CHAPTER 9

Cost of Goods Sold and Inventory:

Estimation and Noncost Valuation
MULTIPLE CHOICE QUESTIONS
Theory/Definitional Quetion
1 Reporting a purchase commitment
2 ssumptions of gross profit method
! "sefulness of gross profit method
# Constraint of the gross profit method
$ Relationship %et&een ending inventory and net income
' Relationship %et&een ending inventory and net income
( Relationship %et&een ending inventory and net income
) Retail inventory method**inclusion of freight*in
+ "ses of the gross profit method
1, Items included in goods availa%le for sales under retail inventory
11 "nderstating ending inventory in C-GS calculation
12 Relationship %et&een ending inventory and net income
1! dvantages of the retail method
1# Characteristics of retail inventory method
1$ ssumptions of the retail method
1' Calculating the cost ratio to %e used &ith retail inventory method
1( Net reali.a%le value
1) Net reali.a%le value
1+ Relationship of mar/ups on cost and on selling price
2, Reporting decline in value of noncancella%le purchase contract
21 0ollar*value 1I2- retail and an incremental layer
22 3reatment of net mar/ups and mar/do&ns under retail method
2! Current rate defined %y e4change rate
2# Replacement cost of inventory under the lo&er of cost or mar/et method
2$ 5hen net reali.a%le value is appropriate for inventory valuation
2' 1o&er of cost or mar/et method
2( 1o&er of cost or mar/et method
2) Current replacement cost as general meaning for 6mar/et6
2+ 7ethod for inventory costing needs to %e disclosed
'!
!" Chapter + Cost of Goods Sold and Inventory: Estimation and Noncost Valuation
!, Relationship %et&een cost ratio retail inventory method and the estimated
cost of ending inventory
Co#$utational Quetion
!1 Computation of ending inventory
!2 Computation of ending inventory using the gross margin method
!! Computation of estimated inventory %alance given gross margin
!# Computation of cost of goods sold and operating profit
!$ Estimate cost of goods sold under gross profit method
!' Computation of estimated costs of missing inventory
!( Computation of loss due to theft
!) Computation of estimated inventory loss due to fire
!+ Computation of 1C7 value for inventory
#, Computation of cost of goods availa%le for sale
#1 Recording of ra& materials
#2 Computation of 1C7 value for inventory
#! Computation of ending inventory at cost using retail method
## Computation of estimated inventory at lo&er of cost or mar/et using retail
method
#$ Computation of unit price using lo&er of cost or mar/et
#' Computation of unit price using lo&er of cost or mar/et
#( Computation of ending inventory using 1I2- retail
#) Computation of inventory under dollar*value 1I2- retail method
#+ Computation of cost component of 1C7
$, Computation of mar/et component of 1C7
$1 Computation of inventory value under 1C7
$2 Computation of e4change gain8loss
$! Computation of e4change gain8loss
$# Computation of estimated inventory %alance given gross margin
$$ 3he effect of undiscovered errors on su%se9uent year*end inventories
$' 3he effect of undiscovered errors on su%se9uent year*end inventories
$( 3he effect of undiscovered errors on su%se9uent year*end inventories
$) Computation of estimated cost of inventory
$+ Computation of estimated inventory using conventional retail8&eighted
average
', Record decline in value of noncancella%le inventory contract
'1 Record decline in value of noncancella%le inventory contract
PRO%LEMS
1 Estimation of cost of inventory given mar/ups
2 Computation of inventory loss due to fire
! Computation of net income after discovering inventory errors
# Estimation of loss due to theft
$ Computation of net income after discovering inventory errors
' Computation of ending inventory at 1C7 using retail method
( Computation of ending inventory at 1C7 using retail method
) Computation of ending inventory using dollar*value 1I2- retail method
+ Computation of ending inventory using dollar*value 1I2- retail method
1, E4change gain8loss**record sale: ad;ustment: and receipt of payment
11 0etermination of proper carrying value of inventory items at 1C7
12 1o&er*of*cost*or*mar/et method and entries
1! Gross profit method
1# 0ollar*value retail 1I2- method
1$ Effect of failure to apply 1C7
1' Validity of retail method appro4imating &eighted average cost
1( "ses of the retail method
MULTIPLE CHOICE QUESTIONS
c 1< n airline that enters into a commitment to purchase ne4t month=s fuel at a
set
1-' price should
a< record an appropriation of retained earnings<
%< record an asset for the inventory and a lia%ility for the payment
o%ligation at the date on &hich the commitment is made<
c< disclose the e4istence of the commitment in the financial statements<
d< disclose the e4istence of the commitment in the financial statements
only if prices have declined since entering the commitment<
d 2< 3he use of the gross profit method assumes
1-2 a< the amount of gross profit is the same as in prior years<
%< sales and cost of goods sold have not changed from previous years<
c< inventory values have not increased from previous years<
d< the relationship %et&een selling price and cost of goods sold is similar
to prior years<
c !< 3he gross profit method of estimating inventory &ould not %e useful &hen
1-2 a< a periodic system is in use and inventories are re9uired for interim
statements<
%< inventories have %een destroyed or lost %y fire: theft: or other casualty:
and the specific data re9uired for inventory valuation are not availa%le<
c< there is a significant change in the mi4 of products %eing sold<
d< the relationship %et&een gross profit and sales remains sta%le over
time<
'$
!! Chapter + Cost of Goods Sold and Inventory: Estimation and Noncost Valuation
c #< 3he gross profit method of inventory valuation is invalid &hen
1-2 a< there is su%stantial increase in the 9uantity of inventory during the year<
%< there is su%stantial increase in the cost of inventory during the year<
c< the gross margin percentage changes significantly during the year<
d< all ending inventory is destroyed %y fire %efore it can %e counted<
c $< 5hen the current year>s ending inventory amount is overstated:
1-# a< the current year>s cost of goods sold is overstated<
%< the current year>s total assets are understated<
c< the current year>s net income is overstated<
d< the ne4t year>s income is overstated<
% '< If the ending inventory %alance is understated: net income of the same
period
1-# a< &ill %e overstated<
%< &ill %e understated<
c< &ill %e unaffected<
d< cannot %e determined from the a%ove information<
% (< n overstatement of ending inventory in ?eriod 1 &ould result in income of
1-# ?eriod 2 %eing
a< overstated<
%< understated<
c< correctly stated<
d< 3he ans&er cannot %e determined from the information given<
c )< "nder the retail inventory method: freight*in &ould %e included in the
1-! calculation of the goods availa%le for sale for &hich of the follo&ing@
Cost Retail
a< No No
%< No Aes
c< Aes No
d< Aes Aes
a +< 5hich statement is true a%out the gross profit method@
1-2 a< It may not %e used to estimate inventories for annual statements<
%< It may not %e used to estimate inventories for interim statements<
c< It may not %e used %y insurers of inventory<
d< It may not %e used for internal estimates of inventory<
'(
a 1,< 3he retail inventory method &ould include &hich of the follo&ing in the
1-! calculation of the goods availa%le for sale at %oth cost and retail@
a< ?urchase returns
%< Sales returns
c< 7ar/do&ns
d< 7ar/ups
a 11< 5hich of the follo&ing &ill result if the current year>s ending inventory
amount
1-# is understated in the cost of goods sold calculation@
a< Cost of goods sold &ill %e overstated<
%< 3otal assets &ill %e overstated<
c< Net income &ill %e overstated<
d< Both a and c<
% 12< If ending inventory on 0ecem%er !1: 2,,1: is overstated %y C!,:,,,: &hat
is
1-# the effect on net income for 2,,2@
a< Net income is overstated %y C!,:,,,<
%< Net income is understated %y C!,:,,,<
c< Net income is overstated %y C',:,,,<
d< 3he ans&er cannot %e determined from the information given<
d 1!< 3he retail inventory method has the advantage that it
1-! a< provides a value for ending inventory that closely appro4imates replace*
ment value<
%< hides costs from competitors and customers<
c< gives a more accurate statement of inventory costs than other methods<
d< provides a method for inventory control and facilitates determination of
the periodic inventory<
% 1#< 3he retail inventory method is characteri.ed %y
1-! a< the recording of sales at cost<
%< the recording of purchases at selling price<
c< the reporting of year*end inventory at retail in the financial statements<
d< the recording of mar/ups at retail and mar/do&ns at cost<
d 1$< 3he retail method is %ased on the assumption that the
1-! a< ratio of gross margin to sales is appro4imately the same each period<
%< ratio of cost to retail changes at a constant rate<
c< %eginning inventory and the cost of goods sold contain the same
proportion of high*cost and lo&*cost ratio goods<
d< gross margin percentage applica%le to ending inventory and to the
goods sold during the period is the same<
% 1'< 5hich statement is accurate a%out calculating the cost ratio to %e used &ith
1-! the retail inventory method@
a< 3he %eginning inventory is e4cluded and mar/do&ns are not deducted
%efore computing the cost ratio &hen using the average cost method<
%< 3he %eginning inventory is included and mar/do&ns are deducted
%efore computing the cost ratio &hen using the lo&er*of*cost*or*mar/et
method<
c< 3he %eginning inventory is included and mar/do&ns are not deducted
%efore computing the cost ratio &hen using the lo&er*of*cost*or*mar/et
method<
d< 3he %eginning inventory is e4cluded and mar/do&ns are deducted
%efore computing the cost ratio &hen using the average cost method<
c 1(< 5hat is the ma4imum amount at &hich inventory can %e valued &hen the
1-1 goods have e4perienced a permanent decline in value@
a< Distorical cost
%< Sales price
c< Net reali.a%le value
d< Net reali.a%le value reduced %y a normal profit margin
% 1)< Net reali.a%le value can %e defined as
1-1 a< selling price<
%< selling price less costs to complete and sell<
c< selling price plus costs to complete and sell<
d< ac9uisition cost plus costs to complete and sell<
% 1+< mar/up of 2$ percent on cost is e9uivalent to &hat mar/up on selling
price@
1-2 EroundedF
a< 1$ percent
%< 2, percent
c< 2$ percent
d< !! percent
d 2,< 0uring 2,,2: the Victor 7anufacturing Company signed a noncancella%le
1-' contract to purchase 2:,,, pounds of a ra& material at C!2 per pound
during 2,,!< -n 0ecem%er !1: 2,,2: the mar/et price of the ra& material
is C2' per pound: and the selling price of the finished product is e4pected
to decline accordingly< 3he financial statements prepared for 2,,2 should
report
a< an appropriation of retained earnings for C12:,,,<
%< nothing regarding this matter<
c< a note descri%ing the e4pected loss on the purchase commitment<
d< a loss of C12:,,, in the income statement<
c 21< 5hen using dollar*value 1I2- retail: if an incremental layer &as added last
1-$ year: the layer should %e multiplied %y
a< this year=s cost ratio and this year=s inde4<
%< this year=s cost ratio and last year=s inde4<
c< last year=s cost ratio and last year=s inde4<
d< last year=s cost ratio and this year=s inde4<
% 22< company uses the retail method to estimate inventory for interim reporting
1-! purposes< 5hich of the follo&ing descri%es the proper treatment of net
mar/ups and mar/do&ns in the cost*to*retail ratio calculation if the retail
method is used to appro4imate a lo&er of average cost or mar/et
valuation@
a< Net mar/do&ns should %e included in the ratioG net mar/ups should %e
e4cluded<
%< Net mar/ups should %e included in the ratioG net mar/do&ns should %e
e4cluded<
c< Both net mar/ups and mar/do&ns should %e included in the ratio
calculation<
d< Both net mar/ups and mar/do&ns should %e e4cluded in the ratio
calculation<
a 2!< 3he spot rate is the e4change rate
1-( a< at &hich currencies can %e traded immediately<
%< in effect on the date of the specific transaction<
c< in effect on the date the %alance sheet is prepared<
d< in effect on the date an invoice denominated in a foreign currency is
issued<
c 2#< 5hen &ould the replacement cost of inventory %e used as the mar/et value
1-1 under the lo&er*of*cost*or*mar/et method@
a< l&ays<
%< 5hen replacement cost is a%ove net reali.a%le value<
c< 5hen replacement cost is %elo& net reali.a%le value and a%ove net
reali.a%le value less normal profit margin<
d< 5hen replacement cost is %elo& net reali.a%le value less normal profit
margin<
a 2$< If the replacement cost of a unit of inventory has declined %elo& original
cost:
1-1 %ut the replacement cost e4ceeds net reali.a%le value: the amount to %e
used for purposes of inventory valuation is
a< net reali.a%le value<
%< original cost<
c< mar/et value<
d< net reali.a%le value less a normal profit margin<
d 2'< "nder generally accepted accounting principles: the
lo&er*of*cost*or*mar/et
1-1 procedure for assigning a value to inventory can %e assigned to
a< total inventory<
%< groups of similar inventory items<
c< individual inventory items<
d< all of the a%ove<
c 2(< 3he lo&er*of*cost*or*mar/et inventory procedure &ould %e e4pected to
result
1-1 in the lo&est inventory valuation &hen applied to
a< total inventory<
%< groups of similar inventory items<
c< individual inventory items<
d< none of the a%ove<
c 2)< 5hen valuing ra& materials inventory at lo&er of cost or mar/et: &hat is the
1-1 general meaning of the term 6mar/et6@
a< Net reali.a%le value
%< Net reali.a%le value less a normal profit margin
c< Current replacement cost
d< 0iscounted present value
d 2+< n e4ample of an inventory accounting policy that should %e disclosed is
the
1-# a< effect of inventory profits caused %y inflation<
%< classification of inventory into ra& materials: &or/ in process: and
finished goods<
c< identification of ma;or suppliers<
d< method used for inventory costing<
% !,< If the denominator used to compute the cost ratio retail inventory is
1-! understated: the estimated cost of ending inventory &ould %e
a< understated<
%< overstated<
c< correctly stated<
d< stated at historical cost<
a !1< Dardy Company is a &holesale electronics distri%utor< -n 0ecem%er !1:
2,,2:
1-2 it prepared the follo&ing partial income statement:
Gross sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C',,:#,,
Sales discounts<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< #,,
Net sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C',,:,,,
Cost of goods sold:
Beginning inventory<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C2,,:,,,
Net purchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< !,,:,,,
Given this information: if Dardy Company>s gross margin is !, percent of
net sales: &hat is the correct ending inventory %alance@
a< C),:,,,
%< C12,:,,,
c< C1),:,,,
d< C$,,:,,,
% !2< 7iller Company needs an estimate of its ending inventory %alance< 3he
1-2 follo&ing information is availa%le:
Cost Retail
Sales revenue<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C1),:,,,
Beginning inventory<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C !$:,,, '2:,,,
Net purchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1,,:,,, 1!$:,,,
Gross margin percentage<<<<<<<<<<<<<<<<<<<<<<<<<< !,H
Given this information: &hen using the gross margin estimation method:
ending inventory is appro4imately
a< C1:,,,<
%< C+:,,,<
c< C1+:,,,<
d< C11:'$,<
c !!< 3he follo&ing information is availa%le for the Becca Company for the three
1-2 months ended Iune !, of this year:
Inventory: pril 1 of this year<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C1:2,,:,,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< #:$,,:,,,
2reight*in<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< !,,:,,,
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ':#,,:,,,
3he gross margin &as 2$ percent of sales< 5hat is the estimated inventory
%alance at Iune !,@
a< C)),:,,,
%< C+!!:,,,
c< C1:2,,:,,,
d< C1:$,,:,,,
c !#< ?etersen 7ens&ear: Inc< maintains a mar/up of ', percent %ased on cost<
1-2 3he company=s selling and administrative e4penses average !, percent of
sales< nnual sales &ere C1:##,:,,,< ?etersen>s cost of goods sold and
operating profit for the year are
Cost of -perating
Goods Sold ?rofit
a< C)'#:,,, C1##:,,,
%< C)'#:,,, C#!2:,,,
c< C+,,:,,, C1,):,,,
d< C+,,:,,, C#!2:,,,
c !$< -n -cto%er !1: a flood at ?ayne Company=s only &arehouse caused
severe
1-2 damage to its entire inventory< Based on recent history: ?ayne has a gross
profit of 2$ percent of net sales< 3he follo&ing information is availa%le from
?ayne>s records for the ten months ended -cto%er !1:
Inventory: Ianuary 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C $2,:,,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< #:12,:,,,
?urchase returns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ',:,,,
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< $:',,:,,,
Sales discounts<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< #,,:,,,
physical inventory disclosed usa%le damaged goods &hich ?ayne
estimates can %e sold for C(,:,,,< "sing the gross profit method: the
estimated cost of goods sold for the ten months ended -cto%er !1 should
%e
a< C'),:,,,<
%< C!:)!,:,,,<
c< C!:+,,:,,,<
d< C#:2,,:,,,<
% !'< 3he follo&ing information appears in -lsen Company=s records for the year
1-2 ended 0ecem%er !1:
Inventory: Ianuary 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C !2$:,,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1:1$,:,,,
?urchase returns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< #,:,,,
2reight*in<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< !,:,,,
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1:(,,:,,,
Sales discounts<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1,:,,,
Sales returns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1$:,,,
-n 0ecem%er !1: a physical inventory revealed that the ending inventory
&as only C21,:,,,< -lsen>s gross profit on net sales has remained
constant at !, percent in recent years< -lsen suspects that some inventory
may have %een pilfered %y one of the company=s employees< t 0ecem%er
!1: &hat is the estimated cost of missing inventory@
a< C($:,,,
%< C)2:$,,
c< C21,:,,,
d< C2+2:$,,
a !(< 0avis Company=s accounting records indicated the follo&ing information:
1-2
Inventory: 1818,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C 1:,,,:,,,
?urchases during 2,,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< $:,,,:,,,
Sales during 2,,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ':#,,:,,,
physical inventory ta/en on 0ecem%er !1: 2,,2: revealed actual ending
inventory at cost &as C1:1$,:,,,< 0avis> gross profit on sales has regularly
%een a%out 2$ percent in recent years< 3he company %elieves some
inventory may have %een stolen during the year< 5hat is the estimated
amount of missing inventory at 0ecem%er !1: 2,,2@
a< C$,:,,,
%< C2,,:,,,
c< C!$,:,,,
d< C#$,:,,,
a !)< -n Iune 1+: 2,,2: a fire destroyed the entire uninsured merchandise
inventory
1-2 of the llen 7erchandising Company< 3he follo&ing data are availa%le:
Inventory: Ianuary 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C ),:,,,
?urchases: Ianuary 1 through Iune 1+<<<<< $',:,,,
Sales: Ianuary 1 through Iune 1+<<<<<<<<<<<<< ((':,,,
7ar/up percentage on cost<<<<<<<<<<<<<<<<<<<<<<< 2$H
5hat is the appro4imate inventory loss as a result of the fire@
a< C1+:2,,
%< C2(:2,,
c< C!#:,,,
d< C$):,,,
c !+< Commodity J sells for C12<,,G selling e4penses are C2<#,G normal profit is
1-1 C!<,,< If the cost of Commodity J is C(<), and the replacement cost is
C'<,,: the lo&er of cost or mar/et is
a< C$<#,<
%< C'<,,<
c< C'<',<
d< C(<),<
c #,< 3he follo&ing information is availa%le for 3orino Corp< for its most recent
year:
1-2
Net sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C!:',,:,,,
2reight*in<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< +,:,,,
?urchase discounts<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< $,:,,,
Ending inventory<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2#,:,,,
3he gross margin is #, percent of net sales< 5hat is the cost of goods
availa%le for sale@
a< C1:'),:,,,
%< C1:+2,:,,,
c< C2:#,,:,,,
d< C2:##,:,,,
a #1< company entered into a purchase agreement on 7arch !1: 2,,1: to
1-' purchase ra& materials< 3hese materials are to %e delivered on pril !,:
2,,2< 3he company did not actually put these materials into production until
Iune !,: 2,,2< 3he contract price and the mar/et prices for these
materials are sho&n %elo&:
Contract price: !8!18,1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C1:2,,:,,,
7ar/et price: 128!18,1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1:,,,:,,,
7ar/et price: #8!,8,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1:#,,:,,,
7ar/et price: '8!,8,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1:',,:,,,
t the time of delivery E#8!,8,2F: 3he company should record the ra&
materials at
a< C1:2,,:,,,<
%< C1:,,,:,,,<
c< C1:#,,:,,,<
d< C1:',,:,,,<
% #2< Venus Inc< carries ?roduct in inventory on 0ecem%er !1 at its unit cost of
1-1 C22<$,< Because of a sharp decline in demand for the product: the selling
price is reduced to C2#<,, per unit< Venus= normal profit margin on ?roduct
is C#<),: disposal costs are C!<,, per unit: and the replacement cost is
C1$<+,< "nder the rule of lo&er of cost or mar/et: Venus= 0ecem%er !1
inventory of ?roduct should %e valued at a unit cost of
a< C1$<+,<
%< C1'<2,<
c< C21<,,<
d< C22<$,<
c #!< 3he sh%y Sporting Goods Store uses the retail inventory method<
Information
1-! relating to the computation of the inventory at 0ecem%er !1: 2,,2: is as
follo&s:
Cost Retail
Inventory at Ianuary 1: 2,,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C !2:,,, C ),:,,,
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< $),:,,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2(,:,,, ',,:,,,
2reight*in<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< (:',,
Net mar/ups<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< #,:,,,
Net mar/do&ns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2,:,,,
5hat is the ending inventory at cost at 0ecem%er !1: 2,,2: using the retail
inventory method and the lo&er*of*cost*or*mar/et estimation@
a< C#!:,,,
%< C#$:,,,
c< C$1:',,
d< C$#:,,,
% ##< 3he Saturn 0epartment Store uses the retail inventory method to
appro4imate
1-! ending inventory< 3he follo&ing information is availa%le for the month of
ugust:
Cost Retail
Cost of goods availa%le for sale<<<<<<<<<<<<<<<<<<<<<< C(2,:,,, C+,,:,,,
Net mar/ups Enot included a%oveF<<<<<<<<<<<<<<<<<< 1,,:,,,
Net mar/do&ns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< #,:,,,
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< '),:,,,
5hat &as the appro4imate inventory using the average cost estimate for
inventory@
a< C2,1:',,
%< C21,:,,,
c< C22#:,,,
d< C2!,:#,,
a #$< company sells four products: I: II: III: and IV< 3he company values all
1-1 inventories using the lo&er*of*cost*or*mar/et procedure< 3he company has
consistently e4perienced a profit margin of 2, percent of sales and e4pects
this rate to hold for the future< dditional information: sho&n %elo&: is
availa%le for the most recent year as of 0ecem%er !1<
-riginal Cost to Estimated Cost E4pected Selling
?roduct Cost Replace to Sell ?rices
I C', C(, C1, C1,,
II (, +, 2, 12,
III ), ', 1, ',
IV +, ), 2, +,
"sing the lo&er*of*cost*or*mar/et procedure: &hat is the reported inventory
value at 0ecem%er !1 for one unit of ?roduct I@
a< C',
%< C(,
c< C),
d< C+,
a #'< company sells four products: I: II: III: and IV< 3he company values all
1-1 inventories using the lo&er*of*cost*or*mar/et procedure< 3he company has
consistently e4perienced a profit margin of 2, percent of sales and e4pects
this rate to hold for the future< dditional information: sho&n %elo&: is
availa%le for the most recent year as of 0ecem%er !1<
-riginal Cost to Estimated Cost E4pected Selling
?roduct Cost Replace to Sell ?rices
I C', C(, C1, C1,,
II (, +, 2, 12,
III ), ', 1, ',
IV +, ), 2, +,
"sing the lo&er*of*cost*or*mar/et procedure: &hat is the reported inventory
value at 0ecem%er !1 for one unit of ?roduct II@
a< C(,
%< C('
c< C+,
d< C+'
a #(< 3he 2air%an/s 0epartment Store uses the 1I2- retail inventory method to
1-$ appro4imate a 1I2- value for ending inventory< Information relating to the
computation of the inventory at 0ecem%er !1 is as follo&s:
Cost Retail
Inventory: Ianuary 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C !2:,,, C ),:,,,
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< $),:,,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2#':,,, ',,:,,,
2reight*in<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< (:',,
5hat is the ending inventory at cost at 0ecem%er !1 using the retail
inventory method and a 1I2- appro4imation@
a< C#,:,,,
%< C#1:,,,
c< C#2:,,,
d< C#!:,,,
% #)< -n 0ecem%er !1: 2,,1: Iohnson Company adopted the dollar*value 1I2-
1-$ retail inventory method< Inventory data for 2,,2 are as follo&s:
1I2- Cost Retail
Inventory: 0ecem%er !1: 2,,1<<<<<<<<<<<<<<<<<<<<<<<< C1),:,,, C2$,:,,,
Inventory: 0ecem%er !1: 2,,2<<<<<<<<<<<<<<<<<<<<<<<< @ !!,:,,,
Increase in price level for 2,,2<<<<<<<<<<<<<<<<<<<<<<< 1,H
Cost*to*retail ratio for 2,,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<< (,H
"nder the dollar*value 1I2- retail method: Iohnson>s inventory at
0ecem%er !1: 2,,2: should %e
a< C21$:,,,<
%< C21):$,,<
c< C2!1:,,,<
d< C2!':,,,<
c #+< 3he Garrett Corporation uses the lo&er*of*cost*or*mar/et method to value
1-1 inventory< 0ata regarding the items in &or/*in*process inventory are
presented %elo&<
7ar/ers ?ens Dighlighters
Distorical cost<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C2#:,,, C1):)), C!,:,,,
Selling price<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< !':,,, !':,,, !':,,,
Estimated cost to complete<<<<<<<<<<<<< #:),, #:),, ':),,
Replacement cost<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2,:),, 1':),, !1:),,
Normal profit margin as a
percentage of selling price<<<<<<<<<<< 2$H 2$H 1,H
3he value for cost to %e used in the lo&er*of*cost*or*mar/et comparison for
the mar/ers is
a< C2,:),,<
%< C2!:#,,<
c< C2#:,,,<
d< C!1:2,,<
a $,< 3he Garrett Corporation uses the lo&er*of*cost*or*mar/et method to value
1-1 inventory< 0ata regarding the items in &or/*in*process inventory are
presented %elo&<
7ar/ers ?ens
Dighlighters
Distorical cost<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C2#:,,, C1):)), C!,:,,,
Selling price<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< !':,,, !':,,, !':,,,
Estimated cost to complete<<<<<<<<<<<<< #:),, #:),, ':),,
Replacement cost<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2,:),, 1':),, !1:),,
Normal profit margin as a
percentage of selling price<<<<<<<<<< 2$H 2$H 1,H
5hen valuing the pens: the mar/et value to %e used in the lo&er*of*cost*or*
mar/et comparison is
a< C22:2,,<
%< C!1:2,,<
c< C1':),,<
d< C1):),,<
% $1< 3he Garrett Corporation uses the lo&er*of*cost*or*mar/et method to value
1-1 inventory< 0ata regarding the items in &or/*in*process inventory are
presented %elo&<
7ar/ers ?ens
Dighlighters
Distorical cost<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C2#:,,, C1):)), C!,:,,,
Selling price<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< !':,,, !':,,, !':,,,
Estimated cost to complete<<<<<<<<<<<<< #:),, #:),, ':),,
Replacement cost<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2,:),, 1':),, !1:),,
Normal profit margin as a
percentage of selling price<<<<<<<<<< 2$H 2$H 1,H
3he inventory valuation for highlighters using the lo&er*of*cost*or*mar/et
method is
a< C2$:',,<
%< C2+:2,,<
c< C!1:),,<
d< C!,:,,,<
c $2< "tah Enterprises purchased inventory from 3o/yo 0istri%uting for 1:,,,:,,,
1-( yen on 0ecem%er 1: 2,,1: &hen the e4change rate for yen &as C<,,#< -n
0ecem%er !1: 2,,1: "tah=s year*end: the e4change rate &as C<,,!$< 3he
invoice &as paid %y "tah Enterprises in 2,,2 &hen the e4change rate &as
C<,,!)< Do& much e4change gain or loss &ould %e recogni.ed %y "tah
Enterprises in 2,,2 relating to this transaction@
a< C2,, loss
%< C2,, gain
c< C!,, loss
d< C!,, gain
d $!< "tah Enterprises purchased inventory from 3o/yo 0istri%uting for 1:,,,:,,,
1-( yen on 0ecem%er 1: 2,,1 &hen the e4change rate for yen &as C<,,#< -n
0ecem%er !1: 2,,1: "tah=s year*end: the e4change rate &as C<,,!$< 3he
invoice &as paid %y "tah Enterprises in 2,,2 &hen the e4change rate &as
C<,,!)< Do& much e4change gain or loss &ould %e recogni.ed %y "tah
Enterprises in 2,,1 relating to this transaction@
a< C2,, loss
%< C2,, gain
c< C$,, loss
d< C$,, gain
% $#< 3he follo&ing information is availa%le for the Neptune Company for the
three
1-2 months ended 7arch !1 of this year:
Inventory: Ianuary 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C #$,:,,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1:(,,:,,,
2reight*in<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1,,:,,,
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2:#,,:,,,
3he gross margin &as estimated to %e 2$ percent of sales< 5hat is the
estimated inventory %alance at 7arch !1@
a< C!$,:,,,
%< C#$,:,,,
c< C$'2:$,,
d< C',,:,,,
c $$< Elrond Company %egan operations in 2,,,< 0uring the first t&o years of
1-# operations: Elrond made undiscovered errors in ta/ing its year*end
inventories that understated 2,,, ending inventory %y C#,:,,, and
overstated 2,,1 ending inventory %y C$,:,,,< 3he com%ined effect of
these errors on reported income is
2,,, 2,,1 2,,2
a< understated C#,:,,, overstated C$,:,,, not affected
%< understated C#,:,,, overstated C1,:,,, not affected
c< understated C#,:,,, overstated C+,:,,, understated C$,:,,,
d< overstated C#,:,,, understated C$,:,,, overstated C1,:,,,
d $'< Elrond Company %egan operations in 2,,,< 0uring the first t&o years of
1-# operations: Elrond made undiscovered errors in ta/ing its year*end
inventories that overstated 2,,, ending inventory %y C$,:,,, and
overstated 2,,1 ending inventory %y C#,:,,,< 3he com%ined effect of
these errors on reported income is
2,,, 2,,1 2,,2
a< overstated C$,:,,, overstated C+,:,,, understated C#,:,,,
%< overstated C$,:,,, overstated C#,:,,, not affected
c< understated C$,:,,, understated C+,:,,, not affected
d< overstated C$,:,,, understated C1,:,,, understated C#,:,,,
d $(< Elrond Company %egan operations in 2,,,< 0uring the first t&o years of
1-# operations: Elrond made undiscovered errors in ta/ing its year*end
inventories that overstated 2,,, ending inventory %y C$,:,,, and
understated 2,,1 ending inventory %y C#,:,,,< 3he com%ined effect of
these errors on reported income is
2,,, 2,,1 2,,2
a< understated C$,:,,, overstated C+,:,,, understated C#,:,,,
%< overstated C$,:,,, understated C+,:,,, not affected
c< overstated C$,:,,, understated C#,:,,, not affected
d< overstated C$,:,,, understated C+,:,,, overstated C#,:,,,
% $)< Iupiter Company prepares monthly income statements< physical
inventory
1-2 is ta/en only at year*endG hence: month*end inventories must %e estimated<
ll sales are made on account< 3he rate of mar/up on cost is $, percent<
3he follo&ing information relates to the month of 7ay:
ccounts receiva%le: 7ay 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C2,:,,,
ccounts receiva%le: 7ay !1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< !,:,,,
Collection of accounts receiva%le during 7ay<<<<<<<<<<<<<<<<<<<<<< $,:,,,
Inventory: 7ay 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< !':,,,
?urchases of inventory during 7ay<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< !2:,,,
3he estimated cost of the 7ay !1 inventory is
a< C2#:,,,<
%< C2):,,,<
c< C!):,,,<
d< C##:,,,<
a $+< company sells four products: I: II: III and IV< 3he company values all
1-2 inventories using the lo&er*of*cost*or*mar/et procedure< 3he company has
consistently e4perienced a profit margin of 2, percent of sales and e4pects
this rate to hold for the future< dditional information: sho&n %elo&: is
availa%le for the most recent year as of 0ecem%er !1<
-riginal Cost to Estimated Cost E4pected Selling
?roduct Cost Replace to Sell ?rices
I C', C(, C1, C1,,
II (, +, 2, 12,
III ), ', 1, ',
IV +, ), 2, +,
"sing the lo&er*of*cost*or*mar/et procedure: &hat is the reported inventory
value at 0ecem%er !1 for one unit of ?roduct III@
a< C$,
%< C',
c< C(,
d< C),
% ',< company sells four products: I: II: III: and IV< 3he company values all
1-2 inventories using the lo&er*of*cost*or*mar/et procedure< 3he company has
consistently e4perienced a profit margin of 2, percent of sales and e4pects
this rate to hold for the future< dditional information: sho&n %elo&: is
availa%le for the most recent year as of 0ecem%er !1<
-riginal Cost to Estimated Cost E4pected Selling
?roduct Cost Replace to Sell ?rices
I C', C(, C1, C1,,
II (, +, 2, 12,
III ), ', 1, ',
IV +, ), 2, +,
"sing the lo&er*of*cost*or*mar/et procedure: &hat is the reported inventory
value at 0ecem%er !1 for one unit of ?roduct IV@
a< C',
%< C(,
c< C),
d< C+,
a '1< 3he Cart&right Corporation entered into a purchase contract during 2,,1 to
purchase merchandise inventory in the future for resale< 3he contract
contained no provisions for cancellation or revision< 3he total amount
paya%le under the contract &as C+,,:,,,< t the end of 2,,2: the estimated
replacement cost of the goods yet to %e purchased under the contract &as
C)2$:,,,< ?ayment on the contract is due in 2,,!: and the replacement
cost of C)2$:,,, li/ely &ill not increase< s a result of these
circumstances: &hat entry: if any: should Cart&right Corporation ma/e at
the end of 2,,2 relating to this contract@
a< Estimated loss on purchase contract<<<<<<<<<<<<<<<<<<<<<<<<<($:,,,
Estimated lia%ility on purchase contractKKK<< ($:,,,
%< Estimated inventory<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<)2$:,,,
Estimated purchase contractKKKKKKKK< )2$:,,,
c< Estimated inventory<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<)2$:,,,
Estimated loss on purchase contract<<<<<<<<<<<<<<<<<<<<<<<<< ($:,,,
Estimated lia%ility on purchase contractKKK<< +,,:,,,
d< No entry should %e made until 2,,!: &hen the goods are received<
PRO%LEMS
Problem 1
3he follo&ing data relate to the records of ?o&ell Corp< for the month of
Septem%er<
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C1',:,,,
Beginning inventory<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C 2,:,,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1),:,,,
Goods availa%le for sale<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C2,,:,,,
"sing these data: estimate the cost of ending inventory for each situation %elo&:
E1F 7ar/up is $, percent on cost<
E2F 7ar/up is ', percent on sales<
E!F 7ar/up is 2$ percent on cost<
E#F 7ar/up is #, percent on sales<
Solution 1
1-2
E1F C1',:,,,81<$, L C1,':''(
C2,,:,,, * C1,':''( L C+!:!!! ending inventory
E2F C1',:,,, 4 E1,,H * ',HF L C'#:,,,
C2,,:,,, * C'#:,,, L C1!':,,, ending inventory
E!F C1',:,,,81<2$ L C12):,,,
C2,,:,,, * C12):,,, L C(2:,,, ending inventory
E#F C1',:,,, 4 E1,,H * #,HF L C+':,,,
C2,,:,,, * C+':,,, L C1,#:,,, ending inventory
Problem 2
Northstar Sales Corp< &as organi.ed on Ianuary 1: 2,,1< -n 0ecem%er !1: 2,,2:
the company lost most of its inventory in a &arehouse fire ;ust %efore the year*end
count of inventory &as to ta/e place< 0ata from the records disclosed the
follo&ing:
2,,1 2,,2
Inventory: Ianuary 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C , C1(!:12,
?urchases during year<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< )',:,,, '+2:,,,
?urchase returns and allo&ances during year<<<<<<<<<<<< #':12, '#:',,
Sales during year<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ()):,,, )!':,,,
Sales returns and allo&ances during year<<<<<<<<<<<<<<<<<< 1':,,, 2,:,,,
-n Ianuary 1: 2,,2: Northstar=s pricing policy &as changed so that the gross profit
rate &ould %e ! percentage points higher than the one earned in 2,,1<
Salvaged undamaged merchandise &as mar/ed to sell at C2#:,,,: &hile damaged
merchandise mar/ed to sell at C1':,,, had an estimated net reali.a%le value of
C!:',,<
0etermine the company=s inventory loss due to the fire that occurred on 0ecem%er
!1: 2,,2<
Solution 2
1-2
2,,1 2,,2
Gross Gross
?rofit H ?rofit H
Sales EnetF<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C((2:,,, 1,,H C)1':,,, 1,,H
Cost of goods sold:
Beginning inventory<<<<<<<<<<<<<<<< C , C1(!:12,
?urchases EnetF<<<<<<<<<<<<<<<<<<<<<<< )1!:)), '2(:#,,
Goods availa%le for sale<<<<<<<<< C)1!:)), C),,:$2,
Ending inventory<<<<<<<<<<<<<<<<<<<<< 1(!:12, 1#(:(2, MMM
Cost of goods sold<<<<<<<<<<<<<<<<<< C'#,:(', )!H C'$2:),, MM ),H
Gross profit on sales<<<<<<<<<<<<<<<<<<< C1!1:2#, 1(H C1'!:2,, 2,H M
M 1(H N !H L 2,H
MM C)1':,,, 4 ),H L C'$2:),,
MMM C),,:$2, * C'$2:),, L C1#(:(2,
December 31, 2002
Ending inventory EcostF<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C1#(:(2,
1ess: Cost of undamaged inventory EC2#:,,, 4 <),F<<<<<<<<<<<<<<<<< C1+:2,,
Net reali.a%le value of damaged merchandise<<<<<<<<<<< !:',, 22:),,
Inventory loss due to fire<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C12#:+2,
Problem 3
Oingston Company reported the follo&ing net income amounts:
1+++ C$2:,,,
2,,, C!):,,,
2,,1 C'':,,,
In 2,,2: the company discovered errors that %een made in computing the ending
inventories for 1+++ and 2,,,: as follo&s:
1+++ Ending inventory understated %y C#:,,,<
2,,, Ending inventory understated %y C):,,,<
Compute the correct net incomes for E1F 1+++: E2F 2,,,: and E!F 2,,1<
Solution 3
1-#
E1F 1+++ net income:
s reported<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C $2:,,,
Correction for 1+++ inventory understatement<<<<<<<<<<<<<<<<<<<<< #:,,,
Corrected net income<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C $':,,,
E2F 2,,, net income:
s reported<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C !):,,,
Correction for 1+++ inventory understatement<<<<<<<<<<<<<<<<<<<<< E#:,,,F
Correction for 2,,, inventory understatement<<<<<<<<<<<<<<<<<<<<< ):,,,
Corrected net income<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C #2:,,,
E!F 2,,1 net income:
s reported<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C '':,,,
Correction for 2,,, inventory understatement<<<<<<<<<<<<<<<<<<<<< E):,,,F
Corrected net income<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C $):,,,
Problem 4
-n 7ay 1(: it &as discovered that a material amount of inventory had %een stolen<
physical count discloses that C$$:,,, of merchandise &as on hand as of 7ay 1(<
3he follo&ing additional data is availa%le from the accounting records:
Inventory: Ianuary 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C '2:,,,
?urchases: Ianuary 1 * 7ay 1( Eincludes C#:,,, shipped 2-B
shipping point 7ay 1': received 7ay 1+F<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 11#:,,,
Sales Egoods delivered to customersF: Ianuary 1 * 7ay 1(<<<<<<<<<<<<<<<<<<<<<<< +,:,,,
Records indicate that the company=s gross profit has averaged #, percent of
selling prices< Estimate the amount of loss due to theft<
Solution 4
1-2
Inventory: Ianuary 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C '2:,,,
?urchases EC11#:,,, * C#:,,,F<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 11,:,,,
Cost of goods availa%le for sale<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C1(2:,,,
Sales <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C+,:,,,
Gross profit EC+,:,,, 4 #,HF<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< !':,,,
Estimated cost of goods sold<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< $#:,,,
Estimated inventory: 7ay 1(<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C11):,,,
ctual inventory: 7ay 1(<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< $$:,,,
3heft loss<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C '!:,,,
Problem 5
Boston Company reported the follo&ing net income amounts:
1+++ C#2:,,,
2,,, C'(:,,,
2,,1 C():,,,
In 2,,2: the company discovered errors that %een made in computing the ending
inventories for 1+++ and 2,,,: as follo&s:
1+++ Ending inventory overstated %y C+:,,,<
2,,, Ending inventory understated %y C':,,,<
Compute the correct net incomes for E1F 1+++: E2F 2,,,: and E!F 2,,1<
Solution 5
1-#
E1F 1+++ net income:
s reported<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C #2:,,,
Correction for 1+++ inventory overstatement<<<<<<<<<<<<<<<<<<<<<<<< E+:,,,F
Corrected net income<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C !!:,,,
E2F 2,,, net income:
s reported<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C '(:,,,
Correction for 1+++ inventory overstatement<<<<<<<<<<<<<<<<<<<<<<<< +:,,,
Correction for 2,,, inventory understatement<<<<<<<<<<<<<<<<<<<<< ':,,,
Corrected net income<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C )2:,,,
E!F 2,,1 net income:
s reported<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C ():,,,
Correction for 2,,, inventory understatement<<<<<<<<<<<<<<<<<<<<< E':,,,F
Corrected net income<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C (2:,,,
Problem 6
Gi%%>s 0epartment Store uses the retail inventory method< Information relating to
the computation of the inventory at 0ecem%er !1: 2,,2: is as follo&s:
Cost Retail
Inventory at Ianuary 1: 2,,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C #$:,,, C ($:,,,
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ',,:,,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2(,:,,, $+,:,,,
2reight*in<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ':($,
7ar/ups<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< $,:,,,
7ar/do&ns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2,:,,,
Estimated normal shrin/age<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2H of sales
?repare a schedule to calculate the estimated ending inventory at the lo&er of
average cost or mar/et at 0ecem%er !1: 2,,2: using the retail inventory method<
Solution 6
1-!
Cost Retail
Inventory at Ianuary 1: 2,,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C #$:,,, C ($:,,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2(,:,,, $+,:,,,
2reight*in<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ':($,
7ar/ups<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< $,:,,,
C!21:($,
C(1$:,,,
Cost ratio EC!21:($,8C(1$:,,,F<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< #$H
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C',,:,,,
7ar/do&ns <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2,:,,,
Estimated normal shrin/age E2H 4 C',,:,,,F<<<<<<<<<<<<<<<<<<<<<< 12:,,,
C'!2:,,
,
Estimated inventory at retail: 0ecem%er !1: 2,,2<<<<<<<<<< C )!:,,,
Estimated inventory at lo&er of cost or mar/et:
0ecem%er !1: 2,,2 EC)!:,,, 4 #$HF<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C !(:!$,
Problem 7
3he Pena Sporting Goods Store values its inventory using the retail inventory
method to appro4imate at the lo&er of cost or mar/et< 3he follo&ing data are
availa%le for the month of Iuly:
Cost Retail
Inventory: Iuly 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C ($:!2, C1,':#,,
7ar/do&ns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1:#(,
7ar/ups<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ):$#,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 22,:22' !1!:,#,
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< !#1:',,
?urchase returns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< #:2,, $:,#,
Sales returns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1#:(,,
Based on the data presented a%ove: compute the estimated inventory at Iuly !1 at
the lo&er of average cost or mar/et under the retail inventory method< Round the
cost ratio to three decimal places<
Solution 7
1-!
Cost Retail
Inventory: Iuly 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C ($:!2, C1,':#,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 22,:22' !1!:,#,
?urchase returns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< E#:2,,F
E$:,#,F
7ar/ups<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ):$#,
Goods availa%le for sale<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C2+1:!#' C#22:+#,
Cost ratio EC2+1:!#'8C#22:+#,F<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ')<+H
Sales EnetF EC!#1:',, * C1#:(,,F<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C!2':+,,
7ar/do&ns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1:#(,
C!2$:#!,
Estimated inventory at retail: Iuly !1<<<<<<<<<<<<<<<<<<<<<<<<< C +(:$1,
Estimated inventory at lo&er of cost or
mar/et EC+(:$1, 4 ')<+HF<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C '(:1)#
Problem 8
3he Clayton Grocery Store uses the dollar*value 1I2- retail method< Information
relating to the computation of the inventory at 0ecem%er !1: 1+++: follo&s:
Cost Retail
Inventory: Ianuary 1: 2,,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C1,#:#,, C1'2:,,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< #'):,,, (++:2,,
2reight*in<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< (2:,,,
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ')#:,,,
7ar/ups<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1##:,,,
7ar/do&ns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< #!:2,,
ssuming that there &as no change in the price inde4 during the year: compute the
inventory at 0ecem%er !1: 2,,2: using the dollar*value 1I2- retail method<
Solution 8
1-$ Cost
Retail
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C#'):,,, C(++:2,,
2reight*in<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< (2:,,,
7ar/ups<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1##:,,,
7ar/do&ns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
E#!:2,,F
C$#,:,,, C+,,:,,,
Cost8retail EC$#,:,,,8C+,,:,,,F:<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ',H
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ')#:,,,
1+++ layer at retail<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C21':,,,
1+++ layer at cost EC21':,,, 4 <',F<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C12+:',,
Inventory: Ianuary 1: 2,,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1,#:#,, 1'2:,,,
Inventory: 0ecem%er !1: 2,,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C2!#:,,, C!():,,,
Problem 9
3he Broo/s 0epartment Store uses the dollar*value 1I2- retail method for
determining inventory values< Information relating to the inventory for 2,,2 is
given %elo&<
Cost Retail
Inventory: Ianuary 1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C#'):,,, C +',:,,,
?urchases EnetF<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< (2,:,,, 1:,),:,,,
7ar/ups<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 12,:,,,
7ar/do&ns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< #):,,,
Sales EnetF<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< +(':),,
?rice inde4: 0ecem%er !1: 2,,1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1<2,
?rice inde4: 0ecem%er !1: 2,,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1<2'
Compute the 2,,2 ending inventory at 1I2- cost using the dollar*value 1I2- retail
method<
Solution 9
1-$
Beginning inventory at %ase*year retail: C+',:,,,81<2, L C),,:,,,
Ending inventory at %ase*year retail: C1:1!$:2,,81<2' L C+,,:+$2

Cost Retail
Beginning inventory<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C #'):,,, C +',:,,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< (2,:,,, 1:,),:,,,
7ar/ups<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 12,:,,,
7ar/do&ns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
E#):,,,F
C 1:1)):,,, C 2:112:,,,
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< +(':),,
C 1:1!$:2,,
Base*Aear ?rice 1I2- Cost8 1I2-
Retail Inde4 1ayer Retail Cost
Ian< 1: 2,,2 C),,:,,, 1<2, C +',:,,, C#'):,,,
0ec< !1: 2,,2 1,,:+$2 1<2' 12(:2,, '2<$H M (+:$,,
C+,,:+$2 C1:,)(:2,, C$#(:$,,
M Computation of Cost to Retail Ratio
Cost Retail
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C(2,:,,, C1:,),:,,,
7ar/ups<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 12,:,,,
7ar/do&ns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
E#):,,,F
C(2,:,,,
C1:1$2:,,,
Cost ratio EC(2,:,,,8C1:1$2:,,,F<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< '2<$H
Problem 10
5ardle Inc< carries four items in inventory< 3he follo&ing data relate to such
goods at the end of 2,,2:
Replacement Estimated Selling Normal
Item Cost Cost Sales ?rice Cost ?rofit
C11<,, C1,<,, C1'<,, C1<), C#<,,
B 12<,, 12<,, 2,<,, 1<', 2<$,
C $<,, #<,, +<$, 1<+, 1<,,
0 1#<,, 1$<,, 1$<,, 2<#, !<$,
0etermine the proper carrying value of each inventory item using the lo&er*of*cost*
or* mar/et method<
Solution 10
1-1
Replacement 1o&er of Cost
Item Cost Cost Ceiling 2loor 7ar/et or 7ar/et
C11<,, C1,<,, C1#<2, C1,<2, C1,<2, C1,<2,
B 12<,, 12<,, 1)<#, 1$<+, 1$<+, 12<,,
C $<,, #<,, (<', '<', '<', $<,,
0 1#<,, 1$<,, 12<', +<1, 12<', 12<',
Problem 11
-n 0ecem%er 1': 2,,1: Big pple 0istri%uting: %ased in Ne& Aor/ City: sold
inventory costing C+:,,, to lps Clim%ing Inc<: a S&iss firm< 3he transaction &as
denominated in S&iss francs and the invoice totaled (,:,,, francs< lps Clim%ing
paid the invoice on Ianuary 1): 2,,2< Relevant e4change rates are as follo&s:
E4change Rate for
S&iss 2rancs
0ecem%er 1': 2,,1<<<<<<<<<<<<<<< C<21,
0ecem%er !1: 2,,1<<<<<<<<<<<<<<< <1+(
Ianuary 1): 2,,2<<<<<<<<<<<<<<<<<<< <2,2
?repare ;ournal entries on the %oo/s of Big pple 0istri%uting to record
E1F the initial sale EBig pple uses a perpetual inventory systemF<
E2F the ad;ustment made on the %alance sheet date<
E!F the receipt of payment<
Solution 11
1-(
E1F
2,,1
0ec< 1' Cost of Goods Sold<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< +:,,,
Inventory<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< +:,,,
ccounts Receiva%le EfrancsF<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1#:(,,
Sales EC<21, 4 (,:,,, francsF<<<<<<<<<<<<<<<<<<<<<<<<< 1#:(,,
E2F
0ec< !1 E4change 1oss QEC<21, * C<1+(F 4 (,:,,,R<<<<<<<<<<<<<<<<<<<< +1,
ccounts Receiva%le EfrancsF<<<<<<<<<<<<<<<<<<<< +1,
E!F
2,,2
Ian< 1) Cash EfrancsF EC<2,2 4 (,:,,, francsF<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1#:1#,
ccounts Receiva%le EfrancsF<<<<<<<<<<<<<<<<<<<< 1!:(+,
E4change Gain<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< !$,
Problem 12
3he #+ers Company %egan its operations in early 2,,2< 3he company carries five
different types of inventory &hich are listed %elo& along &ith other relevant data<
3he company values its inventory at the lo&er of cost or mar/et< t 0ecem%er !1:
2,,2: #+ers has e4actly one unit of each item in ending inventory<
Estimated Estimated Normal ?rofit
ctual Replacement Selling Cost 7argin on
Item Cost Cost ?rice to Sell Selling ?rice
1 C12<,, C1!<,, C2,<,, C#<,, 2,H
2 1#<,, 1,<,, 1,<,, 2<,, 1,H
! 1'<,, 1,<,, 2,<,, '<,, 1$H
# 1)<,, 1$<,, 2#<,, 2<,, 2$H
$ 2,<,, 22<,, !,<,, #<,, !,H
E1F Complete the follo&ing information using the lo&er*of*cost*or*mar/et method as
of
0ecem%er !1: 2,,2<
Item Ceiling 2loor 7ar/et 1C7
1
2
!
#
$
E2F Compute the inventory loss: if any: #+ers should sho& in 2,,2 using the
lo&er*of*cost*or*mar/et method applied on an individual items %asis<
E!F ?repare the ad;usting : if any: re9uired as of 0ecem%er !1: 2,,2: assuming all
such
entries are made directly to the inventory account<
Solution 12
1-1
E1F
Item Ceiling 2loor 7ar/et 1C7
1 1' 12 1! 12
2 ) ( ) )
! 1# 11 11 11
# 22 1' 1' 1'
$ 2' 1( 22 2,
E2F 1oss L 1!M
M E12 N 1# N 1' N 1) N 2,F * E12 N ) N 11 N 1' N 2,F
E!F 1oss from 0ecline in Value of Inventory<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1!
Inventory<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1!
Problem 13
3he Steelers Company had its entire inventory destroyed &hen a fire s&ept through
the company=s &arehouse< 2ortunately: the accounting records &ere loc/ed in a
fireproof safe and &ere not damaged< 3he follo&ing information for the period up to
the date of the fire &as ta/en from the accounting records:
Sales<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C#)':#,,
?urchases<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 2+$:,,,
Beginning inventory<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1#(:),,
?urchase returns<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1':',,
2reight*in<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< ):2,,
E1F ssuming that the gross profit has averaged 2$ percent of selling price: &hat is
the
estimated value of the inventory destroyed in the fire@ Sho& all calculations in
good
form<
E2F ssuming that the mar/up percentage on cost is 2) percent: &hat is the
estimated
value of the inventory destroyed in the fire@ Sho& all calculations in good form<
Solution 13
1-2
E1F Beginning Inventory C1#(:),,
N ?urchases 2+$:,,,
N 2reight*in ):2,,
?urchase returns 1':',,
L Goods availa%le for sale C#!#:#,,
Cost of goods sold E#)':#,, 4 <($F !'#:),,
L Inventory lost in fire C '+:',,
E2F Beginning Inventory C1#(:),,
N ?urchases 2+$:,,,
N 2reight*in ):2,,
?urchase returns 1':',,
L Goods availa%le for sale C#!#:#,,
Cost of goods sold E#)':#,, 1<2)F !),:,,,
L Inventory lost in fire C $#:#,,
Problem 14
3he follo&ing information is availa%le for ?ac/ers Corporation &hich has %een using
the dollar*value retail 1I2- method for the past t&o years:
Cost Retail
Beginning inventory E1818,,F<<<<<<<<<<<<<<<<<<<<<<<< C#,:,,, C ),:,,,
Net purchases * 2,,1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C'+:',, C12,:,,,
Net sales * 2,,1<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< 1,':2,,
Net purchases * 2,,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< C',:,,, C1,,:,,,
Net sales * 2,,2<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< )1:$',
?rice inde4 at %eginning of 2,,1: 1<,,
?rice inde4 at end of 2,,1: 1<12
?rice inde4 at end of 2,,2: 1<22
"sing the dollar*value retail 1I2- method: calculate the %alance sheet valuation for
inventory<
E1F at the end of 2,,1<
E2F at the end of 2,,2<
Solution 14
1-$
E1F All inventory amounts at retail.
0ollar
Ending End*of*Aear Inventory Inventory Incremental Value
Inventory Inde4 at Base Aear 1ayers 1ayer Cost 1I2-
C+!:),, 1<12 C)!:($, C),:,,, 1<,, 4 <$, M C#,:,,,
!:($, 1<12 4 <$) MM 2:#!'
C#2:#!'
ME#,:,,, ),:,,,F
MME'+:',, 12,:,,,F
E2F All inventory amounts at retail.
0ollar
Ending End*of*Aear Inventory Inventory Incremental Value
Inventory Inde4 at Base Aear 1ayers 1ayer Cost 1I2-
C112:2#, 1<22 C+2:,,, C),:,,, 1<,, 4 <$, C#,:,,,
!:($, 1<12 4 <$) 2:#!'
):2$, 1<22 4 <', M ':,!+
C#):#($
ME',:,,, 1,,:,,,F
Problem 15
Current generally accepted accounting principles state that a departure from the
cost
%asis of pricing inventory is re9uired &hen the utility of the goods is no longer as
great as its cost< ccordingly: the lo&er*of*cost*or*mar/et rule is applied to
inventories such that: if mar/et is less than cost: an ad;ustment is made to record
the loss and to restate ending inventory at the lo&er value<
5hat effect &ould the failure to apply the lo&er*of*cost*or*mar/et method have on
the income statement in current and future periods@
Solution 15
1-1
2ailure in the current period to apply the lo&er*of*cost*or*mar/et method &ould
result not only in the nonrecognition of a loss %ut &ould also distort gross margins in
the current and future periods< 7argins in the current and future periods &ould %e
too lo& as a result of matching lo&er selling prices against costs that are no longer
relevant< pplication of the lo&er*of*cost*or*mar/et method results in constant
margins on products %oth in current and future periods<
Problem 16
3he claim is sometimes made that the retail method is an appro4imation of the
&eighted average method since the cost to retail percentage is computed as a
&eighted average of the cost*retail relationship of all goods availa%le for sale during
the period< Evaluate the validity of the statement a%ove<
Solution 16
1-!
n appro4imation of &eighted average cost &ill result only if selling prices are
relatively sta%le or are unrelated to the changes in cost prices during the period< If
selling prices are moving in the same direction as costs and in appro4imately the
same percentages: then a first*in: first*out inventory may %e appro4imated< ssume
that %oth costs and selling prices have increased %y 2, percent during the period<
In this case: the mar/*on percentage &ill have remained constant< 3he ending
inventory &ill %e priced initially at the selling prices e4isting at the end of the period
and the conversion to cost &ill result in an appro4imation of the most recent
purchases: &hich is an appro4imation of a first*in: first*out flo&<
Problem 17
ma;or advantage of the retail inventory method is that it provides a means for
converting inventory amounts determined %y a physical count: priced at retail: to a
cost %asis< 3he retail method allo&s enterprises to reduce record/eeping and to
estimate the inventory %alance &ithout a physical count<
E4plain ho& the retail method could %e useful other than providing inventory cost
data for financial reports<
Solution 17
1-!
3he follo&ing are uses of the retail method in addition to its application for financial
reporting purposes:
1< 3he retail method provides a method of estimating the cost of inventory &ithout
ta/ing a physical count for interim periods not only for interim financial reports %ut
also for internal management analyses: including the formulation of purchasing
policy<
2< 3he retail method aids management in esta%lishing controls for inventory
regarding such issues as theft: mar/do&ns: and additional mar/ups in situations
&here neither a traditional periodic or a perpetual inventory system is used on an
interim %asis<
!< 3he retail method is accepted %y the Internal Revenue Service and thus can %e
used %oth for ta4 reporting and ta4 planning<
#< 3he retail method can %e used %y e4ternal and internal auditors as a test of the
overall reasona%leness of a physical inventory costed in the normal manner<
CHAPTER 9 && QUI' A
Name SSSSSSSSSSSSSSSSSSSSSSSSS
Section SSSSSSSSSSSSSSSSSSSSSSSS
3 2 1< 3he gross profit method is %ased on an assumed relationship %et&een gross
profit and net sales<
3 2 2< 3he gross profit method is an alternative inventory costing method used in the
preparation of annual financial statements<
3 2 !< 3he gross profit method is useful &hen a periodic inventory system is used
and inventories are re9uired for interim financial statements<
3 2 #< In applying the gross profit method of estimating inventory: the gross profit
may %e stated as either a percentage of sales or a percentage of cost<
3 2 $< 3he retail inventory method can %e used to appro4imate a lo&er of average
cost or mar/et valuation<
3 2 '< Beginning inventory %alances are disregarded in computing the cost
percentage &hen using the retail method to appro4imate a 2I2- value for
ending inventory<
3 2 (< 5hen the retail inventory method is used: an annual physical count is
re9uired to measure actual shrin/age<
3 2 )< 3he mar/up percentage on sales can %e e4pressed as the gross margin
percentage less the cost percentage<
3 2 +< 7ar/ups are increases that raise sales prices a%ove original retail<
3 21,< 3he retail inventory method and the gross method are %oth %ased on the ratio
of cost of goods sold to sales price<
++
CHAPTER 9 && QUI' %
Name SSSSSSSSSSSSSSSSSSSSSSSSS
Section SSSSSSSSSSSSSSSSSSSSSSSS
3 2 1< In applying the retail inventory method: sales returns: sales discounts: and
sales allo&ances are proper deductions from gross sales in determining the
estimated ending retail inventory<
3 2 2< 5hen using the retail inventory method to appro4imate a lo&er*of*cost*or*
mar/et value for ending inventory: mar/ups: as &ell as mar/do&ns: are
recogni.ed in calculating the cost percentage applica%le to goods stated at
retail<
3 2 !< -verstating ending inventory &ill affect the %alance sheet: %ut not the income
statement<
3 2 #< In the dollar*value 1I2- retail inventory method: mar/do&ns: as &ell as
mar/ups: are recogni.ed in calculating the cost percentage applica%le to
goods stated at retail<
3 2 $< "nder the lo&er*of*cost*or*mar/et rule: mar/et value is al&ays the lo&est of
three amounts**replacement cost: floor: and ceiling<
3 2 '< -verstating purchases &ill cause the gross margin to %e understated %y the
same amount<
3 2 (< 3he lo&er*of*cost*or*mar/et method may %e applied to each inventory item: to
ma;or classes or categories of inventory items: or to the inventory as a &hole<
3 2 )< pplication of lo&er of cost or mar/et to individual items results in a higher
inventory valuation than application to classes of inventory or inventory as a
&hole<
3 2 +< In valuing inventories at the lo&er of cost or mar/et: the ceiling limitation is
applied so that inventories are not valued at more than their net reali.a%le
value<
3 21,< -verstating ending inventory in ?eriod 1 &ill cause ending inventory in ?eriod
2 to %e understated %y the same amount<
1,,
3est Ban/: Intermediate Accounting: 1!
th
ed< ()(
CHAPTER 9 && QUI' SOLUTIONS
Tui.
1< 3
2< 2
!< 3
#< 3
$< 3
'< 2
(< 3
)< 2
+< 3
1,< 3
Tui. B
1< 2
2< 2
!< 2
#< 3
$< 2
'< 3
(< 3
)< 2
+< 3
1,< 2