1>%00>000.
,2. For 200,> cost of 'oods availa)le for sale for +ale !orporation was C/00>000. The 'ross
profit rate was 20I. 8ales for the $ear were C-00>000. What was the amount of the
endin' inventor$A
a. C0.
). C2*0>000.
c. C1-0>000.
d. C1*0>000.
,3. 4n 2pril 1% of the current $ear> a fire destro$ed the entire uninsured inventor$ of a retail
store. The followin' data are availa)le=
8ales> Kanuar$ 1 throu'h 2pril 1% C300>000
3nventor$> Kanuar$ 1 %0>000
Purchases> Kanuar$ 1 throu'h 2pril 1% 2%0>000
"arkup on cost 2%I
9 - ;=
The amount of the inventor$ loss is estimated to )e
a. C*0>000.
). C30>000.
c. C,%>000.
d. C%0>000.
,#. The inventor$ account of Lance !ompan$ at .ecem)er 31> 200,> included the followin'
items=
3nventor$ 2mount
"erchandise out on consi'nment at sales price
Eincludin' markup of #0I on sellin' priceF C1%>000
1oods purchased> in transit Eshipped f.o.). shippin' pointF 12>000
1oods held on consi'nment )$ Lance 13>000
1oods out on approval Esales price C,>*00> cost C*>#00F ,>*00
Hased on the a)ove information> the inventor$ account at .ecem)er 31> 200,> should )e
reduced )$
a. C20>200.
). C22>*00.
c. C32>200.
d. C32>000.
,%. Fl$nn 8ales !ompan$ uses the retail inventor$ method to value its merchandise inventor$.
The followin' information is availa)le for the current $ear=
!ost &etail
He'innin' inventor$ C 30>000 C %0>000
Purchases 1#%>000 200>000
Frei'ht-in 2>%00 N
9et markups N ->%00
9et markdowns N 10>000
7mplo$ee discounts N 1>000
8ales N 20%>000
3f the endin' inventor$ is to )e valued at the lower-of-cost-or-market> what is the cost to
retail ratioA
a. C1,,>%00 O C2%0>000
). C1,,>%00 O C2%->%00
c. C1,%>000 O C2*0>000
d. C1,,>%00 O C2#->%00
Lse the followin' information for ;uestions ,* throu'h -0.
The followin' data concernin' the retail inventor$ method are taken from the financial records of
8tone !ompan$.
!ost &etail
He'innin' inventor$ C #/>000 C ,0>000
Purchases 22#>000 320>000
Frei'ht-in *>000 N
9et markups N 20>000
9et markdowns N 1#>000
8ales N 33*>000
9 - ;>
,*. The endin' inventor$ at retail should )e
a. C,#>000.
). C*0>000.
c. C*#>000.
d. C#2>000.
,,. 3f the endin' inventor$ is to )e valued at appro<imatel$ the lower of cost or market> the
calculation of the cost to retail ratio should )e )ased on 'oods availa)le for sale at E1F cost
and E2F retail> respectivel$ of
a. C2,/>000 and C#10>000.
). C2,/>000 and C3/*>000.
c. C2,/>000 and C3/0>000.
d. C2,3>000 and C3/0>000.
,-. 3f the fore'oin' fi'ures are verified and a count of the endin' inventor$ reveals that
merchandise actuall$ on hand amounts to C%#>000 at retail> the )usiness has
a. reali(ed a windfall 'ain.
). sustained a loss.
c. no 'ain or loss as there is close coincidence of the inventories.
d. none of these.
:,/. 2ssumin' no chan'e in the price level if the L3F4 inventor$ method were used in
conBunction with the data> the endin' inventor$ at cost would )e
a. C#2>*00.
). C#2>000.
c. C#0>-00.
d. C#3>200.
:-0. 2ssumin' that the L3F4 inventor$ method were used in conBunction with the data and that
the inventor$ at retail had increased durin' the period> then the computation of retail in the
cost to retail ratio would
a. e<clude )oth markups and markdowns and include )e'innin' inventor$.
). include markups and e<clude )oth markdowns and )e'innin' inventor$.
c. include )oth markups and markdowns and e<clude )e'innin' inventor$.
d. e<clude markups and include )oth markdowns and )e'innin' inventor$.
-1. 1ooch !orporation had the followin' amounts> all at retail=
He'innin' inventor$ C 3>*00 Purchases C120>000
Purchase returns *>000 9et markups 1->000
2)normal shorta'e #>000 9et markdowns 2>-00
8ales ,2>000 8ales returns 1>-00
7mplo$ee discounts 1>*00 9ormal shorta'e 2>*00
What is 1ooch@s endin' inventor$ at retailA
a. C%#>#00.
). C%*>000.
c. C%,>*00.
d. C%->#00
9 - ;?
-2. .r$er !orporation had the followin' amounts> all at retail=
He'innin' inventor$ C 3>*00 Purchases C100>000
Purchase returns *>000 9et markups 1->000
2)normal shorta'e #>000 9et markdowns 2>-00
8ales ,2>000 8ales returns 1>-00
7mplo$ee discounts 1>*00 9ormal shorta'e 2>*00
What is .r$er@s endin' inventor$ at retailA
a. C3#>#00.
). C3*>000.
c. C3,>*00.
d. C3->#00
-3. .$e !orporation@s computation of cost of 'oods sold is=
He'innin' inventor$ C *0>000
2dd= !ost of 'oods purchased #0%>000
!ost of 'oods availa)le for sale #*%>000
7ndin' inventor$ /0>000
!ost of 'oods sold C3,%>000
The avera'e da$s to sell inventor$ for .$e are
a. %-.# da$s.
). *,.* da$s.
c. ,3.0 da$s.
d. -,.* da$s.
-#. 2ce !orporation@s computation of cost of 'oods sold is=
He'innin' inventor$ C *0>000
2dd= !ost of 'oods purchased #0%>000
!ost of 'oods availa)le for sale #*%>000
7ndin' inventor$ -0>000
!ost of 'oods sold C3-%>000
The avera'e da$s to sell inventor$ for 2ce are
a. %*./ da$s.
). *3.1 da$s.
c. **.# da$s.
d. ,%.- da$s.
-%. The 200, financial statements of Wert !ompan$ reported a )e'innin' inventor$ of
C-0>000> an endin' inventor$ of C120>000> and cost of 'oods sold of C*00>000 for the
$ear. Wert@s inventor$ turnover ratio for 200, is
a. ,.% times.
). *.0 times.
c. %.0 times.
d. #.3 times.
9 - ;9
Lse the followin' information for ;uestions -* throu'h /0.
Trent !o. uses the retail inventor$ method. The followin' information is availa)le for the current
$ear.
!ost &etail
He'innin' inventor$ C ,->000 C122>000
Purchases 2/%>000 #1%>000
Frei'ht-in %>000 N
7mplo$ee discounts N 2>000
9et markups N 1%>000
9et "arkdowns N 20>000
8ales N 3/0>000
-*. 3f the endin' inventor$ is to )e valued at appro<imatel$ lower of avera'e cost or market>
the calculation of the cost ratio should )e )ased on cost and retail of
a. C300>000 and C#30>000.
). C300>000 and C#2->000.
c. C3,3>000 and C%%0>000.
d. C3,->000 and C%%2>000.
-,. The endin' inventor$ at retail should )e
a. C1*0>000.
). C1%0>000.
c. C1##>000.
d. C1#0>000.
--. The appro<imate cost of the endin' inventor$ )$ the conventional retail method is
a. C/%>/00.
). C/#>/20.
c. C/->000.
d. C102>#-0.
:-/. 3f the endin' inventor$ is to )e valued at appro<imatel$ L3F4 cost> the calculation of the
cost ratio should )e )ased on cost and retail of
a. C3,->000 and C%%2>000.
). C3,->000 and C%32>000.
c. C300>000 and C#10>000.
d. C300>000 and C#30>000.
:/0. 2ssumin' that the L3F4 inventor$ method is used> that the )e'innin' inventor$ is the )ase
inventor$ when the inde< was 100> and that the inde< at $ear end is 112> the endin'
inventor$ at dollar-value L3F4 retail cost is
a. C-0>#*0.
). C/2>,%,.
c. C/%>/00.
d. C102>#-0.
9 - /@
Lse the followin' information for ;uestions /1 and /2.
Haker !ompan$> which uses the retail L3F4 method to determine inventor$ cost> has provided the
followin' information for 200,=
!ost &etail
3nventor$> 1M1M0, C /#>000 C1#0>000
9et purchases 3,->000 %*2>000
9et markups *->000
9et markdowns 30>000
9et sales %30>000
:/1. 2ssumin' sta)le prices Eno chan'e in the price inde< durin' 200,F> what is the cost of
HakerDs inventor$ at .ecem)er 31> 200,A
a. C12->100.
). C13->100.
c. C13*>000.
d. C132>300.
:/2. 2ssumin' that the price inde< was 10% at .ecem)er 31> 200, and 100 at Kanuar$ 1>
200,> what is the cost of HakerDs inventor$ at .ecem)er 31> 200, under the dollar-value-
L3F4 retail methodA
a. C133>*/0.
). C13->/1%.
c. C1#0>30%.
d. C131>-00.
$ult#ple C,o#ce Anse!sCo(putat#onal
%3. a %/. ) *%. a ,1. c ,,. a -3. c :-/. c
%#. ) *0. c **. d ,2. ) ,-. ) -#. c :/0. a
%%. ) *1. c *,. d ,3. a :,/. ) -%. ) :/1. )
%*. c *2. c *-. a ,#. a :-0. c -*. d :/2. a
%,. c *3. ) */. a ,%. ) -1. a -,. d
%-. ) *#. a ,0. ) ,*. ) -2. a --. a
9 - /;
$ULTIPLE CHOICECPA A)apte)
/3. Teel .istri)ution !o. has determined its .ecem)er 31> 200, inventor$ on a F3F4 )asis at
C2%0>000. 3nformation pertainin' to that inventor$ follows=
7stimated sellin' price C2%%>000
7stimated cost of disposal 10>000
9ormal profit mar'in 30>000
!urrent replacement cost 22%>000
Teel records losses that result from appl$in' the lower-of-cost-or-market rule. 2t .ecem)er
31> 200,> the loss that Teel should reco'ni(e is
a. C0.
). C%>000.
c. C20>000.
d. C2%>000.
/#. Lnder the lower-of-cost-or-market method> the replacement cost of an inventor$ item
would )e used as the desi'nated market value
a. when it is )elow the net reali(a)le value less the normal profit mar'in.
). when it is )elow the net reali(a)le value and a)ove the net reali(a)le value less the
normal profit mar'in.
c. when it is a)ove the net reali(a)le value.
d. re'ardless of net reali(a)le value.
/%. The ori'inal cost of an inventor$ item is a)ove the replacement cost and the net reali(a)le
value. The replacement cost is )elow the net reali(a)le value less the normal profit
mar'in. 2s a result> under the lower-of-cost-or-market method> the inventor$ item should
)e reported at the
a. net reali(a)le value.
). net reali(a)le value less the normal profit mar'in.
c. replacement cost.
d. ori'inal cost.
/*. 1ore !ompan$Ds accountin' records indicated the followin' information=
3nventor$> 1M1M0, C *00>000
Purchases durin' 200, 3>000>000
8ales durin' 200, 3>-00>000
2 ph$sical inventor$ taken on .ecem)er 31> 200,> resulted in an endin' inventor$ of
C,00>000. 1oreDs 'ross profit on sales has remained constant at 2%I in recent $ears.
1ore suspects some inventor$ ma$ have )een taken )$ a new emplo$ee. 2t .ecem)er
31> 200,> what is the estimated cost of missin' inventor$A
a. C%0>000.
). C1%0>000.
c. C200>000.
d. C2%0>000.
9 - //
/,. 7aton !o. uses the retail inventor$ method to estimate its inventor$ for interim statement
purposes. .ata relatin' to the computation of the inventor$ at Kul$ 31> 200,> are as
follows=
!ost &etail
3nventor$> 2M1M0, C 200>000 C 2%0>000
Purchases 1>000>000 1>%,%>000
"arkups> net 1,%>000
8ales 1>,%0>000
7stimated normal shopliftin' losses 20>000
"arkdowns> net 110>000
Lnder the lower-of-cost-or-market method> 7atonDs estimated inventor$ at Kul$ 31> 200, is
a. C,2>000.
). C-#>000.
c. C/*>000.
d. C120>000.
/-. 2t .ecem)er 31> 200,> the followin' information was availa)le from .ole !o.Ds accountin'
records=
!ost &etail
3nventor$> 1M1M0, C1#,>000 C 203>000
Purchases -33>000 1>1%%>000
2dditional markups #2>000
2vaila)le for sale C/-0>000 C1>#00>000
8ales for the $ear totaled C1>0%0>000. "arkdowns amounted to C10>000. Lnder the lower-
of-cost-or-market method> .oleDs inventor$ at .ecem)er 31> 200, was
a. C2/#>000.
). C2#%>000.
c. C2%2>000.
d. C23->000.
://. 4n .ecem)er 31> 200*> Lill$ !o. adopted the dollar-value L3F4 retail inventor$ method.
3nventor$ data for 200, are as follows=
L3F4 !ost &etail
3nventor$> 12M31M0* C300>000 C#20>000
3nventor$> 12M31M0, A %%0>000
3ncrease in price level for 200, 10I
!ost to retail ratio for 200, ,0I
Lnder the L3F4 retail method> Lill$Ds inventor$ at .ecem)er 31> 200,> should )e
a. C3*1>*00.
). C3-%>000.
c. C3/1>000.
d C#00>100.
$ult#ple C,o#ce Anse!sCPA A)apte)
/3. d /#. ) /%. ) /*. a /,. a /-. d ://. a
9 - /1
DERIVATIONS Co(putat#onal
No" Anse! De!#:at#on
%3. a Product 1= &! ? C#%> 9&+ ? C-0 P C10 ? C,0
9&+ P P" ? C,0 P EC-0 Q .3F ? C#*> cost ? C#0.
Product 2= &! ? C%#> 9&+ ? C130 P C2* ? C10#
9&+ P P" ? C10# P EC130 Q .3F ? C*%> cost ? C,0.
%#. ) 9&+ ? C20 P C# ? C1*> &! ? C1,
9&+ P P" ? C1* P EC20 Q .#0F ? C-> cost ? C1-.
%%. ) 9&+ ? C#0 P C- ? C32> &! ? C3#
9&+ P P" ? C32 P EC#0 Q .#0F ? C1*> cost ? C3*.
%*. c C*00>000 P C10>000 ? C%/0>000.
%,. c C3%0>000 P C%>000 ? C3#%>000.
%-. ) LF 3>000 Q C1% ? EC#%>000 O C-0>000F Q C%0>000 ? C2->12%
1H ,>000 Q C% ? C3%>000R C3%>000 S C#%>000 ? C-0>000
E1>000 Q C1%F P EC2->12% Q 1>000M3>000F ? C%>*2%.
%/. ) !F 3>000 Q C12 ? EC3*>000 O C*#>000F Q C#0>000 ? C22>%00
3H ,>000 Q C# ? C2->000R C2->000 S C3*>000 ? C*#>000
E1>000 Q C12F P EC22>%00 Q 1>000M3>000F ? C#>%00.
*0. c 3tem J of 3tems Q Price
" #>000 Q C2.%0 ?10>000 10 O %0 Q C#->000 ? C/>*00 O #>000 ? C2.#0
9 2>000 Q C-.00 ?1*>000 1* O %0 Q C#->000 ? C1%>3*0 O 2>000 ? C,.*-
4 *>000 Q C#.00 ?2#>000 2# O %0 Q C#->000 ? C23>0#0 O *>000 ? C3.-#
%0>000
*1. c EC#.00 P C3.10F Q 100>000 ? C/0>000.
*2. c 9o 'ain or loss since 12M31 price EC%.*0F T contract price EC%>00F.
*3. ) EC%.00 P C#.*0F Q 1>000 ? C#00.
*#. a EC%0>000 S C1%0>000F P EC300>000 O %M3F P C3>000 ? C1,>000.
*%. a EC100>000 S C300>000F P EC*00>000 O %M3F P C*>000 ? C3#>000.
**. d E1 S .2F! ? 1>/-0>000R ! ? C1>*%0>000.
*,. d !418= Kul$ ? C2>0#0>000 O 1.2 ? C1>,00>000
2u'. ? C2>1*0>000 O 1.2 ? C1>-00>000
Kul$Ds purchase ? EC1>,00>000 Q .,F S EC1>-00>000 Q .3F ? C1>,30>000.
*-. a C3*0>000 S EC#20>000 P C2#0>000F ? C%#0>000.
9 - /4
DERIVATIONS Co(putat#onal Econt.F
.#0
*/. a NNNN ? .2/ ? 2/I.
1 S .#0
,0. ) !418 ? C300>000 O 1.2% ? C2#0>000
EC220>000 S C1,2>000 P C->000F P C2#0>000 ? C1##>000.
,1. c !418 ? C2>000>000 Q .,% ? C1>%00>000
C-00>000 S C1>*00>000 P C1>%00>000 ? C/00>000.
,2. ) C/00>000 P EC-00>000 Q .-0F ? C2*0>000.
C300>000
,3. a C%0>000 S C2%0>000 P NNNNN ? C*0>000.
1.2%
,#. a EC1%>000 Q #0IF S C13>000 S EC,>*00 P C*>#00F ? C20>200.
,%. ) !ost= C30>000 S C1#%>000 S C2>%00 ? C1,,>%00.
&etail= C%0>000 S C200>000 S C->%00 ? C2%->%00.
,*. ) C,0>000 S C320>000 S C20>000 P C1#>000 P C33*>000 ? C*0>000.
,,. a !ost= C#/>000 S C22#>000 S C*>000 ? C2,/>000.
&etail= C,0>000 S C320>000 S C20>000 ? C#10>000.
,-. ) !onceptual.
C#/>000
:,/. ) NNNN Q C*0>000 ? C#2>000.
C,0>000
:-0. c !onceptual.
-1. a C3>*00 S C11#>000 S C1->000 P C#>000 P C,0>200 P C1>*00 P C2>-00 P C2>*00
? C%#>#00.
-2. a C3>*00 S C/#>000 S C1->000 P C#>000 P C,0>200 P C1>*00 P C2>-00 P C2>*00
? C3#>#00.
-3. c C3,%>000 O UEC*0>000 S C/0>000F O 2V ? %R 3*% O % ? ,3.0.
-#. c C3-%>000 O UEC*0>000 S C-0>000F O 2V ? %.%R 3*% O %.% ? **.#.
-%. ) C*00>000 O UEC-0>000 S C120>000F O 2V ? * times
-*. d !ost= C,->000 S C2/%>000 S C%>000 ? C3,->000.
&etail= C122>000 S C#1%>000 S C1%>000 ? C%%2>000.
-,. d C122>000 S C#1%>000 P C2>000 S C1%>000 P C20>000 P C3/0>000 ? C1#0>000.
9 - /<
DERIVATIONS Co(putat#onal Econt.F
--. a C1#0>000 Q .*-% ? C/%>/00.
:-/. c !ost= C2/%>000 S C%>000 ? C300>000.
&etail= C#1%>000 S C1%>000 P C20>000 ? C#10>000.
C1#0>000
:/0. a Hase $ear price ? 73 ? NNNNN ? C12%>000
1.12
C122>000 W cost ? C,->000
C3>000 Q .,32: Q 1.12 ? 2>#*0
C-0>#*0
C300>000
: NNNNN ? .,32
C#10>000
:/1. ) !ost to retail ratio ? C3,->000 O EC%*2>000 S C*->000 P C30>000F ? 0.*3
73 ? C1#0>000 S C%*2>000 S C*->000 P C30>000 P C%30>000
? C210>000 at retail
C210>000 P C1#0>000 ? C,0>000
!ost of inventor$ ? C/#>000 S EC,0>000 Q .*3F ? C13->100.
:/2. a Hase $ear price= 73 ? C210>000 O 1.0% ? C200>000
C1#0>000 W cost ? C /#>000
*0>000 Q .*3 Q 1.0% ? 3/>*/0
C200>000 C133>*/0
DERIVATIONS CPA A)apte)
/3. d C2%0>000 P C22%>000 E&!F ? C2%>000.
/#. ) !onceptual.
/%. ) !onceptual.
/*. a C3>-00>000 Q .,% ? C2>-%0>000 E!418F
C*00>000 S C3>000>000 P C2>-%0>000 P C,00>000 ? C%0>000.
/,. a EC200>000 S C1>000>000F O EC2%0>000 S C1>%,%>000 S C1,%>000F ? 0.*
EC2%0>000 S C1>%,%>000 S C1,%>000 P C20>000 P C110>000 P
C1>,%0>000F Q 0.* ? C,2>000.
/-. d C/-0>000 O C1>#00>000 ? 0.,
EC1>#00>000 P C10>000 P C1>0%0>000F Q 0., ? C23->000.
://. a C%%0>000 O 1.1 ? C%00>000
C300>000 S EC-0>000 Q 1.1 Q .,F ? C3*1>*00.
9 - /=
E0ERCISES
EA" 9-;@@NLower-of-cost-or-market.
.etermine the proper unit inventor$ price in the followin' independent cases )$ appl$in' the
lower of cost or market rule. !ircle $our choice.
1 2 3 # %
!ost C-.00 C10.%0 C12.00 C*.00 C,.20
9et reali(a)le value -.-% 10.00 12.20 #.2% *./0
9et reali(a)le value less normal profit -.1% /.00 11.#0 3.,% *.00
"arket replacement cost ,./0 10.10 12.%0 #.00 %.#0
Solut#on 9-;@@
!ase 1 C -.00 !ase # C#.00
!ase 2 C10.00 !ase % C*.00
!ase 3 C12.00
EA" 9-;@;NLower-of-cost-or-market.
.etermine the unit value that should )e used for inventor$ costin' followin' 6lower of cost or
market value6 as descri)ed in 2&H 9o. #3.
2 H ! . 7 F
!ost C2.3% C2.#- C2.2% C2.%# C2.3# C2.#3
&eplacement cost 2.2* 2.%% 2.20 2.%2 2.32 2.#*
9et reali(a)le value 2.%0 2.%0 2.%0 2.%0 2.%0 2.%0
9et reali(a)le value less normal profit 2.30 2.30 2.30 2.30 2.30 2.30
Solut#on 9-;@;
!ase 2 C2.30 !ase . C2.%0
!ase H C2.#- !ase 7 C2.32
!ase ! C2.2% !ase F C2.#3
EA" 9-;@/NLower-of-cost-or-market.
2ssume in each case that the sellin' e<penses are C- per unit and that the normal profit is C% per
unit. !alculate the limits for each case. Then enter the amount that should )e used for lower of
cost or market.
8ellin' &eplacement
Price Lpper Limit !ost Lower Limit !ost L!"
EaF C%# CXXXXXX C3- CXXXXXX C#3 CXXXXXX
E)F #, XXXXXX 3* XXXXXX #0 XXXXXX
EcF %* XXXXXX 3/ XXXXXX #0 XXXXXX
EdF #, XXXXXX #2 XXXXXX #0 XXXXXX
9 - />
Solut#on 9-;@/
Lpper Limit Lower Limit L!"
EaF C#* C#1 C#1
E)F 3/ 3# 3*
EcF #- #3 #0
EdF 3/ 3# 3/
EA" 9-;@1NLower-of-cost-or-market.
The .ecem)er 31> 200, inventor$ of .w$er !ompan$ consisted of four products> for which
certain information is provided )elow.
&eplacement 7stimated 7<pected 9ormal Profit
Product 4ri'inal !ost !ost .isposal !ost 8ellin' Price on 8ales
2 C2%.00 C22.00 C*.%0 C#0.00 20I
H C#2.00 C#0.00 C12.00 C#-.00 2%I
! C120.00 C11%.00 C2%.00 C1/0.00 30I
. C1-.00 C1%.-0 C3.00 C2*.00 10I
Inst!uct#ons
Lsin' the lower-of-cost-or-market approach applied on an individual-item )asis> compute the
inventor$ valuation that should )e reported for each product on .ecem)er 31> 200,.
Solut#on 9-;@1
Lower-of-
.esi'nated !ost-or-
Product !eilin' Floor "arket !ost "arket
2 C#0.00 P C*.%0 C33.%0 P C-.00
? C33.%0 ? C2%.%0 C2%.%0 C2%.00 C2%.00
H C#-.00 P C12.00 C3*.00 P C12.00
? C3*.00 ? C2#.00 C3*.00 C#2.00 C3*.00
! C1/0.00 P C2%.00 C1*%.00 P C%,.00
? C1*%.00 ? C10-.00 C11%.00 C120.00 C11%.00
. C2*.00 P C3.00 C23.00 P C2.*0
? C23.00 ? C20.#0 C20.#0 C1-.00 C1-.00
EA" 9-;@4NLower-of-cost-or-market.
2t 12M31M0*> the end of Feene$ !ompan$Ds first $ear of )usiness> inventor$ was C#>100 and
C2>-00 at cost and at market> respectivel$.
Followin' is data relative to the 12M31M0, inventor$ of Feene$=
9 - /?
EA" 9-;@4 EcontF.
4ri'inal 9et 9et &eali(a)le 2ppropriate
!ost &eplacement &eali(a)le +alue Less 3nventor$
3tem Per Lnit !ost +alue 9ormal Profit +alue
2 C .*% C .#%
H .#% .#0
! .,0 .,%
. .,% .*%
7 ./0 .-%
8ellin' price is C1.00Munit for all items. .isposal costs amount to 10I of sellin' price and a
6normal6 profit is 30I of sellin' price. There are 1>000 units of each item in the 12M31M0,
inventor$.
Inst!uct#ons
EaF Prepare the entr$ at 12M31M0* necessar$ to implement the lower-of-cost-or-market procedure
assumin' Feene$ uses a contra account for its )alance sheet.
E)F !omplete the last three columns in the 12M31M0, schedule a)ove )ased upon the lower-of-
cost-or-market rules.
EcF Prepare the entr$EiesF necessar$ at 12M31M0, )ased on the data a)ove.
EdF Gow are inventor$ losses disclosed on the income statementA
Solut#on 9-;@4
EaF Loss .ue to "arket .ecline of 3nventor$................................... 1>300
2llowance to &educe 3nventor$ to "arket...................... 1>300
E)F 4ri'inal 9et 9et &eali(a)le 2ppropriate
!ost &eplacement &eali(a)le +alue Less 3nventor$
3tem Per Lnit !ost +alue 9ormal Profit +alue
2 C .*% C .#% C ./0 C .*0 C .*0
H .#% .#0 ./0 .*0 .#%
! .,0 .,% ./0 .*0 .,0
. .,% .*% ./0 .*0 .*%
7 ./0 .-% ./0 .*0 .-%
C3.#% C3.2%:
:C3.2% Q 1>000 ? C3>2%0
EcF 2llowance to &educe 3nventor$ to "arket.................................. 1>300
!ost of 1oods 8old........................................................ 1>300
Loss .ue to "arket .ecline of 3nventor$................................... 200
2llowance to &educe 3nventor$ to "arket...................... 200
E!ost of inventor$ at 12M31M0, ? C,>2%0F
4&
2 student can record a recover$ of C1>100.
EdF 3nventor$ losses can )e disclosed separatel$ E)elow 'ross profit in operatin' e<pensesF or
the$ can )e shown as part of cost of 'oods sold.
9 - /9
EA" 9-;@< P &elative sales value method.
2dler &ealt$ !ompan$ purchased a plot of 'round for C-00>000 and spent C2>100>000 in
developin' it for )uildin' lots. The lots were classified into Gi'hland> "idland> and Lowland
'rades> to sell at C100>000> C,%>000> and C%0>000 each> respectivel$.
Inst!uct#ons
!omplete the ta)le )elow to allocate the cost of the lots usin' a relative sales value method.
9o. of 8ellin' Total I of 2pportioned !ost
1rade Lots Price &evenue Total 8ales Total Per Lot
Gi'hland 20 C C C C
"idland #0 C C
Lowland 100 C C
1*0 C C
Solut#on 9-;@<
9o. of 8ellin' Total I of 2pportioned !ost
1rade Lots Price &evenue Total 8ales Total Per Lot
Gi'hland 20 C100>000 C 2>000>000 20I C %-0>000 C2/>000
"idland #0 C,%>000 3>000>000 30I -,0>000 C21>,%0
Lowland 100 C%0>000 %>000>000 %0I 1>#%0>000 C1#>%00
1*0 C10>000>000 C2>/00>000
EA" 9-;@=N1ross profit method.
2n inventor$ taken the mornin' after a lar'e theft discloses C*0>000 of 'oods on hand as of
"arch 12. The followin' additional data is availa)le from the )ooks=
3nventor$ on hand> "arch 1 C -#>000
Purchases received> "arch 1 P 11 *3>000
8ales E'oods delivered to customersF 120>000
Past records indicate that sales are made at %0I a)ove cost.
Inst!uct#ons
7stimate the inventor$ of 'oods on hand at the close of )usiness on "arch 11 )$ the 'ross profit
method and determine the amount of the theft loss. 8how appropriate titles for all amounts in
$our presentation.
Solut#on 9-;@=
He'innin' 3nventor$ C -#>000
Purchases *3>000
1oods 2vaila)le 1#,>000
1oods 8old EC120>000 O 1%0IF -0>000
7stimated 7ndin' 3nventor$ *,>000
Ph$sical 3nventor$ *0>000
Theft Loss C ,>000
9 - 1@
EA" 9-;@>N1ross profit method.
4n Kanuar$ 1> a store had inventor$ of C#->000. Kanuar$ purchases were C#*>000 and Kanuar$
sales were C/0>000. 4n Fe)ruar$ 1 a fire destro$ed most of the inventor$. The rate of 'ross profit
was 2%I of cost. "erchandise with a sellin' price of C%>000 remained undama'ed after the fire.
!ompute the amount of the fire loss> assumin' the store had no insurance covera'e. La)el all
fi'ures.
Solut#on 9-;@>
He'innin' 3nventor$ C #->000
Purchases #*>000
1oods availa)le /#>000
!ost of sale EC/0>000 O 12%IF E,2>000F
7stimated endin' inventor$ 22>000
!ost of undama'ed inventor$ EC%>000 O 12%IF E#>000F
7stimated fire loss C1->000
EA" 9-;@?N1ross profit method.
&eese !o. prepares monthl$ income statements. 3nventor$ is counted onl$ at $ear endR thus>
month-end inventories must )e estimated. 2ll sales are made on account. The rate of mark-up on
cost is 20I. The followin' information relates to the month of "a$.
2ccounts receiva)le> "a$ 1 C21>000
2ccounts receiva)le> "a$ 31 2,>000
!ollections of accounts durin' "a$ /0>000
3nventor$> "a$ 1 #%>000
Purchases durin' "a$ %->000
Inst!uct#ons
!alculate the estimated cost of the inventor$ on "a$ 31.
Solut#on 9-;@?
!ollections of accounts C /0>000
2dd accounts receiva)le> "a$ 31 2,>000
.educt accounts receiva)le> "a$ 1 E21>000F
8ales durin' "a$ C /*>000
3nventor$> "a$ 1 C #%>000
Purchases durin' "a$ %->000
1oods availa)le 103>000
!ost of sales EC/*>000 O 120IF E-0>000F
7stimated cost of inventor$> "a$ 31 C 23>000
9 - 1;
EA" 9-;@9N!omparison of inventor$ methods.
3n the cases cited )elow> five different conditions are possi)le when Y is compared with Z. These
possi)ilities are as follows=
a. Y e;uals Z d. Y is e;ual to or 'reater than Z
). Y is 'reater than Z e. Y is e;ual to or less than Z
c. Y is less than Z
Inst!uct#ons
3n the space provided show the relationship of Y and Z for each of the followin' independent
statements.
XXXXX 1. 6!ost or market> whichever is lower>6 ma$ )e applied to E1F the inventor$ as a whole or
to E2F cate'ories of inventor$ items. !ompare EYF the reported value of inventor$
when procedure E1F is used with EZF the reported value of inventor$ when procedure
E2F is used.
XXXXX 2. Prices have )een risin' steadil$. Ph$sical turnover of 'oods has occurred appro<i-
matel$ # times in the last $ear. !ompare EYF the endin' inventor$ computed )$ L3F4
method with EZF the same endin' inventor$ computed )$ the movin' avera'e method.
XXXXX 3. The retail inventor$ method has )een used )$ a store durin' its first $ear of operation.
!ompare EYF markdown cancellations with EZF markdowns.
XXXXX #. Prices have )een risin' steadil$. 2t the )e'innin' of the $ear a compan$ adopted a
new inventor$ methodR the ph$sical ;uantit$ of the endin' inventor$ is the same as
that of the )e'innin' inventor$. !ompare EYF the reported value of inventor$ if L3F4
was the new method with EZF the reported value of inventor$ if F3F4 was the new
method.
XXXXX %. Prices have )een risin' steadil$. Ph$sical turnover of 'oods has occurred five times in
the last $ear. !ompare EYF unit prices of endin' inventor$ items at movin' avera'e
pricin' with EZF those at wei'hted avera'e pricin'.
Solut#on 9-;@9
1. d 2. c 3. e #. c %. )
9 - 1/
PRO%LE$S
P!" 9-;;@N1ross profit method.
4n .ecem)er 31> 200, !arr !ompan$Ds inventor$ )urned. 8ales and purchases for the $ear had
)een C1>#00>000 and C/-0>000> respectivel$. The )e'innin' inventor$ EKan. 1> 200,F was
C1,0>000R in the past !arrDs 'ross profit has avera'ed #0I of sellin' price.
Inst!uct#ons
!ompute the estimated cost of inventor$ )urned> and 'ive entries as of .ecem)er 31> 200, to
close merchandise accounts.
Solut#on 9-;;@
He'innin' inventor$ C 1,0>000
2dd= Purchases /-0>000
!ost of 'oods availa)le 1>1%0>000
8ales C1>#00>000
Less #0I E%*0>000F -#0>000
7stimated inventor$ lost C 310>000
8ales............................................................................................... 1>#00 000
3ncome 8ummar$................................................................. 1>#00>000
!ost of 1oods 8old......................................................................... -#0>000
Fire Loss......................................................................................... 310>000
3nventor$.............................................................................. 1,0>000
Purchases............................................................................ /-0>000
P!" 9-;;;N&etail inventor$ method.
When $ou undertook the preparation of the financial statements for +ance$ !ompan$ at Kanuar$
31> 200,> the followin' data were availa)le=
2t !ost 2t &etail
3nventor$> Fe)ruar$ 1> 200* C,0>-00 C /->%00
"arkdowns 3%>000
"arkups *3>000
"arkdown cancellations 20>000
"arkup cancellations 10>000
Purchases 21/>%00 2/#>000
8ales 3#%>000
Purchases returns and allowances #>300 %>%00
8ales returns and allowances 10>000
Inst!uct#ons
!ompute the endin' inventor$ at cost as of Kanuar$ 31> 200,> usin' the retail method which
appro<imates lower of cost or market. Zour solution should )e in 'ood form with amounts clearl$
la)eled.
9 - 11
Solut#on 9-;;;
2t !ost 2t &etail
He'innin' inventor$> 2M1M0* C ,0>-00 C /->%00
Purchases C21/>%00 C2/#>000
Less purchase returns #>300 21%>200 %>%00 2-->%00
Totals C2-*>000 3-,>000
2dd markups EnetF %3>000
Totals ##0>000
.educt markdowns EnetF 1%>000
8ales price of 'oods availa)le #2%>000
8ales less sales returns 33%>000
7ndin' inventor$> 1M31M0, at retail C /0>000
7ndin' inventor$ at cost= &atio of cost to retail ?
C2-*>000 O C##0>000 ? *%IR
C/0>000 Q *%I ? C%->%00 C %->%00
5P!" 9-;;/N&etail inventor$ method.
The records of 3rvin 8tores included the followin' data=
3nventor$> "a$ 1> at retail> C1#>%00R at cost> C10>##0
Purchases durin' "a$> at retail> C#2>/00R at cost> C31>%%0
Frei'ht-in> C2>000R purchase discounts> C2%0
2dditional markups> C3>-00R markup cancellations> C#00R net markdowns> C1>300
8ales durin' "a$> C#*>%00
Inst!uct#ons
!alculate the estimated inventor$ at "a$ 31 on a L3F4 )asis. 8how $our calculations in 'ood
form and la)el all amounts.
5Solut#on 9-;;/
!ost &etail &atio
3nventor$> "a$ 1 C10>##0 C1#>%00 .,2
Purchases 31>%%0 #2>/00
Frei'ht-in 2>000
Purchase discounts E2%0F
9et markups 3>#00
9et markdowns E1>300F
Totals e<cludin' )e'innin' inventor$ 33>300 #%>000 .,#
1oods availa)le C#3>,#0 %/>%00
8ales E#*>%00F
3nventor$> "a$ 31 C13>000
7stimated inventor$> "a$ 31 EC13>000 Q .,2F C />3*0
9 - 14
5P!" 9-;;1NL3F4 retail inventor$ method> fluctuatin' prices.
!a)el .epartment 8tore wishes to use the retail L3F4 method of valuin' inventories for 200,.
The appropriate data are as follows=
2t !ost 2t &etail
.ecem)er 31> 200* inventor$ E)ase la$erF C1>1%0>000 C2>100>000
Purchases Enet of returns> allowances> markups> and markdownsF 2>100>000 3>%00>000
8ales 2>-,0>000
Price inde< for 200, 10%
Inst!uct#ons
!omplete the followin' schedule Efill in all )lanks and show calculations in the parenthesesF=
!omputation of &etail 3nventor$ for 200, !ost &etail &atio
3nventor$> .ecem)er 31> 200* C1>1%0>000 C2>100>000
Purchases Enet of returns> allowances>
markups> and markdownsF I
Total availa)le C
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
3nventor$> .ecem)er 31> 200,> at retail C
2dBustment of 3nventor$ to L3F4 Hasis !ost &etail
7ndin' inventor$ at )ase $ear prices C
E F
He'innin' inventor$ at )ase $ear prices C
3ncrease at )ase $ear prices C
3ncrease at 200, retail E F C
3ncrease at 200, cost E F
3nventor$> .ecem)er 31> 200,> at L3F4 cost C
5Solut#on 9-;;1
!omputation of &etail 3nventor$ for 200, !ost &etail &atio
3nventor$> .ecem)er 31> 200* C1>1%0>000 C2>100>000
Purchases Enet of returns> allowances> markups> and
markdownsF 2>100>000 3>%00>000 *0I
Total availa)le C3>2%0>000 %>*00>000
Less= 8ales 2>-,0>000
3nventor$> .ecem)er 31> 200,> at retail C2>,30>000
9 - 1<
5Solut#on 9-;;1 Econt.F
2dBustment of 3nventor$ to L3F4 Hasis !ost &etail
7ndin' inventor$ at )ase $ear prices
EC2>,30>000 O 1.0%F C2>*00>000
He'innin' inventor$ at )ase $ear prices C1>1%0>000 2>100>000
3ncrease at )ase $ear prices C %00>000
3ncrease at 200, retail EC%00>000 Q 1.0%F C %2%>000
3ncrease at 200, cost EC%2%>000 Q *0IF 31%>000
3nventor$> .ecem)er 31> 200, at L3F4 cost C1>#*%>000
5P!" 9-;;4NL3F4 retail inventor$ method> sta)le prices.
"iller +ariet$ 8tore uses the L3F4 retail inventor$ method. 3nformation relatin' to the computation
of the inventor$ at .ecem)er 31> 200,> follows=
!ost &etail
3nventor$> Kanuar$ 1> 200, C13*>000 C220>000
Purchases #-0>000 ,00>000
Frei'ht-in -0>000
8ales ,20>000
9et markups 1*0>000
9et markdowns *0>000
Inst!uct#ons
2ssumin' that there was no chan'e in the price inde< durin' the $ear> compute the inventor$ at
.ecem)er 31> 200,> usin' the L3F4 retail inventor$ method.
5Solut#on 9-;;4
"iller +ariet$ 8tore
L3F4 &etail !omputation
.ecem)er 31> 200,
2t !ost 2t &etail &atio
3nventor$> Kanuar$ 1> 200, C13*>000 C 220>000
Purchases #-0>000 ,00>000
Frei'ht-in -0>000
9et markups 1*0>000
9et markdowns E*0>000F
Total Ee<cludin' )e'innin' inventor$F %*0>000 -00>000 ,0I
Total Eincludin' )e'innin' inventor$F C*/*>000 1>020>000
Less sales ,20>000
3nventor$> .ec. 31> 200,> at retail C 300>000
7ndin' inventor$ C 300>000
He'innin' inventor$ C13*>000 E220>000F
3ncrement C -0>000
3ncrement at cost EC-0>000 Q ,0IF %*>000
7ndin' inventor$ at L3F4 cost C1/2>000
9 - 1=
5P!" 9-;;<N.ollar-value L3F4-retail method.
The records of 7vans 8tores provided the followin' data for the $ear=
!ost &etail
EHase inventor$F 3nventor$> Kanuar$ 1 C1%%>000 C 2%0>000
9et purchases -30>-00 1>31->000
8ales 1>2#0>000
4ther data are= Frei'ht-in> C1#>000R net markups> C->000R net markdowns> C*>000R and the price
inde< for the $ear is 110.
Inst!uct#ons
.etermine the appro<imate valuation of the final inventor$ )$ the dollar-value> L3F4-retail method.
La)el all fi'ures.
!ost &etail &atio
5Solut#on 9-;;<
!ost &etail &atio
3nventor$> Kanuar$ 1 C1%%>000 C 2%0>000
9et purchases -30>-00 1>31->000
Frei'ht-in 1#>000
9et markups ->000
9et markdowns E*>000F
Totals e<cludin' )e'innin' inventor$ -##>-00 1>320>000 .*#
1oods availa)le C///>-00 1>%,0>000
8ales E1>2#0>000F
7ndin' inventor$ C 330>000
7ndin' inventor$ deflated EC330>000 O 1.10F C 300>000
Hase inventor$ C1%%>000 E2%0>000F
La$er added C %0>000
9ew la$er at end of $ear dollars EC%0>000 Q 1.10 Q .*#F 3%>200
7stimated inventor$ at dollar value> L3F4 C1/0>200
5P!" 9-;;=N&etail L3F4.
Gorne Hook 8tore uses the conventional retail method and is now considerin' convertin' to the
L3F4 retail method for the period )e'innin' 1M1M0,. 2vaila)le information consists of the followin'=
200* 200,
!ost &etail !ost &etail
3nventor$ 1M1 C 12>%00 C 22>%00 C A C A
Purchases EnetF 2%0>000 3#,>%00 2#%>000 3#%>000
9et markups N %>000 N 10>000
9et markdowns N 2>%00 N %>000
8ales EnetF N 30/>000 N 311>000
Loss from )reaka'e N %00 N -0-
9 - 1>
2pplica)le price inde< N 100 N 110
5P!" 9-;;= Econt.F
Followin' is a schedule showin' the computation of the cost of inventor$ on hand at 12M31M0*
)ased on the conventional retail method.
!ost &etail &atio
3nventor$ 1M1M0* C 12>%00 C 22>%00
Purchases EnetF 2%0>000 3#,>%00
9et markups N %>000
1oods availa)le C2*2>%00 3,%>000 ,0I
8ales EnetF E30/>000F
9et markdowns E2>%00F
Loss from )reaka'e E%00F
3nventor$ 12M31M0* at retail C *3>000
3nventor$ 12M31M0* at L!" EC*3>000 Q ,0IF C ##>100
Inst!uct#ons
EaF Prepare the Bournal entr$ to convert the inventor$ from the conventional retail to the L3F4
retail method. 8how detailed calculations to support $our entr$.
E)F Prepare a schedule showin' the computation of the 12M31M0, inventor$ )ased on the L3F4
retail method as adBusted for fluctuatin' prices. Without preBudice to $our answer to EaF a)ove>
assume that $ou computed the 1M1M0, inventor$ Eretail value C#/>000F under the L3F4 retail
method at a cost of C3#>000.
5Solut#on 9-;;=
EaF !ost &etail
1oods availa)le C2*2>%00 C3,%>000
Less= He'innin' inventor$ E12>%00F E22>%00F
9et markdowns E2>%00F
!ost to retail C2%0>000 C3%0>000
%M, Q C*3>000 ? C#%>000 P C##>100 ? C/00 adBustment
3nventor$.................................................................................. /00
2dBustment to &ecord 3nventor$ at !ost......................... /00
E)F !ost &etail &atio
3nventor$ C 3#>000 C #/>000
Purchases 2#%>000 3#%>000
9et markups 10>000
9et markdowns E%>000F
Total 2#%>000 3%0>000 ,0I
Total 'oods availa)le C2,/>000 3//>000
8ales E311>000F
7ndin' inventor$ at retailNend of $ear dollars C -->000
7ndin' inventor$ deflated EC-->000 O 1.10F C -0>000
He'innin' C 3#>000 #/>000
La$er added EC31>000 Q 1.10 Q ,0IF 23>-,0 C 31>000
7ndin' inventor$ at cost C %,>-,0
9 - 1?

Ch09 Additional Valuation Issues

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Ch09 Additional Valuation Issues

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CHAPTER 9

INVENTORIES: ADDITIONAL VALUATION ISSUES

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