EXERCISE 9.11 (5–10 minutes)
Unrealized Holding Gain or Loss—Income
EXERCISE 9.12 (15–20 minutes)
(a) If the commitment is material in amount, there should be a footnote in
the statement of financial position stating the nature and extent of the
(b) The drop in the market price of the commitment should be charged to
operations in the current year if it is material in amount. The following
entry would be made:
(c) Assuming the €12,000 market decline entry was made on December
31, 2019, as indicated in (b), the entry when the materials are received
in January 2020 would be:
EXERCISE 9.12 (Continued)
This entry records the raw materials at the current cost, eliminates the
EXERCISE 9.13 (8–13 minutes)
(1)
20%
= 16.67% OR 16 2/3%.
100% + 20%
(2)
25%
100% + 25%
(3)
(4)
50%
100% + 50%
EXERCISE 9.14 (10–15 minutes)
(a)
Inventory, May 1 (at cost) ………………………………..
€160,000
Purchases (at cost) …………………………………………
640,000
Purchase discounts ………………………………………..
(12,000)
Goods available (at cost) …………………………
Sales (at selling price) …………………………………….
Sales returns (at selling price) …………………………
Net sales (at selling price) ……………………………….
Less: Gross profit (25% of €930,000) ……………….
697,500
EXERCISE 9.14 (Continued)
(b) Gross profit as a percent of sales must be computed:
25%
= 20% of sales.
100% + 25%
Inventory, May 1 (at cost) …………………………..
€160,000
Purchases (at cost) ……………………………………
640,000
Purchase discounts …………………………………..
Freight-in ………………………………………………….
Goods available (at cost) ……………………
Sales (at selling price) ……………………………….
Sales returns (at selling price) ……………………
Net sales (at selling price) ………………………….
Less: Gross profit (20% of €930,000) ………….
186,000
744,000
EXERCISE 9.15 (15–20 minutes)
(a)
Merchandise on hand, January 1 ………………..
$ 38,000
Purchases …………………………………………………
92,000
Less: Purchase returns and allowances …….
(2,400)
Freight-in ………………………………………………….
3,400
Total merchandise available (at cost) ….
Cost of goods sold* …………………………………..
(90,000)
Ending inventory ……………………………………….
41,000
Less: Undamaged goods …………………………..
10,900
EXERCISE 9.15 (Continued)
(b)
Cost of goods sold = 66 2/3% of sales of $120,000 = $80,000
[$131,000 [as computed in (a)] – $80,000]
Less: Undamaged goods …………………………………………
Ending inventory (at cost) …………………………………………
$51,000
EXERCISE 9.16 (15–20 minutes)
Beginning inventory …………………………………………..
R$170,000
Purchases …………………………………………………………
450,000
620,000
Purchase returns ……………………………………………….
Goods available (at cost) ……………………………………
590,000
Sales …………………………………………………………………
Sales returns …………………………………………………….
Net sales …………………………………………………………..
Less: Gross profit (30% X R$626,000) ………………..
Estimated ending inventory (unadjusted for
damage) …………………………………………………………
151,800
Less: Goods on hand—undamaged (at cost)
R$21,000 X (1 – 30%) ………………………………..
Less: Goods on hand—damaged (at net
realizable value) ………………………………………
5,300
EXERCISE 9.17 (10–15 minutes)
Beginning inventory (at cost) ……………………………..
¥ 38,000
Purchases (at cost) ……………………………………………
90,000
Goods available (at cost) …………………………...
128,000
Sales (at selling price) ………………………………………..
¥116,000
Less sales returns ……………………………………………..
4,000
Net sales …………………………..………………………………
112,000
Less: Gross profit* (20% of ¥112,000) …………………
22,400
Net sales (at cost) ……………………………………
89,600
Estimated inventory (at cost) ……………………………..
EXERCISE 9.18 (15–20 minutes)
Lumber
Millwork
Hardware
Inventory 1/1/19 (cost)
$ 250,000
$ 90,000
$ 45,000
Purchases to 8/18/19 (cost)
Cost of goods available
Deduct cost of goods sold*
Inventory 8/18/19
$ 110,000
$ 55,000
EXERCISE 9.18 (Continued)
Computation for cost of goods sold:*
*Alternative computation for cost of goods sold:
Markup on selling price: Cost of goods sold:
EXERCISE 9.19 (20–25 minutes)
Ending inventory:
(a)
Gross profit is 40% of sales
Total goods available for sale (at cost) ……..
£2,100,000
Sales (at selling price) ……………………………..
£2,300,000
Less: Gross profit (40% of sales) ……………..
920,000
(b)
Gross profit is 60% of cost
Total goods available for sale (at cost) ……..
£2,100,000
Sales (at selling price) ……………………………..
£2,300,000
Less: Gross profit (37.5% of sales) …………..
862,500
(c)
Gross profit is 35% of sales
Total goods available for sale (at cost) ……..
£2,100,000
Sales (at selling price) ……………………………..
£2,300,000
Less: Gross profit (35% of sales) ……………..
805,000
EXERCISE 9.19 (Continued)
(d)
Gross profit is 25% of cost
Total goods available for sale (at cost) ……..
Sales (at selling price) ……………………………..
Less: Gross profit (20% of sales) ……………..
EXERCISE 9.20 (20–25 minutes)
(a)
Cost
Retail
Beginning inventory…………………………………
R$ 58,000
R$100,000
Purchases ……………………………………………….
122,000
200,000
Net markups ……………………………………………
—
Totals ……………………………………………..
320,000
Net markdowns ……………………………………….
Sales price of goods available ………………….
290,000
Deduct: Sales …………………………………………
(b)
1.
R$180,000 ÷ R$300,000 = 60%
2.
3.
4.
EXERCISE 9.20 (Continued)
(c)
1.
Method 3.
2.
Method 3.
3.
Method 3.
EXERCISE 9.21 (12–17 minutes)
Cost
Retail
Beginning inventory …………………….
€ 200,000
€ 280,000
Purchases …………………………………..
1,425,000
2,140,000
Totals …………………………………
1,625,000
2,420,000
Add: Net markups
Markups …………………………….
Markup cancellations ………….
Deduct: Net markdowns
Markdowns …………………………
Markdown cancellations ………
Sales price of goods available ……..
2,470,000
Deduct: Sales ……………………………..
2,250,000
Cost-to-retail ratio =
€1,625,000
= 65%
€2,500,000
EXERCISE 9.22 (20–25 minutes)
Cost
Retail
Beginning inventory …………………………
£30,000
£ 46,500
Purchases ……………………………………….
55,000
88,000
Purchase returns ……………………………..
(3,000)
Freight on purchases ……………………….
2,400
Totals ……………………………………..
85,400
Add: Net markups
Markups …………………………………
£10,000
Markup cancellations ………………
(1,500)
Net markups ……………………………………
8,500
Deduct: Net markdowns
Markdowns ……………………………..
9,300
Markdown cancellations …………..
(2,800)
Net markdowns ……………………………….
6,500
Sales price of goods available ………….
Deduct: Net sales (£95,000 – £2,000) ….
93,000
EXERCISE 9.23 (10–15 minutes)
(a) Inventory turnover:
2015
TIME AND PURPOSE OF PROBLEMS
Problem 9.1 (Time 10–15 minutes)
Purpose—to provide the student with an understanding of the lower-of–cost-or–net realizable value
Problem 9.2 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the lower-of–cost-or-net realizable value
Problem 9.3 (Time 30–35 minutes)
Problem 9.4 (Time 15–20 minutes)
Purpose—to provide a problem that requires entries for recording the unrealized gains and losses on
biological assets and harvested assets.
Problem 9.5 (Time 20–30 minutes)
Problem 9.6 (Time 40–45 minutes)
Purpose—to provide the student with a complex problem involving a fire loss where the gross profit
Problem 9.7 (Time 20–30 minutes)
Purpose—to provide the student with a problem on the retail inventory method. The problem is relatively
straightforward although transfers-in from other departments as well as the proper treatment for normal
spoilage complicate the problem. A good problem that summarizes the essentials of the retail inventory
method.
Problem 9.8 (Time 20–30 minutes)
Purpose—to provide the student with a problem on the retail inventory method. This problem is similar
Problem 9.9 (Time 20–30 minutes)
Time and Purpose of Problems (Continued)
Problem 9.10 (Time 30–40 minutes)
Problem 9.11 (Time 30–40 minutes)
Purpose—to provide the student with an opportunity to write a memo explaining what is net realizable
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) 1. The balance in the Allowance to Reduce Inventory to NRV at May
31, 2019, 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
Louvered glass doors
Thermal windows
2. For the fiscal year ended May 31, 2019, the gain that would be
recorded due to the change in the Allowance to Reduce Inventory
PROBLEM 9.2 (Continued)
(b) 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, 2020
Cost of Goods Sold …………………………………………………
68,000
Allowance to Reduce Inventory to NRV ……………
($780,000 – $712,000)
December 31, 2021
Allowance to Reduce Inventory to NRV
[($905,000 – $830,000) – $68,000] …………………..
(b)
Loss Method
December 31, 2020
Loss Due to Decline of Inventory to NRV ………………….
68,000
Allowance to Reduce Inventory to NRV ……………
($780,000 – $712,000)
December 31, 2021
Loss Due to Decline of Inventory to NRV ………………….
Allowance to Reduce Inventory to NRV
[($905,000 – $830,000) – $68,000] …………………..
PROBLEM 9.4
(a)
Biological Assets—Grape Vineyard …………………..
15,000
Unrealized Holding Gain or Loss – Income …
15,000
(b)
Grape Inventory ……………………………………………….
30,000
Unrealized Holding Gain or Loss – Income …
30,000
(c)
Cash ……………………………………………………………….
35,000
Cost of Goods Sold ………………………………………….
30,000
Sales Revenue ………………………………………….
35,000
(d)
Unrealized Holding Gain or Loss – Income ………..
€15,000
Unrealized Holding Gain or Loss – Income ………..
30,000
Gross Profit on Sold Grapes …………………………….
5,000
Total Effect on Income ……………………………………..
€50,000
PROBLEM 9.5
Beginning inventory ……………………………………………..
¥ 80,000
Purchases ……………………………………………………………
290,000
370,000
Purchase returns ………………………………………………….
(28,000)
Total goods available ……………………………………………
342,000
Sales ……………………………………………………………………
Less: Gross profit (35% of ¥394,000) …………………….
(256,100)
Ending inventory (unadjusted for damage) …………….
Less: Goods on hand—undamaged
(¥30,000 X [1 – 35%]) …………………………………..
19,500
Inventory damaged ………………………………………………
Less: Residual value of damaged inventory ………….
8,150
PROBLEM 9.6
STANISLAW ASA
Computation of Inventory Fire Loss
April 15, 2019
Inventory, 1/1/19 …………………………………….
€ 75,000
Purchases, 1/1/ – 3/31/19…………………………
52,000
April merchandise shipments paid ………….
3,400
Unrecorded purchases on account ………….
15,600
Total …………………………………………….
146,000
Less: Shipments in transit ……………………..
€ 2,300
Merchandise returned ………………….
950
3,250
Merchandise available for sale ………………..
142,750
Less estimated cost of sales:
Sales, 1/1/ – 3/31/19 ……………………….
135,000
Sales, 4/1/ – 4/15/19
Receivables acknowledged
at 4/15/19 ………………………………
Estimated receivables not
acknowledged ………………………
8,000
Total ……………………………………….
54,000
Add collections, 4/1/ – 4/15/19
(€12,950 – €950) ………………………….
12,000
Total ……………………………………….
66,000
Less receivables, 3/31/19 ………………
40,000
26,000
Total sales 1/1/ – 4/15/19 …………..
161,000
Less gross profit (45%* X €161,000) ………..
72,450
88,550
Estimated merchandise inventory …………..
54,200
Less: Sale of salvaged inventory ……………
3,500