Chapter 9 Inventories: Additional Issues
103. Zanesville Pots Co. uses the conventional retail method to estimate ending inventories. The
following data has been summarized for the year ended December 31, 2016:
Cost
Retail
Inventory, January 1
$ 88,000
$ 132,000
Purchases
163,000
240,000
Net markups
10,100
Net markdowns
9,200
Normal spoilage
43,200
Net sales
213,000
Required:
Estimate the cost of ending inventory applying the conventional retail method.
163,000
240,000
251,000
372,900
$76,672
104. Cornhusker Can Co. uses the conventional retail method to estimate ending inventories. The
following data has been summarized for year ended December 31, 2016:
Cost
Retail
Inventory, January 1
$ 80,000
$ 126,000
Purchases
166,000
244,000
Net markups
9,100
Net markdowns
8,200
Normal spoilage
13,200
Employee discounts
15,600
Net sales
238,000
Required:
Estimate the cost of ending inventory applying the conventional retail method. Assume that
sales are recorded net of employee discounts.
$126,000
166,000
246,000
(253,600
$67,561
105. Cindy Lou Linens uses the conventional retail method to estimate its ending inventories. The
company records sales net of employee discounts. The following partial data has been
summarized for the year ended December 31, 2016:
Cost
Retail
Inventory, January 1
$ 465,460
$ 736,000
Purchases
1,412,000
2,344,000
Net markups
???
Net markdowns
48,200
Normal spoilage
43,200
Employee discounts
75,600
Net sales
2,138,000
Inventory, Dec. 31
494,460
824,100
Required:
Compute the net markups for Cindy Lou Linens during 2016.
Retail
$ 824,100
Chapter 9 Inventories: Additional Issues
106. Charleston Company has elected to use the dollar-value LIFO retail method to value its
inventory. The following data has been accumulated from the accounting records:
Cost
Retail
Merchandise inventory, January 1, 2016
$320,000
$ 500,000
Net purchases
670,000
1,020,000
Net markups
14,000
Net markdowns
4,000
Net sales
650,000
Pertinent retail price indexes:
January 1, 2016
1.00
December 31, 2016
1.10
Required:
Estimate the ending inventory for December 31, 2016.
14,000
Step 2
At Year-end
at Base Year
Retail Prices
$500,000 x 1.00 x .64
$320,000
300,000 x 1.10 x .65
214,500
Total ending inventory at dollar-value LIFO retail cost
$534,500
Chapter 9 Inventories: Additional Issues
107. Green Acres Co. has elected to use the dollar-value LIFO retail method to value its inventory.
The following data has been accumulated from the accounting records:
Pertinent retail price indexes:
Cost
Retail
Merchandise inventory, January 1, 2016
$240,000
$375,000
Net purchases
505,000
765,000
Net markups
10,500
Net markdowns
3,000
Net sales
570,000
January 1, 2016
1.00
December 31, 2016
1.10
Required:
Estimate the cost of ending inventory for December 31, 2016.
_______
$1,147,500
Converted
$375,000 x 1.00 x .64
$240,000
150,000 x 1.10 x .654
$107,910
Total ending inventory at dollar-value LIFO retail cost
$347,910
Chapter 9 Inventories: Additional Issues
108. Orlando Company has used the average cost method for inventory valuation since it began
business in 2012, but has elected to change to the FIFO method starting in 2015. Year-end
inventory valuations under each method are shown below:
Year
Average
Cost
FIFO
2012
$42,000
$47,000
2013
53,000
61,000
2014
59,000
68,000
2015
62,000
72,000
Required:
How would Orlando reflect the change in accounting principle in its financial statements
(ignore income taxes)?
109. Ramsgate Company has used the FIFO method for inventory valuation since it began business
in 2012, but has elected to change to the average cost method starting in 2015. Year-end
inventory valuations under each method are shown below:
Average
Year
FIFO
Cost
2012
$49,000
$46,000
2013
55,000
48,000
2014
57,000
51,000
2015
61,000
53,000
Required:
How, and when, would Ramsgate reflect the change in accounting principle in its financial
statements (ignore income taxes)?
Chapter 9 Inventories: Additional Issues
Use the following to answer questions 110 and 114:
In the following questions, inventory errors are noted for 2016. Assume that the errors are not
discovered until 2017, and that the company uses a periodic inventory system. Indicate the effect of
the error, if any, on the accounts noted in the columns, using the following code:
U = Understated; O = Overstated; NE = No effect
110.
Error
Cost of goods sold
Retained earnings
Double counted items in ending inventory
Error
Cost of goods sold
Retained earnings
Double counted items in ending inventory
111.
Error
Cost of goods sold
Retained earnings
Unrecorded purchases
Error
Cost of goods sold
Retained earnings
Unrecorded purchases
Chapter 9 Inventories: Additional Issues
112.
Error
Cost of goods sold
Retained earnings
Understated beginning inventory
Error
Cost of goods sold
Retained earnings
Understated beginning inventory
113.
Error
Cost of goods sold
Retained earnings
The company ignored its purchase of
inventory that was bought FOB
shipping point and was in transit at
year end
Error
Cost of goods sold
Retained earnings
114.
Error
Cost of goods sold
Retained earnings
Recorded purchases for $523,000 that
should have been $532,000.
Error
Cost of goods sold
Retained earnings
115. In 2016, the internal auditors of Blooper Inc. discovered that goods costing $12 million that
were shipped f.o.b. shipping point in December of 2015 were in transit on December 31. The
goods were recorded as a purchase in December of 2015 but were not included in the 2015
year-end inventory.
Required:
Prepare the journal entry needed in 2016 to correct the error. Also, briefly describe any other
measures Blooper would take in connection with correcting the error. (Ignore income taxes.)
116. In the year 2016, the internal auditors of Goofy Co. discovered that goods costing $25 million
that were purchased in December of 2015 were recorded for $20 million. The goods were
properly measured in the December 31, 2015, ending physical inventory.
Required:
Prepare the journal entry needed in 2016 to correct the error. Also, briefly describe any other
measures Goofy would take in connection with correcting the error. (Ignore income taxes.)
117. On September 5, 2016, Howard Corporation signed a purchase commitment to purchase
inventory for $130,000 on or before March 31, 2017. The company’s fiscal year-end is
December 31. The contract was exercised on March 4, 2017, and the inventory was purchased
for cash at the contract price. On the purchase date of March 4, the market price of the
inventory was $116,000. The market price of the inventory on December 31, 2016, was
$120,000. The company uses a perpetual inventory system.
Required:
1. Prepare the necessary adjusting journal entry (if any is required) on December 31, 2016.
2. Prepare the journal to record the purchase on March 4, 2017.
Chapter 9 Inventories: Additional Issues
Use the following to answer questions 118 and 119:
Memphis Wholesale Market applies the lower of cost and net realizable valuation to
individual products and has collected the following data:
Product A
Product B
Product C
Selling price
$100
$125
$80
Cost
70
75
80
Costs to sell
15
20
8
118. Determine the inventory book value for Products A, B, and C.
119. Determine the inventory book value for Products A, B, and C assuming that Memphis
Wholesale Market prepares its financial statements according to International Financial
Reporting Standards (IFRS).
Chapter 9 Inventories: Additional Issues
Essay
Instructions:
The following answers point out the key phrases that should appear in students’ answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
120. Briefly explain how a material adjustment to inventory due to application of the lower of cost
and net realizable value rule should be reported in the financial statements.
121. The following disclosure note appeared in the 2016 annual report to shareholders of Upton
Systems Inc.
Inventories are stated at the lower of cost and net realizable value. Cost is computed using
standard cost, which approximates actual cost, on a first-in, first-out basis. The Company
provides inventory allowances based on excess and obsolete inventories.
Another disclosure note in the annual report stated:
The Company recorded a provision for inventory, including purchase commitments, totaling
$1.40 billion during fiscal 2016, which included an additional excess inventory charge as
previously discussed. This additional excess inventory charge was due to a sudden and
significant decrease in demand for the Company’s products and was calculated in accordance
with the Company’s accounting policy.
A skeptic may conclude that Upton’s policy and practices threaten earnings quality. Discuss
how it may do so.
122. Briefly explain the differences between U.S. GAAP and International Financial Reporting
Standards (IFRS) in the application of the lower of cost and net realizable value rule for
valuing inventory.
123. Briefly outline the steps in the gross profit method of estimating ending inventory and indicate
when the method might be used.
124. The gross profit method and retail method are both ways of estimating ending inventory.
Briefly explain how the two methods differ.
125. Briefly explain the difference between the LIFO retail method and the dollar-value LIFO retail
method.
126. Briefly explain the financial reporting required when a company changes to or from the LIFO
inventory method.
127. Briefly explain the financial reporting required when material misstatements are found in
previous years’ financial statements that are included for comparative purposes in the current
year’s financial statements.
128. Symington and Cribbs (S&C) is a sporting goods distributor. S&C uses the FIFO inventory
method to determine the cost of its ending inventory. Ending inventory quantities are
determined by a physical count. For the fiscal year-end December 31, 2016, ending inventory
was originally determined to be $67 million. However, in early January of 2017, the
company’s controller, Amy Grant, discovered that an error was made in the inventory count.
Chapter 9 Inventories: Additional Issues
Required:
1. Is Amy correct by stating that the error will self-correct next year as long as 2017 ending
inventory is correctly stated? If the error is not corrected in the current year, what will be
the effect on 2016 and 2017 income before tax?
2. Discuss the ethical dilemma Amy faces.