MULTIPLE CHOICE—CPA Adapted
132. Ryan Distribution Co. has determined its December 31, 2017 inventory on a FIFO basis at $980,000. Information pertaining to that inventory follows:
Estimated selling price $1,020,000
Estimated cost of disposal 40,000
Normal profit margin 120,000
Current replacement cost 900,000
Ryan records losses that result from applying the lower-of-cost-or-market rule. At December 31, 2017, the loss that Ryan should recognize is
a. $0.
b. $20,000.
c. $40,000.
d. $80,000.
133. Under the lower-of-cost-or-market method, the replacement cost of an inventory item would be used as the designated market value
a. when it is below the net realizable value less the normal profit margin.
b. when it is below the net realizable value and above the net realizable value less the normal profit margin.
c. when it is above the net realizable value.
d. regardless of net realizable value.
134. The original cost of an inventory item is above the replacement cost and the net realizable value. The replacement cost is below the net realizable value less the normal profit margin. As a result, under the lower-of-cost-or-market method, the inventory item should be reported at the
a. net realizable value.
b. net realizable value less the normal profit margin.
c. replacement cost.
d. original cost.
135. Keen Company's accounting records indicated the following information:
Inventory, 1/1/17 $ 1,800,000
Purchases during 2017 9,000,000
Sales during 2017 11,400,000
A physical inventory taken on December 31, 2017, resulted in an ending inventory of $2,100,000. Keen's gross profit on sales has remained constant at 25% in recent years. Keen suspects some inventory may have been taken by a new employee. At December 31, 2017, what is the estimated cost of missing inventory?
a. $150,000.
b. $450,000.
c. $600,000.
d. $750,000.
136. Henke Co. uses the retail inventory method to estimate its inventory for interim statement purposes. Data relating to the computation of the inventory at July 31, 2017, are as follows:
Cost Retail
Inventory, 2/1/17 $ 300,000 $ 375,000
Purchases 1,500,000 2,362,500
Markups, net 262,500
Sales 2,400,000
Estimated normal shoplifting losses 30,000
Markdowns, net 165,000
Under the lower-of-cost-or-market method, Henke's estimated inventory at July 31, 2017 is
a. $243,000.
b. $261,000.
c. $279,000.
d. $405,000.
137. At December 31, 2017, the following information was available from Kohl Co.'s accounting records:
Cost Retail
Inventory, 1/1/17 $147,000 $ 203,000
Purchases 833,000 1,155,000
Additional markups 42,000
Available for sale $980,000 $1,400,000
Sales for the year totaled $1,250,000. Markdowns amounted to $10,000. Under the lower-of-cost-or-market method, Kohl's inventory at December 31, 2017 was
a. $294,000.
b. $112,000.
c. $105,000.
d. $98,000.
*138. On December 31, 2017, Pacer Co. adopted the dollar-value LIFO retail inventory method. Inventory data for 2018 are as follows:
LIFO Cost Retail
Inventory, 12/31/17 $900,000 $1,260,000
Inventory, 12/31/18 ? 1,650,000
Increase in price level for 2018 10%
Cost to retail ratio for 2018 70%
Under the LIFO retail method, Pacer's inventory at December 31, 2018, should be
a. $1,084,800.
b. $1,155,500.
c. $1,173,000.
d $1,200,300.
BRIEF EXERCISES
BE. 9-139—Lower-of-cost-or-market.
Determine the proper unit inventory price in the following independent cases by applying the lower of cost or market rule. Circle your choice.
1 2 3 4 5
Cost $7.80 $10.50 $11.80 $6.00 $7.20
Net realizable value 8.85 10.00 12.20 4.25 6.90
Net realizable value less normal profit 8.15 9.00 11.40 3.75 6.50
Market replacement cost 7.90 10.10 12.50 4.00 5.40
BE. 9-140—Lower-of-cost-or-market.
Determine the unit value that should be used for inventory costing following "lower of cost or market value".
A B C D E F
Cost $2.35 $2.47 $2.35 $2.54 $2.44 $2.44
Replacement cost 2.20 2.55 2.20 2.52 2.37 2.46
Net realizable value 2.50 2.50 2.50 2.45 2.50 2.50
Net realizable value less normal profit 2.25 2.30 2.40 2.30 2.30 2.30
BE. 9-141—Lower-of-cost-or-market.
Assume in each case that the selling expenses are $8 per unit and that the normal profit is $5 per unit. Calculate the limits for each case. Then enter the amount that should be used for lower of cost or market.
Selling Replacement
Price Upper Limit Cost Lower Limit Cost LCM
(a) $59 $______ $43 $______ $47 $______
(b) 47 ______ 36 ______ 40 ______
(c) 60 ______ 44 ______ 45 ______
(d) 48 ______ 42 ______ 40 ______
EXERCISES
Ex. 9-142—Lower-of-cost-or-market.
The December 31, 2017 inventory of Gwynn Company consisted of four products, for which certain information is provided below.
Replacement Estimated Expected Normal Profit
Product Original Cost Cost Disposal Cost Selling Price on Sales
A $24.00 $22.00 $6.50 $40.00 20%
B $42.00 $40.00 $10.00 $48.00 25%
C $120.00 $115.00 $25.00 $190.00 30%
D $19.00 $15.80 $4.00 $26.00 10%
Instructions
Using the lower-of-cost-or-market approach applied on an individual-item basis, compute the inventory valuation that should be reported for each product on December 31, 2017.
Ex. 9-143—Lower-of-cost-or-market.
At 12/31/17, the end of Jenner Company's first year of business, inventory was $6,100 and $5,100 at cost and at market, respectively.
Following is data relative to the 12/31/18 inventory of Jenner:
Original Net Net Realizable Appropriate
Cost Replacement Realizable Value Less Inventory
Item Per Unit Cost Value Normal Profit Value
A $ .65 $ .45
B .45 .40
C .70 .75
D .75 .65
E .90 .85
Selling price is $1.00/unit for all items. Disposal costs amount to 10% of selling price and a "normal" profit is 30% of selling price. There are 1,500 units of each item in the 12/31/18 inventory.
Instructions
(a) Prepare the entry at 12/31/17 necessary to implement the lower-of-cost-or-market procedure assuming Jenner uses a contra account for its balance sheet.
(b) Complete the last three columns in the 12/31/18 schedule above based upon the lower-of-cost-or-market rules.
(c) Prepare the entry(ies) necessary at 12/31/18 based on the data above.
(d) How are inventory losses disclosed on the income statement?
Ex. 9-144 – Relative sales value method.
Doran Realty Company purchased a plot of ground for $1,900,000 and spent $4,100,000 in developing it for building lots. The lots were classified into Highland, Midland, and Lowland grades, to sell at $120,000, $90,000, and $60,000 each, respectively.
Instructions
Complete the table below to allocate the cost of the lots using a relative sales value method.
No. of Selling Total % of Apportioned Cost
Grade Lots Price Revenue Total Sales Total Per Lot
Highland 20 $ $ $ $
Midland 40 $ $
Lowland 100 $ $
160 $ $
Ex. 9-145—Gross profit method.
An inventory taken the morning after a large theft discloses $60,000 of goods on hand as of March 12. The following additional data is available from the books:
Inventory on hand, March 1 $ 84,000
Purchases received, March 1 – 11 63,000
Sales (goods delivered to customers) 105,000
Past records indicate that sales are made at 40% above cost.
Instructions
Estimate the inventory of goods on hand at the close of business on March 11 by the gross profit method and determine the amount of the theft loss. Show appropriate titles for all amounts in your presentation.
Ex. 9-146—Gross profit method.
On January 1, a store had inventory of $48,000. January purchases were $46,000 and January sales were $95,000. On February 1 a fire destroyed most of the inventory. The rate of gross profit was 25% of cost. Merchandise with a selling price of $5,000 remained undamaged after the fire. Compute the amount of the fire loss, assuming the store had no insurance coverage. Label all figures.
Ex. 9-147—Gross profit method.
Utley Co. prepares monthly income statements. Inventory is counted only at year end; thus, month-end inventories must be estimated. All sales are made on account. The rate of mark-up on cost is 20%. The following information relates to the month of May.
Accounts receivable, May 1 $21,000
Accounts receivable, May 31 15,000
Collections of accounts during May 90,000
Inventory, May 1 45,000
Purchases during May 58,000
Instructions
Calculate the estimated cost of the inventory on May 31.
PROBLEMS
Pr. 9-148—Gross profit method.
On December 31, 2018 Felt Company's inventory burned. Sales and purchases for the year had been $1,500,000 and $980,000, respectively. The beginning inventory (Jan. 1, 2018) was $170,000; in the past Felt's gross profit has averaged 30% of selling price.
Instructions
Compute the estimated cost of inventory burned, and give entries as of December 31, 2018 to close merchandise accounts.
Pr. 9-149—Retail inventory method.
When you undertook the preparation of the financial statements for Telfer Company at January 31, 2018, the following data were available:
At Cost At Retail
Inventory, February 1, 2017 $70,800 $ 98,500
Markdowns 35,000
Markups 63,000
Markdown cancellations 20,000
Markup cancellations 10,000
Purchases 219,500 294,000
Sales revenue 335,000
Purchases returns and allowances 4,300 5,500
Sales returns and allowances 10,000
Instructions
Compute the ending inventory at cost as of January 31, 2018, using the retail method which approximates lower of cost or market. Your solution should be in good form with amounts clearly labeled.
*Pr. 9-150—Retail inventory method.
The records of Lohse Stores included the following data:
Inventory, May 1, at retail, $14,500; at cost, $10,440
Purchases during May, at retail, $42,900; at cost, $31,550
Freight-in, $2,000; purchase discounts, $250
Additional markups, $3,800; markup cancellations, $400; net markdowns, $1,300
Sales during May, $45,500
Instructions
Calculate the estimated inventory at May 31 on a LIFO basis. Show your calculations in good form and label all amounts.
*Pr. 9-151—LIFO retail inventory method, fluctuating prices.
Flint Department Store wishes to use the retail LIFO method of valuing inventories for 2018. The appropriate data are as follows:
At Cost At Retail
December 31, 2017 inventory (base layer) $1,250,000 $2,100,000
Purchases (net of returns, allowances, markups, and markdowns) 2,100,000 3,500,000
Sales revenue 3,185,000
Price index for 2018 105
Instructions
Complete the following schedule (fill in all blanks and show calculations in the parentheses):
Computation of Retail Inventory for 2018 Cost Retail Ratio
Inventory, December 31, 2017 $1,250,000 $2,100,000
Purchases (net of returns, allowances,
markups, and markdowns) %
Total available $
____________________________________
Inventory, December 31, 2018, at retail $
Adjustment of Inventory to LIFO Basis Cost Retail
Ending inventory at base year prices $
( )
Beginning inventory at base year prices $
Increase at base year prices $
Increase at 2018 retail ( ) $
*Pr. 9-151 (Cont.)
Increase at 2018 cost ( )
Inventory, December 31, 2018, at LIFO cost $
*Pr. 9-152—LIFO retail inventory method, stable prices.
Potter Variety Store uses the LIFO retail inventory method. Information relating to the computation of the inventory at December 31, 2018, follows:
Cost Retail
Inventory, January 1, 2018 $146,000 $220,000
Purchases 480,000 700,000
Freight-in 80,000
Sales 750,000
Net markups 160,000
Net markdowns 60,000
Instructions
Assuming that there was no change in the price index during the year, compute the inventory at December 31, 2018, using the LIFO retail inventory method.
*Pr. 9-153—Dollar-value LIFO-retail method.
The records of Heese Stores provided the following data for the year:
Cost Retail
(Base inventory) Inventory, January 1 $150,000 $ 250,000
Net purchases 830,800 1,318,000
Sales revenue 1,229,000
Other data are: Freight-in, $14,000; net markups, $8,000; net markdowns, $6,000; and the price index for the year is 110.
Instructions
Determine the approximate valuation of the final inventory by the dollar-value, LIFO-retail method. Label all figures.
Cost Retail Ratio
*Pr. 9-154—Retail LIFO.
Klein Book Store uses the conventional retail method and is now considering converting to the LIFO retail method for the period beginning 1/1/18. Available information consists of the following:
2017 2018
Cost Retail Cost Retail
Inventory 1/1 $ 12,500 $ 22,500 $ ? $ ?
Purchases (net) 250,000 347,500 245,000 345,000
Net markups — 5,000 — 10,000
Net markdowns — 2,500 — 5,000
Sales (net) — 322,000 — 327,500
Loss from breakage — 500 — -0-
Applicable price index — 100 — 110
Following is a schedule showing the computation of the cost of inventory on hand at 12/31/17 based on the conventional retail method.
Cost Retail Ratio
Inventory 1/1/17 $ 12,500 $ 22,500
Purchases (net) 250,000 347,500
Net markups — 5,000
Goods available $262,500 375,000 70%
Sales (net) (322,000)
Net markdowns (2,500)
Loss from breakage (500)
Inventory 12/31/17 at retail $ 50,000
Inventory 12/31/17 at LCM ($50,000 × 70%) $ 35,000
Instructions
(a) Prepare the journal entry to convert the inventory from the conventional retail to the LIFO retail method. Show detailed calculations to support your entry.
(b) Prepare a schedule showing the computation of the 12/31/18 inventory based on the LIFO retail method as adjusted for fluctuating prices. Without prejudice to your answer to (a) above, assume that you computed the 1/1/18 inventory (retail value $49,000) under the LIFO retail method at a cost of $34,000.
IFRS QUESTIONS
True / False
1. IFRS permits an entity to reverse inventory write-downs in certain situations, whereas GAAP does not.
2. IFRS defines market as replacement cost subject to certain constraints.
3. IFRS uses a ceiling to determine market.
4. Similar to GAAP, certain agricultural products and mineral products must be reported at net realizable value using IFRS.
5. IFRS records market in the lower-of-cost-or-market differently than GAAP.
Multiple Choice Questions
1. Where is the authoritative IFRS guidance related to accounting and reporting for inventories found?
a. IAS 2 only.
b. IAS 41 only.
c. Neither IAS 2 or IAS 41 deal with inventory
d. Both IAS2 and IAS 41.
2. A major difference between GAAP and IFRS with respect to accounting for inventories pertains to:
a. guidelines on ownership of goods.
b. costs to include in inventories .
c. The use of LIFO cost flow assumption.
d. The use of LCNRV.
3. Which of the following is a similarity between GAAP and IFRS with respect to accounting for inventories?
a. Both standards use a ceiling or a floor to determine lower-of-cost-or-market.b. Both standards allow for reversals of writedowns.
c. The use of more principles based guidelines exist under both IFRS and GAAP standards.
d. Inventory acquisitions are accounted for at historical cost.
4. Alonzo Company in Italy prepares its financial statements in accordance with IFRS. In 2017, it reported cost of goods sold of €600 million and average inventory of €100 million. What is Alonzo's average days to sell inventory?
a. 6 days
b. 16.7 days
c. 60.8 days
d. 30.4 days
5. Starfish Company (a company using GAAP and LIFO inventory method) is considering changing to IFRS and the FIFO inventory method. How would a comparison of these methods affect Starfish's financials?
a. During a period of inflation, the current ratio would decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO.
b. During a period of inflation, the taxes will decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO.
c. During a period of inflation, net income would be greater if IFRS and the FIFO inventory method are used as compared to GAAP and LIFO.
d. During a period of inflation, working capital would decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO.
6. Which of the following statements is true regarding IFRS and inventories?
a. In order to determine market valuation of inventories, IFRS uses a ceiling and a floor.
b. IFRS permits the option of valuing inventories at fair value.
c. With respect to inventories, IFRS defines market as net realizable value.
d. IFRS allows inventory to be written up above its original cost.
7. State Company manufactured a machine at a cost of $80,000. The product is sold for $88,000 at a 5% discount. The delivery costs are estimated to be $8,000. Under IFRS, how much should be the carrying amount of this inventory?
a. $80,000
b. $88,000
c. $72,000
d. $75,600
8. The following information relates to Moore Company's inventory:
Cost of inventory = $460
Selling price of inventory = $500
Normal profit margin = 10% of selling price
Current replacement cost = $370
Cost of completion and disposal = $50
Under IFRS, which of the following would be the correct measurement value for the inventory?
a. $460
b. $370
c. $500
d. $450
9. Assume that Darcy Industries had the following inventory values:
Inventory cost (on December 31, 2017) = $500
Inventory market (on December 31, 2017) = $450
Inventory net realizable value (on December 31, 2017) = $440
Inventory market (on June 30, 2018) = $520
Inventory net realizable value (on June 30, 2018) = $525
Under IFRS, what is the inventory carrying value on December 31, 2017?
a. $500
b. $450
c. $440
d. $525
10. Assume that Darcy Industries had the following inventory values:
Inventory cost (on December 31, 2017) = $500
Inventory market (on December 31, 2017) = $450
Inventory net realizable value (on December 31, 2017) = $440
Inventory market (on June 30, 2018) = $520
Inventory net realizable value (on June 30, 2018) = $525
Under IFRS, what is the inventory carrying value on June 30, 2018?
a. $500
b. $520
c. $525
d. $440
