E6-21 Applying the lower-of-cost-or-market rule to merchandise inventories
Learning Objective 4
Clarmont Resources, which uses the FIFO inventory costing method, has the following account balances
at May 31, 2019, prior to releasing the financial statements for the year:
Merchandise Inventory, ending $ 13,500
Cost of Goods Sold 68,000
Net Sales Revenue 123,000
Clarmont has determined that the current replacement cost (current market value) of the May 31, 2019,
ending merchandise inventory is $12,400.
Requirements
1. Prepare any adjusting journal entry required from the information given.
2. What value would Clarmont report on the balance sheet at May 31, 2019, for merchandise
inventory?
SOLUTION
E6-22 Applying the lower-of-cost-or-market rule to inventories
Learning Objective 4
2. GP $66,500
Nutriset Foods reports merchandise inventory at the lower-of-cost-or-market. Prior to releasing its
financial statements for the year ended March 31, 2019, Nutriset’s preliminary income statement, before
the year-end adjustments, appears as follows:
Nutriset has determined that the current replacement cost of ending merchandise inventory is $19,500.
Cost is $24,000.
Requirements
1. Journalize the adjusting entry for merchandise inventory, if any is required.
2. Prepare a revised partial income statement to show how Nutriset Foods should report sales, cost of
goods sold, and gross profit.
SOLUTION
E6-23 Measuring the effect of an inventory error
Learning Objective 5
b. Correct GP $19,000
Hot Bread Bakery reported Net sales revenue of $44,000 and cost of goods sold of $33,000. Compute
Hot Bread’s correct gross profit if the company made either of the following independent accounting
errors. Show your work.
a. Ending merchandise inventory is overstated by $8,000.
b. Ending merchandise inventory is understated by $8,000.
SOLUTION
E6-24 Correcting an inventory error—two years
Learning Objective 5
1. 2019, NI $36,500
Nature Foods Grocery reported the following comparative income statements for the years ended June 30, 2019 and 2018:
During 2019, Nature Foods Grocery discovered that ending 2018 merchandise inventory was overstated by $5,500.
Requirements
1. Prepare corrected income statements for the two years.
2. State whether each year’s net income—before your corrections—is understated or overstated, and indicate the amount of the
understatement or overstatement.
SOLUTION
E6-24, cont.
Requirement 2
E6-25 Computing inventory turnover and days’ sales in inventory
Learning Objective 6
Calm Day reported the following income statement for the year ended December 31, 2019:
Requirements
1. Compute Calm Day’s inventory turnover rate for the year. (Round to two decimal places.)
2. Compute Calm Day’s days’ sales in inventory for the year. (Round to two decimal places.)
SOLUTION
E6A-26 Comparing ending merchandise inventory, cost of goods sold, and gross profit
using the periodic inventory system—FIFO, LIFO, and weighted-average methods
Learning Objective 7 Appendix 6A
2. COGS $513
Assume that Jump Coffee Shop completed the following periodic inventory transactions for a
line of merchandise inventory:
Jun. 1 Beginning merchandise inventory 17 units @ $ 15 each
12 Purchase 5 units @ $ 19 each
20 Sale 14 units @ $ 37 each
24 Purchase 11 units @ $ 23 each
29 Sale 13 units @ $ 37 each
Requirements
1. Compute ending merchandise inventory, cost of goods sold, and gross profit using the FIFO
inventory costing method.
2. Compute ending merchandise inventory, cost of goods sold, and gross profit using the LIFO
inventory costing method.
3. Compute ending merchandise inventory, cost of goods sold, and gross profit using the
weighted-average inventory costing method. (Round weighted-average cost per unit to the
nearest cent and all other amounts to the nearest dollar.)
SOLUTION
Requirement 1
