9 Inventories: Additional Valuation Issues PROBLEMS 9
PROBLEMS
P9-1 (L01) (LCNRV) Remmers Company manufactures desks. Most of the company’s desks are standard models and are sold on the basis of catalog prices. At December 31, 2017, the following finished desks (10 desks in each category) appear in the company’s inventory…
Instructions
At what amount should each of the four desks appear in the company’s December 31, 2017, inventory, assuming that the company has adopted a lower-of-FIFO-cost-or-net realizable value (LCNRV) approach for valuation of inventories on an individual-item basis?
P9-2 (L01) (LCNRV) Garcia Home Improvement Company installs replacement siding, windows, and louvered glass doors for single-family homes and condominium complexes. The company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2017. Jim Alcide, controller for Garcia, has gathered the following data concerning inventory.
At May 31, 2017, the balance in Garcia’s Raw Materials Inventory account was $408,000, and Allowance to Reduce Inventory to NRV had a credit balance of $27,500. Alcide summarized the relevant inventory cost and market data at May 31, 2017, in the schedule below.
Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Garcia’s May 31, 2017, financial statements for inventory under the LCNRV rule as applied to each item in inventory. Devereaux expressed concern over departing from the historical cost principle…
Instructions
(a) Determine the proper balance in Allowance to Reduce Inventory to NRV at May 31, 2017.
(b) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded (using the loss method) due to the change in Allowance to Reduce Inventory to NRV.
(c) Explain the rationale for the use of the LCNRV rule as it applies to inventories.
P9-3 (L01) (LCNRV—Cost-of-Goods-Sold and Loss) Malone Company determined its ending inventory at cost and at LCNRV at December 31, 2017, December 31, 2018, and December 31, 2019, as shown below…
Instructions
(a) Prepare the journal entries required at December 31, 2018, and at December 31, 2019, assuming that a perpetual inventory system and the cost-of-goods-sold method of adjusting to LCNRV is used.
(b) Prepare the journal entries required at December 31, 2018, and at December 31, 2019, assuming that a perpetual inventory is recorded at cost and reduced to LCNRV using the loss method.
P9-4 (L02) EXCEL GROUPWORK (Lower-of-Cost-or-Market) Referring to the situation in P9-2 for Garcia Home Improvement Company, consider the following expanded data at May 31, 2017. Assume Garcia uses LIFO inventory costing…
Instructions
(a) (1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31, 2017.
(2) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory to Market.
(b) Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories.
(CMA adapted)
P9-5 (L02) WRITING (Lower-of-Cost-or-Market) Fiedler Co. follows the practice of valuing its inventory at the lower-ofcost- or-market. The following information is available from the company’s inventory records as of December 31, 2017...
Instructions
Greg Forda is an accounting clerk in the accounting department of Fiedler Co., and he cannot understand why the market value keeps changing from replacement cost to net realizable value to something that he cannot even figure out. Greg is very confused, and he is the one who records inventory purchases and calculates ending inventory. You are the manager of the department and an accountant.
(a) Calculate the lower-of-cost-or-market using the individual-item approach.
(b) Show the journal entry he will need to make in order to write down the ending inventory from cost to market.
(c) Write a memo to Greg explaining what designated market value is as well as how it is computed. Use your calculations to aid in your explanation.
P9-6 (L04) (Gross Profit Method) Eastman Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. Corporate records disclose the following…
Merchandise with a selling price of $30,000 remained undamaged after the fire, and damaged merchandise has a net realizable value of $8,150. The company does not carry fire insurance on its inventory.
Instructions
Prepare a formal labeled schedule computing the fire loss incurred. (Do not use the retail inventory method.)
P9-7 (L04) GROUPWORK (Gross Profit Method) On April 15, 2018, fire damaged the office and warehouse of Stanislaw Corporation. The only accounting record saved was the general ledger, from which the balance sheet data below was prepared…
The following data and information have been gathered.
1. The fiscal year of the corporation ends on December 31.
2. An examination of the April bank statement and canceled checks revealed that checks written during the period April
1–15 totaled $13,000: $5,700 paid to accounts payable as of March 31, $3,400 for April merchandise shipments, and $3,900 paid for other expenses. Deposits during the same period amounted to $12,950, which consisted of receipts on account from customers with the exception of a $950 refund from a vendor for merchandise returned in April.
3. Correspondence with suppliers revealed unrecorded obligations at April 15 of $15,600 for April merchandise shipments, including $2,300 for shipments in transit (f.o.b. shipping point) on that date.
4. Customers acknowledged indebtedness of $46,000 at April 15, 2018. It was also estimated that customers owed another $8,000 that will never be acknowledged or recovered. Of the acknowledged indebtedness, $600 will probably be uncollectible.
5. The companies insuring the inventory agreed that the corporation’s fire-loss claim should be based on the assumption that the overall gross profit rate for the past 2 years was in effect during the current year. The corporation’s audited financial statements disclosed this information:…
6. Inventory with a cost of $7,000 was salvaged and sold for $3,500. The balance of the inventory was a total loss.
Instructions
Prepare a schedule computing the amount of inventory fire loss. The supporting schedule of the computation of the gross profit should be in good form. (AICPA adapted)
P9-8 (L05) EXCEL (Retail Inventory Method) The records for the Clothing Department of Sharapova’s Discount Store are summarized below for the month of January.
Inventory, January 1: at retail $25,000; at cost $17,000
Purchases in January: at retail $137,000; at cost $82,500
Freight-in: $7,000
Purchase returns: at retail $3,000; at cost $2,300
Transfers in from suburban branch: at retail $13,000; at cost $9,200
Net markups: $8,000
Net markdowns: $4,000
Inventory losses due to normal breakage, etc.: at retail $400
Sales revenue at retail: $95,000
Sales returns: $2,400
Instructions
(a) Compute the inventory for this department as of January 31, at retail prices.
(b) Compute the ending inventory using lower-of-average-cost-or-market.
P9-9 (L05) (Retail Inventory Method) Presented below is information related to Waveland Inc…
Instructions
Assuming that Waveland Inc. uses the conventional retail inventory method, compute the cost of its ending inventory at December 31, 2018.
P9-10 (L05) GROUPWORK (Retail Inventory Method) Fuque Inc. uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October 2018…
Instructions
(a) Using the conventional retail method, prepare a schedule computing estimated lower-of-cost-or-market inventory for October 31, 2018.
(b) A department store using the conventional retail inventory method estimates the cost of its ending inventory as $60,000. An accurate physical count reveals only $47,000 of inventory at lower-of-cost-or-market. List the factors that may have caused the difference between the computed inventory and the physical count.
P9-11 (L01,3,6) (Statement and Note Disclosure, LCNRV, and Purchase Commitment) Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1993, Maddox has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Maddox’s fiscal year, November 30, 2017, are shown below. The inventories are stated at cost before any year-end adjustments.
Finished goods $647,000
Work in process 112,500
Raw materials 264,000
Factory supplies 69,000
The following information relates to Maddox’s inventory and operations.
1. The finished goods inventory consists of the items analyzed below…
2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment.
3. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan.
4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20% above the current market price. The NRV of the rest of the raw materials is $127,400.
5. The total NRV of the work in process inventory is $108,700.
6. Included in the cost of factory supplies are obsolete items with an historical cost of $4,200. The market value of the remaining factory supplies is $65,900.
7. Maddox applies the LCNRV method to each of the three types of shifters in finished goods inventory. For each of the other three inventory accounts, Maddox applies the LCNRV method to the total of each inventory account.
8. Consider all amounts presented above to be material in relation to Maddox’s financial statements taken as a whole.
Instructions
(a) Prepare the inventory section of Maddox’s balance sheet as of November 30, 2017, including any required note(s).
(b) Without prejudice to your answer to (a), assume that the NRV of Maddox’s inventories is less than cost. Explain how this decline would be presented in Maddox’s income statement for the fiscal year ended November 30, 2017.
(c) Assume that Maddox has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2017, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Maddox after November 30, 2017. Discuss the impact, if any, that this purchase commitment would have on Maddox’s financial statements prepared for the fiscal year ended November 30, 2017. (CMA adapted)
*P 9-12 (L07) (Conventional and Dollar-Value LIFO Retail) As of January 1, 2017, Aristotle Inc. adopted the retail method of accounting for its merchandise inventory.
To prepare the store’s financial statements at June 30, 2017, you obtain the following data…
Instructions
(a) Prepare a schedule to compute Aristotle’s June 30, 2017, inventory under the conventional retail method of accounting for inventories.
(b) Without prejudice to your solution to part (a), assume that you computed the June 30, 2017, inventory to be $59,400 at retail and the ratio of cost to retail to be 70%. The general price level has increased from 100 at January 1, 2017, to 108 at June 30, 2017. Prepare a schedule to compute the June 30, 2017, inventory at the June 30 price level under the dollar value LIFO retail method. (AICPA adapted)
*P9-13 (L07) GROUPWORK (Retail, LIFO Retail, and Inventory Shortage) Late in 2014, Joan Seceda and four other investors took the chain of Becker Department Stores private, and the company has just completed its third year of operations under the ownership of the investment group. Andrea Selig, controller of Becker Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Becker Department Stores contain the following amounts on November 30, 2017, the end of the fiscal year…
Instructions
(a) Describe the circumstances under which the retail inventory method would be applied and the advantages of using the retail inventory method.
(b) Assuming that prices have been stable, calculate the value, at cost, of Becker Department Stores’ ending inventory using the last-in, first-out (LIFO) retail method. Be sure to furnish supporting calculations.
(c) Estimate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended
November 30, 2017.
(d) Complications in the retail method can be caused by such items as
(1) freight-in costs,
(2) purchase returns and allowances,
(3) sales returns and allowances, and
(4) employee discounts. Explain how each of these four special items is handled in the retail inventory method.
(CMA adapted)
*P9-14 (L07) (Change to LIFO Retail) Diderot Stores Inc., which uses the conventional retail inventory method, wishes to change to the LIFO retail method beginning with the accounting year ending December 31, 2017.
Amounts as shown below appear on the store’s books before adjustment…
You are to assume that all markups and markdowns apply to 2017 purchases, and that it is appropriate to treat the entire inventory as a single department.
Instructions
Compute the inventory at December 31, 2017, under the following methods.
(a) The conventional retail method.
(b) The last-in, first-out retail method, effecting the change in method as of January 1, 2017. Assume that the cost-to-retail percentage for 2016 was recomputed correctly in accordance with procedures necessary to change to LIFO. This ratio was 59%. (AICPA adapted)
*P 9-15 (L07) (Change to LIFO Retail; Dollar-Value LIFO Retail) Davenport Department Store converted from the conventional retail method to the LIFO retail method on January 1, 2017, and is now considering converting to the dollar-value LIFO inventory method. During your examination of the financial statements for the year ended December 31, 2018, management requested that you furnish a summary showing certain computations of inventory cost for the past 3 years.
Here is the available information.
1. The inventory at January 1, 2016, had a retail value of $56,000 and cost of $29,800 based on the conventional retail method.
2. Transactions during 2016 were as follows…
3. The retail value of the December 31, 2017, inventory was $75,600, the cost ratio for 2017 under the LIFO retail method was
61%, and the regional price index was 105% of the January 1, 2017, price level.
4. The retail value of the December 31, 2018, inventory was $62,640, the cost ratio for 2018 under the LIFO retail method was
60%, and the regional price index was 108% of the January 1, 2017, price level.
Instructions
(a) Prepare a schedule showing the computation of the cost of inventory on hand at December 31, 2016, based on the conventional retail method.
(b) Prepare a schedule showing the recomputation of the inventory to be reported on December 31, 2016, in accordance with procedures necessary to convert from the conventional retail method to the LIFO retail method beginning January 1, 2017. Assume that the retail value of the December 31, 2016, inventory was $60,000.
(c) Without prejudice to your solution to part (b), assume that you computed the December 31, 2016, inventory (retail value $60,000) under the LIFO retail method at a cost of $33,300. Prepare a schedule showing the computations of the cost of the store’s 2017 and 2018 year-end inventories under the dollar-value LIFO method.
(AICPA adapted)
