SOLUTIONS TO PROBLEMS
PROBLEM 9.1
Item
Cost
Net
Realizable
Value*
Lower-of–
Cost-or–NRV
A
$470
$ 450
$450
B
C
D
PROBLEM 9.2
(a) The balance in the Allowance to Reduce Inventory to NRV at May
31, 2020, should be $15,200, as calculated in Exhibit 1 below.
Cost
NRV
LCNRV
Aluminum siding
$ 70,000
$ 56,000
$ 56,000
Cedar shake siding
86,000
84,800
84,800
Louvered glass doors
Thermal windows
(b) For the fiscal year ended May 31, 2020, the gain that would be
recorded due to the change in the Allowance to Reduce Inventory
PROBLEM 9.2 (Continued)
(c) The use of the lower-of-cost-or–net realizable value (LCNRV) rule is
based on both the expense recognition principle and the concept of
PROBLEM 9.3
(a)
Cost-of-Goods-Sold Method
December 31, 2021
Cost of Goods Sold …………………………………………………
68,000
Allowance to Reduce Inventory to NRV …………….
December 31, 2022
Cost of Goods Sold …………………………………………………
Allowance to Reduce Inventory to NRV
(b)
Loss Method
December 31, 2021
Loss Due to Decline of Inventory to NRV ………………….
68,000
Allowance to Reduce Inventory to NRV …………….
December 31, 2022
Loss Due to Decline of Inventory to NRV ………………….
Allowance to Reduce Inventory to NRV
PROBLEM 9.4
(a) (1) The balance in the Allowance to Reduce Inventory to Market at
May 31, 2020, should be $34,600, as calculated in Exhibit 1 below.
Exhibit 1
CALCULATIONS OF PROPER BALANCE
in the Allowance to Reduce Inventory to Market
At May 31, 2020
Cost
Replace-
ment
Cost
NRV
(Ceiling)
NRV less
normal
profit
(Floor)
LCM
Aluminum siding
$ 70,000
$ 62,500
$ 56,000
$ 50,900
$ 56,000
Cedar shake siding
86,000
79,400
84,800
77,400
79,400
Louvered glass doors
Thermal windows
Totals
$408,000
(2) For the fiscal year ended May 31, 2020, the loss that would be
recorded due to the change in the Allowance to Reduce Inventory
PROBLEM 9.4 (Continued)
(b) The use of the lower-of–cost–or-market (LCM) rule is based on both the
expense recognition principle and the concept of conservatism. The
PROBLEM 9.5
(a) Schedule A
Item
On Hand
Quantity
Replacement
Cost/Unit
NRV
(Ceiling)
NRV—
Normal
Profit
(Floor)
Designated
Market
Cost
Lower-of–
Cost–or–
Market
A
1,100
$8.40
$9.00
$7.20
$8.40
$7.50
$7.50
B
800
C
1,000
D
1,000
E
1,400
Schedule B
Item
Cost
Lower-of-Cost-or-Market
Difference
A
1,100 X $7.50 = $8,250
1,100 X $7.50 = $8,250
None
C
1,000 X $5.60 = $5,600
1,000 X $5.45 = $5,450
D
1,000 X $3.80 = $3,800
1,000 X $3.80 = $3,800
None
1,400 X $6.40 = $8,960
$950
(b) Cost of Goods Sold ……………………………………………………….
950
Allowance to Reduce Inventory to Market …………………
Loss Due to Market Decline of Inventory …………………………
Allowance to Reduce Inventory to Market …………………
950
PROBLEM 9.5 (Continued)
(c)
To: Greg Forda, Clerk
From: Accounting Manager
Date: January 14, 2021
Subject: Instructions on determining lower–of-cost-or-market for inven-
tory valuation
This memo responds to your questions regarding our use of lower–of-cost-
or-market for inventory valuation. Simply put, inventory should be valued
at whichever is the lower: the actual cost or the market value of the
inventory at the time of valuation.
Refer to Item A on the attached schedule. The values for the replacement
cost, net realizable value, and net realizable value less a normal profit margin
are $8.40, $9.00 ($10.50 – $1.50), and $7.20 ($9.00 – $1.80) respectively. The
middle value is the replacement cost, $8.40, which becomes the designated
PROBLEM 9.5 (Continued)
Proceed in the same way, always choosing the middle value among replace–
ment cost, net realizable value, and net realizable value less a normal profit,
and compare that middle value to the actual cost. The lower of these will
always be the amount at which you value the particular item.
Schedule A
Item
On Hand
Quantity
Replacement
Cost/Unit
NRV
Ceiling
NRV—
Normal
Profit
(Floor)
Designated
Market
Cost
Lower-of–
Cost-or–
Market
A
1,100
$8.40
$9.00
$7.20
$8.40
$7.50
$7.50
B
C
1,000
D
1,000
1,400
Schedule B
Item
Cost
Lower-of-Cost-or-Market
Difference
A
1,100 X $7.50 = $8,250
1,100 X $7.50 = $8,250
None
B
800 X $8.20 = $6,560
800 X $7.90 = $6,320
C
1,000 X $5.60 = $5,600
1,000 X $5.45 = $5,450
D
1,000 X $3.80 = $3,800
1,000 X $3.80 = $3,800
None
E
1,400 X $6.40 = $8,960
1,400 X $6.00 = $8,400
Communication
PROBLEM 9.6
Beginning inventory ……………………………………………..
$ 80,000
Purchases ……………………………………………………………
290,000
370,000
Purchase returns ………………………………………………….
(28,000)
Total goods available ……………………………………………
Sales revenue ………………………………………………………
Sales returns ………………………………………………………..
Net sales …………………………..…………………………………
Less: Gross profit (35% of $394,000) …………………….
Ending inventory (unadjusted for damage) …………….
Inventory damaged ……………………………………………….
Less: Net realizable value of damaged inventory …..
8,150
PROBLEM 9.7
STANISLAW CORPORATION
Computation of Inventory Fire Loss
April 15, 2021
Inventory, 1/1/21 …………………………………….
$ 75,000
Purchases, 1/1/ – 3/31/21 ………………………..
52,000
April merchandise shipments paid ………….
Unrecorded purchases on account …………
Total …………………………………………….
Less: Shipments in transit ……………………..
Merchandise returned ………………….
Merchandise available for sale ………………..
Less estimated cost of sales:
Sales revenue, 4/1/ – 4/15/21
Receivables acknowledged
at 4/15/21 ………………………………
$46,000
Estimated receivables not
acknowledged ………………………
8,000
Total ……………………………………….
54,000
Add collections, 4/1/ – 4/15/21
Total ……………………………………….
66,000
Less receivables, 3/31/21 ………………
26,000
Less gross profit (45%* X $161,000) ………..
Estimated merchandise inventory …………..
54,200
Less: Sale of salvaged inventory ……………
PROBLEM 9.7 (Continued)
*Computation of Gross Profit Rate
Net sales, 2019 …………………………………………
$390,000
Net sales, 2020 …………………………………………
530,000
Total net sales ………………………………..
Beginning inventory …………………………………
Net purchases, 2019 …………………………………
Net purchases, 2020 …………………………………
Total ………………………………………………
Less: Ending inventory …………………………...
506,000
PROBLEM 9.8
(a)
Cost
Retail
Beginning inventory………………………
$ 17,000
$ 25,000
Purchases …………………………………….
82,500
137,000
Freight-in ……………………………………..
7,000
Purchase returns …………………………..
(3,000)
Net markups …………………………………
180,000
Net markdowns …………………………….
(4,000)
Sales revenue ……………………………….
$(95,000)
Sales returns ………………………………..
2,400
(92,600)
Inventory losses due to breakage …..
(400)
(b)
Ending inventory at lower-of-average-cost-or-market
PROBLEM 9.9
Cost
Retail
Beginning inventory ……………………..
$ 250,000
$ 390,000
Purchases ……………………………………
914,500
1,460,000
Purchase returns ………………………….
(60,000)
(80,000)
Purchase discounts ……………………..
(18,000)
Freight-in ……………………………………..
42,000
Markups ………………………………………
$ 120,000
Markup cancellations ……………………
Markdowns…………………………………..
Markdown cancellations ……………….
20,000
(25,000)
Sales revenue ………………………………
Sales returns ………………………………..
Inventory losses due to breakage ….
Employee discounts ……………………..
PROBLEM 9.10
(a)
Cost
Retail
Inventory (beginning) ………………….
$ 52,000
$ 78,000
Purchases ………………………………….
272,000
423,000
Purchase returns ………………………..
(5,600)
(8,000)
Freight–in …………………………………..
16,600
Totals ………………………………..
$335,000
493,000
Markups …………………………………….
Markup cancellations ………………….
7,000
Net markdowns ………………………….
Normal spoilage and breakage ……
Sales revenue …………………………….
Ending inventory at retail ……………
$335,000
$500,000
Ending inventory at lower-of-cost-or-market
(67% of $96,400) ………………………
(b) The difference between the inventory estimate per retail method and
the amount per physical count may be due to:
1. Theft losses (shoplifting or pilferage).
2. Spoilage or breakage above normal.
PROBLEM 9.11
(a) The inventory section of Maddox’s balance sheet as of November 30,
2020, including required footnotes, is presented below. Also presented
below are the inventory section supporting calculations.
Note 1. Lower-of-cost (first-in, first-out) or-NRV is applied on a
Note 2. Seventy-five percent of bar end shifters finished goods
inventory in the amount of $136,500 ($182,000 X .75) is
PROBLEM 9.11 (Continued)
Supporting Calculations
Finished
Goods
Work-in–
Process
Raw
Materials
Factory
Supplies
Down tube shifters at NRV …………
$266,000
Bar end shifters at cost ………………
182,000
Head tube shifters at cost …………..
195,000
$108,700
Derailleurs at market ………………….
Remaining items at NRV …………….
Supplies at cost …………………………
(b) The decline in the NRV of inventory below cost may be reported using
one or two alternate methods, the direct write-down of inventory
(cost-of-goods-sold method) or the (loss method). An allowance may
(c) Purchase contracts for which a fixed price has been established
should be disclosed on the financial statements of the buyer. If the
contract price is greater than the current market price (a loss would
*PROBLEM 9.12
(a)
Cost
Retail
Inventory, January 1 …………………..
$ 30,000
$ 43,000
Purchases ………………………………….
104,800
155,000
Purchase returns ………………………..
(2,800)
(4,000)
Totals ………………………………..
132,000
194,000
Add: Net markups
Markups …………………………...
$ 9,200
Markup cancellations …………
(3,200)
6,000
Totals ………………………………..
$132,000
Deduct: Net markdowns
Markdowns ………………………..
Markdown cancellations ……..
4,000
Sales price of goods available …….
196,000
Sales revenue …………………………….
154,000
Sales returns and allowances ……..
Ending inventory at retail ……………
$ 50,000
Cost-to-retail ratio =
$132,000
= 66%
$200,000
Inventory at lower-of-cost-or–
market (66% X $50,000) …………….
$ 33,000
(b)
Ending inventory at retail at January 1 price level
($59,400 ÷ 1.08) …………………………………………………………
$ 55,000
Less beginning inventory at retail ………………………………..
Inventory increment at retail, January 1 price level ………..
Beginning inventory at cost …………………………………………
Ending inventory at dollar-value LIFO cost ……………………
*PROBLEM 9.13
(a) The retail method is appropriate in businesses that sell many different
items at relatively low unit costs and that have a large volume of
(b) Becker Department Stores’ ending inventory value, at cost, is $83,000,
calculated as follows:
Cost
Retail
Beginning inventory ………………………………
$ 68,000
$100,000
Purchases ……………………………………………..
$255,000
$400,000
Net markups ………………………………….
50,000
Net markdowns ……………………………..
(110,000)
Goods available …………………………………….
440,000
Sales revenue ………………………………………..
(320,000)
Estimated ending inventory at retail ………..
$120,000
Beginning inventory layer ………………………
$ 68,000
$100,000
Incremental increase
20,000
At cost ($20,000 X 75%) ………………….
15,000
*PROBLEM 9.13 (Continued)
(c) The estimated shortage amount, at retail, for Becker Department Stores
(d) When using the retail inventory method, the four expenses and allow–
ances noted are treated in the following manner:
1. Freight costs are added to the cost of purchases.
2. Purchase returns are considered as reductions to both the cost