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Chapter9: Inventories: Additional Issues

Problems

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p. 489

An alternate exercise and problem set is available on the text website: www.mhhe.com/spiceland6e

P 9-1

 

Lower of cost or market

 

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Decker Company has five products in its inventory. Information about the December 31, 2011, inventory follows.

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   The selling cost for each product consists of a 15 percent sales commission. The normal profit percentage for each product is 40 percent of the selling price.

Required:

1.

  

Determine the balance sheet inventory carrying value at December 31, 2011, assuming the LCM rule is applied to individual products.

2.

  

Determine the balance sheet inventory carrying value at December 31, 2011, assuming the LCM rule is applied to the entire inventory. Also, assuming that Decker recognizes an inventory write-down as a separate income statement item, determine the amount of the loss.

P 9-2

 

Lower of cost or market

 

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Almaden Hardware Store sells two distinct types of products, tools and paint products. Information pertaining to its 2011 year-end inventory is as follows:

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Required:

1.

  

Determine the balance sheet inventory carrying value at year-end, assuming the LCM rule is applied to (a) individual products, (b) product type, and (c) total inventory.

2.

  

Assuming that the company recognizes an inventory write-down as a separate income statement item, for each of the LCM applications determine the amount of the loss.

P 9-3

 

Gross profit method

 

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Smith Distributors, Inc., supplies ice cream shops with various toppings for making sundaes. On November 17, 2011, a fire resulted in the loss of all of the toppings stored in one section of the warehouse. The company must provide its insurance company with an estimate of the amount of inventory lost. The following information is available from the company's accounting records:

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Required:

1.

  

Calculate the estimated cost of each of the toppings lost in the fire.

2.

  

What factors could cause the estimates to be over-or understated?

P 9-4

 

Retail inventory method; various cost methods

 

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Sparrow Company uses the retail inventory method to estimate ending inventory and cost of goods sold. Data for 2011 are as follows:

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p. 490

   The company records sales net of employee discounts. Discounts for 2011 totaled $4,000.

Required:

Estimate Sparrow's ending inventory and cost of goods sold for the year using the retail inventory method and the following applications:

1.

  

Average cost

2.

  

Conventional (average, LCM)

P 9-5

 

Retail inventory method; conventional and LIFO

 

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Alquist Company uses the retail method to estimate its ending inventory. Selected information about its year 2011 operations is as follows:

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a.

  

January 1, 2011, beginning inventory had a cost of $100,000 and a retail value of $150,000.

b.

  

Purchases during 2011 cost $1,387,500 with an original retail value of $2,000,000.

c.

  

Freight costs were $10,000 for incoming merchandise.

d.

  

Net additional markups were $300,000 and net markdowns were $150,000.

e.

  

Based on prior experience, shrinkage due to shoplifting was estimated to be $15,000 of retail value.

f.

  

Merchandise is sold to employees at a 20% of selling price discount. Employee sales are recorded in a separate account at the net selling price. The balance in this account at the end of 2011 is $250,000.

g.

  

Sales to customers totaled $1,750,000 for the year.

Required:

1.

  

Estimate ending inventory and cost of goods sold using the conventional retail method (average, LCM).

2.

  

Estimate ending inventory and cost of goods sold using the LIFO retail method. (Assume stable prices.)

P 9-6

 

Retail inventory method; conventional

 

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Grand Department Store, 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 2011:

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Required:

1.

  

Using the conventional retail method, prepare a schedule computing estimated lower-of-cost-or-market inventory for October 31, 2011.

2.

  

A department store using the conventional retail inventory method estimates the cost of its ending inventory as $29,000. An accurate physical count reveals only $22,000 of inventory at lower of cost or market. List the factors that may have caused the difference between computed inventory and the physical count.

(AICPA adapted)

P 9-7

 

Retail method—average cost and LCM

 

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Smith-Kline Company maintains inventory records at selling prices as well as at cost. For 2011, the records indicate the following data:

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p. 491

Required:

Use the retail method to approximate cost of ending inventory in each of the following ways:

1.

  

Average cost

2.

  

Average (LCM) cost

P 9-8

 

Dollar-value LIFO retail method

 

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[This is a variation of the previous problem, modified to focus on the dollar-value LIFO retail method.] Smith-Kline Company maintains inventory records at selling prices as well as at cost. For 2011, the records indicate the following data:

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Required:

Assuming the price level increased from 1.00 at January 1 to 1.10 at December 31, 2011, use the dollar-value LIFO retail method to approximate cost of ending inventory and cost of goods sold.

P 9-9

 

Dollar-value LIFO retail

 

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On January 1, 2011, HGC Camera Store adopted the dollar-value LIFO retail inventory method. Inventory transactions at both cost and retail, and cost indexes for 2011 and 2012 are as follows:

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Required:

Estimate the 2011 and 2012 ending inventory and cost of goods sold using the dollar-value LIFO retail inventory method.

P 9-10

 

Retail inventory method; various applications

 

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Raleigh Department Store converted from the conventional retail method to the LIFO retail method on January 1, 2009, and is now considering converting to the dollar-value LIFO retail inventory method. Management requested, during your examination of the financial statements for the year ended December 31, 2011, that you furnish a summary showing certain computations of inventory costs for the past three years. Available information follows:

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a.

  

The inventory at January 1, 2009, had a retail value of $45,000 and a cost of $27,500 based on the conventional retail method.

b.

  

Transactions during 2009 were as follows:

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Sales to employees are recorded net of discounts.

c.

  

The retail value of the December 31, 2010, inventory was $56,100, the cost-to-retail percentage for 2010 under the LIFO retail method was 62%, and the appropriate price index was 102% of the January 1, 2010, price level.

p. 492

d.

  

The retail value of the December 31, 2011, inventory was $48,300, the cost-to-retail percentage for 2011 under the LIFO retail method was 61%, and the appropriate price index was 105% of the January 1, 2010, price level.

Required:

1.

  

Prepare a schedule showing the computation of the cost of inventory at December 31, 2009, based on the conventional retail method.

2.

  

Prepare a similar schedule as in requirement 1 based on the LIFO retail method.

3.

  

Same requirement as (1) for December 31, 2010 and 2011, based on the dollar-value LIFO retail method.

(AICPA adapted)

P 9-11

 

Retail inventory method; various applications

 

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On January 1, 2011, Pet Friendly Stores adopted the retail inventory method. Inventory transactions at both cost and retail, and cost indexes for 2011 and 2012 are as follows:

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Required:

1.

  

Estimate the 2011 and 2012 ending inventory and cost of goods sold using the dollar-value LIFO retail method.

2.

  

Estimate the 2011 ending inventory and cost of goods sold using the average cost method.

3.

  

Estimate the 2011 ending inventory and cost of goods sold using the conventional retail method (average, LCM).

P 9-12

 

Change in methods

 

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Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1976. In 2011, the company decided to switch to the average cost method. Data for 2011 are as follows:

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Additional Information:

a.

  

The company's effective income tax rate is 40% for all years.

b.

  

If the company had used the average cost method prior to 2011, ending inventory for 2010 would have been $130,000.

c.

  

7,000 units remained in inventory at the end of 2011.

Required:

1.

  

Ignoring income taxes, prepare the 2011 journal entry to adjust the accounts to reflect the average cost method.

2.

  

What is the effect of the change in methods on 2011 net income?

P 9-13

 

Inventory errors

 

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You have been hired as the new controller for the Ralston Company. Shortly after joining the company in 2011, you discover the following errors related to the 2009 and 2010 financial statements:

a.

  

Inventory at 12/31/09 was understated by $6,000.

b.

  

Inventory at 12/31/10 was overstated by $9,000.

c.

  

On 12/31/10, inventory was purchased for $3,000. The company did not record the purchase until the inventory was paid for early in 2011. At that time, the purchase was recorded by a debit to purchases and a credit to cash.

p. 493

The company uses a periodic inventory system.

Required:

1.

  

Assuming that the errors were discovered after the 2010 financial statements were issued, analyze the effect of the errors on 2010 and 2009 cost of goods sold, net income, and retained earnings. (Ignore income taxes.)

2.

  

Prepare a journal entry to correct the errors.

3.

  

What other step(s) would be taken in connection with the errors?

P 9-14

 

Inventory errors

 

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The December 31, 2011, inventory of Tog Company, based on a physical count, was determined to be $450,000. Included in that count was a shipment of goods that cost $50,000 received from a supplier at the end of the month. The purchase was recorded and paid for in 2012. Another supplier shipment costing $20,000 was correctly recorded as a purchase in 2011. However, the merchandise, shipped FOB shipping point, was not received until 2012 and was incorrectly omitted from the physical count. A third purchase, shipped from a supplier FOB shipping point on December 28, 2011, did not arrive until January 3, 2012. The merchandise, which cost $80,000, was not included in the physical count and the purchase has not yet been recorded.

   The company uses a periodic inventory system.

Required:

1.

  

Determine the correct December 31, 2011, inventory balance and, assuming that the errors were discovered after the 2011 financial statements were issued, analyze the effect of the errors on 2011 cost of goods sold, net income, and retained earnings. (Ignore income taxes.)

2.

  

Prepare a journal entry to correct the errors.

P 9-15

 

Integrating problem; Chapters 8 and 9; inventory errors

 

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Capwell Corporation uses a periodic inventory system. The company's ending inventory on December 31, 2011, its fiscal-year end, based on a physical count, was determined to be $326,000. Capwell's unadjusted trial balance also showed the following account balances: Purchases, $620,000; Accounts payable; $210,000; Accounts receivable, $225,000; Sales revenue, $840,000.

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   The internal audit department discovered the following items:

1.

  

Goods valued at $32,000 held on consignment from Dix Company were included in the physical count but not recorded as a purchase.

2.

  

Purchases from Xavier Corporation were incorrectly recorded at $41,000 instead of the correct amount of $14,000. The correct amount was included in the ending inventory.

3.

  

Goods that cost $25,000 were shipped from a vendor on December 28, 2011, terms f.o.b. destination. The merchandise arrived on January 3, 2012. The purchase and related accounts payable were recorded in 2011.

4.

  

One inventory item was incorrectly included in ending inventory as 100 units, instead of the correct amount of 1,000 units. This item cost $40 per unit.

5.

  

The 2010 balance sheet reported inventory of $352,000. The internal auditors discovered that a mathematical error caused this inventory to be understated by $62,000. This amount is considered to be material.

6.

  

Goods shipped to a customer f.o.b. destination on December 25, 2011, were received by the customer on January 4, 2012. The sales price was $40,000 and the merchandise cost $22,000. The sale and corresponding accounts receivable were recorded in 2011.

7.

  

Goods shipped from a vendor f.o.b. shipping point on December 27, 2011, were received on January 3, 2012. The merchandise cost $18,000. The purchase was not recorded until 2012.

Required:

1.

  

Determine the correct amounts for 2011 ending inventory, purchases, accounts payable, sales revenue, and accounts receivable.

2.

  

Calculate cost of goods sold for 2011.

3.

  

Describe the steps Capwell would undertake to correct the error in the 2010 ending inventory. What was the effect of the error on 2010 before-tax income?

P 9-16

 

Purchase commitments

 

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In November 2011, the Brunswick Company signed two purchase commitments. The first commitment requires Brunswick to purchase 10,000 units of inventory at $10 per unit by December 15, 2011. The second commitment requires the company to purchase 20,000 units of inventory at $11 per unit by March 15, 2012. Brunswick's fiscal year-end is December 31. The company uses a periodic inventory system. Both contracts were exercised on their expiration date.

Required:

1.

  

Prepare the journal entry to record the December 15 purchase for cash assuming the following alternative unit market prices on that date:

a.

  

$10.50

b.

  

$ 9.50

p. 494

2.

  

Prepare any necessary adjusting entry at December 31, 2011, for the second purchase commitment assuming the following alternative unit market prices on that date:

a.

  

$12.50

b.

  

$10.30

3.

  

Assuming that the unit market price on December 31 was $10.30, prepare the journal entry to record the purchase on March 15, 2010, assuming the following alternative unit market prices on that date:

a.

  

$11.50

b.

  

$10.00

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