Problem: 1. (Lower-of-Cost-or-Market) The inventory of Wei Company on December 31, 2014, consists of the following items.
| Part No. |
Quantity |
Costper Unit |
Cost to Replace per Unit |
| 10 |
900 |
$135 |
$150 |
| 11 |
1,500 |
90 |
78 |
| 12 |
750 |
120 |
114 |
| 13 |
300 |
255 |
270 |
| 20 |
600 |
308 |
312 |
| 21a |
2,400 |
24 |
14 |
| 22 |
450 |
360 |
352.5 |
Instructions
(a) Determine the inventory as of December 31, 2014, by the lower-of-cost-or-market method, apply- ing this method directly to each item.
(b) Determine the inventory by the lower-of-cost-or-market method, applying the method to the total of the inventory.
Problem 2: (Lower-of-Cost-or-Market) Wolfe Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2014, consists of prod- ucts D, E, F, G, H, and I. Relevant per-unit data for these products appear below.
|
Item |
Item |
Item |
Item |
Item |
Item |
|
D |
E |
F |
G |
H |
I |
| Estimated selling price |
$240 |
$220 |
$190 |
$180 |
$220 |
$180 |
| Cost |
150 |
160 |
160 |
160 |
100 |
72 |
| Replacement cost |
240 |
144 |
140 |
60 |
140 |
60 |
| Estimated selling expense |
60 |
60 |
60 |
50 |
60 |
60 |
| Normal profit |
40 |
40 |
40 |
40 |
40 |
40 |
Instructions:
Using the lower-of-cost-or-market rule, determine the proper unit value for balance sheet reporting purposes at December 31, 2014, for each of the inventory items above.
Problem: 3. (Lower-of-Cost-or-Market-Journal Entries) Yousuf Company began operations in 2013 and determined its ending inventory at cost and at lower-of-cost-or-market at December 31, 2013, and December 31, 2014. This information is presented below.
|
Cost |
Lower-of-Cost-or-Market |
| 12/31/2013 |
$865,000 |
$817,500 |
| 12/31/2014 |
1,025,000 |
987,500 |
Instructions
(a) Prepare the journal entries required at December 31, 2013, and December 31, 2014, assuming that the inventory is recorded at market, and that a perpetual inventory system (direct method) is used.
(b) Prepare journal entries required at December 31, 2013, and December 31, 2014, assuming that the inventory is recorded at cost and an allowance account is adjusted at each year-end under a per- petual system.
(c) Which of the two methods above provides the higher net income in each year?
Problem: 4. (Relative Sales Value Method) During 2014, Galarraga Furniture Company purchases a carload of wicker chairs. The manufacturer sells the chairs to Galarraga for a lump sum of $5,985, because it is discontinuing manufacturing operations and wishes to dispose of its entire stock. Three types of chairs are included in the carload. The three types and the estimated selling price for each are listed below.
| Type |
No. of Chairs |
Estimated Selling Price Each |
| Loungechairs |
80 |
$45 |
| Armchairs |
60 |
40 |
| Straightchairs |
140 |
25 |
During 2014, Galarraga sells 40 lounge chairs, 20 armchairs, and 24 straight chairs. 2Chapter 8 Valuation of Inventories: A Cost-Basis Approach
Instructions
What is the amount of gross profit realized during 2014? What is the amount of inventory of unsold straight chairs on December 31, 2014?
Problem: 5. (Gross Profit Method) Schmidt Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May.
| Inventory,May1 |
$40,000 |
| Purchases(gross) |
160,000 |
| Freight-in |
7,500 |
| Sales |
250,000 |
| Sales returns |
17,500 |
| Purchase discounts |
3,000 |
Instructions
(a) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of sales.
(b) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of cost.
Problem: 6. Higgs Company lost most of its inventory in a fire in November just before the year-end physical inventory was taken. Corporate records disclose the following.
| Inventory (beginning) |
$186,000 |
Sales |
$863,000 |
| Purchases |
667,000 |
Salesreturns |
64,000 |
| Purchasereturns |
46,000 |
Grossprofit%basedon |
25% |
| netsellingprice |
|
|
Merchandise with a selling price of $65,000 remained undamaged after the fire, and damaged merchandise has a salvage value of $26,400. The company does not carry fire insurance on its inventory.
Instructions:
Prepare a formal labeled schedule computing the fire loss incurred. (Do not use the retail inventory method.)
Problem: 7. Late in 2010, Jerry Hassle and two other investors took the chain of Leys Department Stores private, and the company has just completed its fourth year of operations under the ownership of the investment group. The controller of Leys Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Hassle has expressed concern over inventory shortages, and he has asked the controller to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Leys Depart- ment Stores contain the following amounts on October 31, 2014, the end of the fiscal year.
|
Cost |
Retail |
| Beginning inventory |
$124,000 |
$220,000 |
| Purchases |
530,000 |
864,000 |
| Net markups |
|
26,000 |
| Net mark downs |
|
79,000 |
| Sales revenue |
|
790,000 |
According to the October 31, 2014, physical inventory, the actual inventory at retail is $225,000.
Instructions
(a) Describe the circumstances under which the retail inventory method would be applied and the advantages of using the retail inventory method.
(b) Assuming that prices have been stable, calculate the value, at cost, of Leys Department Stores ending inventory using the last-in, first-out (LIFO) retail method. Be sure to furnish supporting calculations.
(c) Estimate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended October 31, 2014.
(d) Complications in the retail method can be caused by such items as (1) freight-in costs, (2) purchase returns and allowances, (3) sales returns and allowances, and (4) employee discounts.
Explain how each of these four special items is handled in the retail inventory method.