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CHAPTER 9
Inventories: Additional Valuation Issues
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Lower-of-cost-or-NRV.
1, 2, 3,
4, 5
1, 2, 3
1, 2, 3,
4, 5, 6
1, 2, 3,
10, 11
1, 2, 3, 5
2.
Inventory accounting
changes; relative
standalone sales value
6, 7, 8
4, 5, 6
7, 8, 9, 10
4
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Describe and apply the lower-of-cost-or-net realizable
value rule.
1, 2, 3
1, 2, 3,
4, 5, 6
1, 2, 3,
10, 11
1, 2, 3, 5
2. Identify other inventory valuation issues.
4, 5, 6, 7, 8
7, 8, 9, 10,
11, 12
4, 10
6
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E9.1
LCNRV.
Simple
15–20
E9.2
LCNRV.
Simple
10–15
E9.3
LCNRV.
Simple
15–20
E9.4
LCNRV—journal entries.
Simple
10–15
E9.5
LCNRV—valuation account.
Moderate
20–25
E9.13
Gross profit method.
Simple
8–13
E9.14
Gross profit method.
Simple
10–15
E9.15
Gross profit method.
Simple
15–20
E9.16
Gross profit method.
Moderate
15–20
E9.17
Gross profit method.
Simple
10–15
E9.18
Gross profit method.
Simple
15–20
P9.1
LCNRV.
Simple
10–15
P9.2
LCNRV.
Moderate
25–30
P9.3
LCNRV—Cost-of-goods-sold and loss.
Moderate
30–35
P9.4
Valuation at net realizable value.
Simple
15–20
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
P9.9
Retail inventory method.
Moderate
20–30
P9.10
Statement and note disclosure, LCNRV, and purchase
commitment.
Moderate
30–40
P9.11
LCNRV.
Moderate
30–40
CA9.1
LCNRV.
Moderate
15–25
ANSWERS TO QUESTIONS
1. Where there is evidence that the utility of goods to be disposed of in the ordinary course of
2. The usual basis for carrying forward the inventory to the next period is cost. Departure from cost is
required; however, when the utility of the goods included in the inventory is less than their cost,
this loss in utility should be recognized as a loss of the current period, the period in which it
occurred. Furthermore, the subsequent period should be charged for goods at an amount that
measures their expected contribution to that period. In other words, the subsequent period should
The arguments against the use of the lower-of-cost-or-net realizable value method of valuing
inventories include the following:
(a) The method requires the reporting of estimated losses (all or a portion of the excess of actual
cost over net realizable value) as definite income charges even though the losses have not
been sustained to date and may never be sustained. Under a consistent criterion of
realization, a drop in net realizable value below original cost is no more a sustained loss than
a rise above cost is a realized gain.
(b) A price shrinkage is brought into the income statement before the loss has been sustained
3. The lower-of-cost-or-net realizable value rule may be applied directly to each item or to the total of
the inventory (or in some cases, to the total of the components of each major category). The
method should be the one that most clearly reflects income. The most common practice is to price
Questions Chapter 9 (Continued)
4. (1) €12.80.
5. One approach is to record the inventory at cost and then reduce it to net realizable value, thereby
reflecting a loss in the current period (often referred to as the loss method). The loss would then
be shown as a separate item in the income statement and the cost of goods sold for the year
6. An exception to the normal recognition rule occurs where the inventory consists of (1) agricultural
assets, and (2) commodities held by broker-traders. Some minerals and minerals products may
also be valued at NRV.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
7. (a) Biological assets are measured on initial recognition and at the end of each reporting period at
fair value less costs to sell (NRV). Companies record a gain or loss due to changes in the
8. Relative standalone sales value is an appropriate basis for pricing inventory when a group of
varying units is purchased at a single lump-sum price (basket purchase). The purchase price must
9. 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 [(£6.20 – £5.90) X 150,000] = £45,000:
Unrealized Holding Gain or Loss—Income (Purchase Commitments) .......
45,000
Purchase Commitment Liability ......................................................
45,000
Questions Chapter 9 (Continued)
10. The major uses of the gross profit method are: (1) it provides an approximation of the ending
inventory which the auditor might use for testing validity of physical inventory count; (2) it means
11. Gross profit as a percentage of sales indicates that the margin is based on selling price rather than
cost; for this reason the gross profit as a percentage of selling price will always be lower than if
12. A markup of 25% on cost equals a 20% markup on selling price; therefore, gross profit equals
$1,000,000 ($5 million X 20%) and net income equals $250,000 [$1,000,000 – (15% X $5 million)].
13.
Inventory, January 1, 2019 ....................................................................
$ 400,000
Purchases to February 10, 2019 ............................................................
$1,140,000
Freight-in to February 10, 2019 ..............................................................
60,000
1,200,000
14. The validity of the retail inventory method is dependent upon (1) the composition of the inventory
remaining approximately the same at the end of the period as it was during the period, and
(2) there being approximately the same rate of markup at the end of the year as was used
15. The conventional retail method is a procedure based on averages whereby inventory figures at
retail are reduced to an inventory valuation figure by multiplying the retail figures by a percentage
which is the complement of the markup percent.
To determine the markup percent, original markups and additional net markups are related to the
An example of reduction to net realizable value follows:
Assume purchase of 100 items at $1 each, marked to sell at $1.50 each, at which price 80 were
Computation of Inventory
Cost
Retail
Ratio
Purchases
$100
$150
66 2/3%
Sales
(120)
16. (a) Ending inventory:
Cost
Retail
Beginning inventory ............................................................
¥ 149,000
¥ 283,500
Purchases ...........................................................................
1,400,000
2,160,000
Ratio of cost to selling price
¥1,619,000
= 64%.
¥2,535,500
17. The accounting policies adopted in measuring inventories, including the cost formula used
(weighted average, FIFO); the total carrying amount of inventories and the carrying amount in
classifications (common classifications of inventories are merchandise, production supplies, raw
Questions Chapter 9 (Continued)
18. Inventory turnover measures how quickly inventory is sold. Generally, the higher the inventory
turnover, the better the enterprise is performing. The more times the inventory turns over, the
smaller the net margin can be to earn an appropriate total profit and return on assets. For
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 9.1
Item
Cost
NRV
LCNRV
Skis
$190.00
$161.00
$161.00
BRIEF EXERCISE 9.2
(a)
Item
Cost
NRV
LCNRV
Item-by-item
Jokers
€ 2,000
€ 2,100
€ 2,000
BRIEF EXERCISE 9.3
(a)
Cost-of-goods-sold-method
Cost of Goods Sold .........................................................
21,000,000
Allowance to Reduce Inventory to NRV ................
21,000,000
BRIEF EXERCISE 9.4
Biological Assets – Shearing Sheep ..............................
4,125*
BRIEF EXERCISE 9.5
Wool Inventory ................................................................
9,000
BRIEF EXERCISE 9.6
Group
Number
of CDs
Sales
Price
per CD
Total
Sales
Price
Relative
Sales
Price
Total
Cost
Cost
Allocated
to CDs
Cost
per CD
BRIEF EXERCISE 9.7
Unrealized Holding Loss—Income ................................
50,000
BRIEF EXERCISE 9.8
Purchases (Inventory) .....................................................
950,000
BRIEF EXERCISE 9.9
Beginning inventory ........................................................
€150,000
Purchases ........................................................................
500,000
BRIEF EXERCISE 9.10
Cost
Retail
Beginning inventory ............................................
$ 12,000
$ 20,000
Net purchases ......................................................
120,000
170,000
BRIEF EXERCISE 9.11
Inventory turnover:
SOLUTIONS TO EXERCISES
EXERCISE 9.1 (15–20 minutes)
Per Unit
Lower-of-
Part No.
Quantity
Cost
NRV
Total
Cost
Total
NRV
Cost-or-
NRV
EXERCISE 9.2 (10–15 minutes)
Item
Net
Realizable
Value
Cost
LCNRV
D
€80*
€75
€75
EXERCISE 9.3 (15–20 minutes)
Item
No.
Cost
per Unit
Net Realizable
Value
LCNRV
Quantity
Final
Inventory
Value
1320
$3.20
$2.90*
$2.90
1,200
$ 3,480
1333
2.70
2.40
2.40
900
2,160
EXERCISE 9.4 (10–15 minutes)
December 31, 2019
(a)
Cost of Goods Sold (£346,000 – £322,000) ....................
24,000
Allowance to Reduce Inventory to NRV ...............
24,000
EXERCISE 9.4 (Continued)
*Cost of inventory at 12/31/19 ....................................
£346,000
LCNRV at 12/31/19 .....................................................
(322,000)
Allowance amount needed to reduce inventory
to NRV (a) ................................................................
£ 24,000
EXERCISE 9.5 (20–25 minutes)
(a)
February
March
April
Sales
$29,000
$35,000
$40,000
Cost of goods sold
Inventory, beginning
15,000
15,100
17,000
EXERCISE 9.5 (Continued)
*
Jan. 31
Feb. 28
Mar. 31
Apr. 30
Inventory at cost
$15,000
$15,100
$17,000
$14,000
Inventory at LCNRV
(14,500)
(12,600)
(15,600)
(13,300)
January 31
(b)
Loss Due to Decline of Inventory to NRV ....................
500
Allowance to Reduce Inventory to NRV .............
500
EXERCISE 9.6 (10–15 minutes)
Net realizable value
€50 – €14 = €36
Cost
€40
Lower-of-cost-or-NRV
€36
EXERCISE 9.7 (10–15 minutes)
(a)
Unrealized Holding Gain or Loss – Income ...................
212,000
Biological Assets – Milking Cows ............................
212,000
EXERCISE 9.8 (10–15 minutes)
(a)
Biological Assets – Shearing Alpaca
($7,700 – $975) ...............................................................
6,725
Unrealized Holding Gain or Loss – Income .............
6,725
(d) (1) The birth of a baby alpaca may result in a gain on the initial
recognition of the biological asset.
9-20 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
EXERCISE 9.9 (15–20 minutes)
Cost Per Lot
(Cost Allocated/
No. of Lots)
£2,040
2,720
1,360
Cost
Allocated
to Lots
£18,360
40,800
25,840
£85,000
Total
Cost
£85,000
85,000
85,000
X
X
X
Relative Sales
Price
£27,000/£125,000
£60,000/£125,000
£38,000/£125,000
Total
Sales
Price
£ 27,000
60,000
38,000
£125,000
Sales
Price Per Lot
£3,000
4,000
2,000
No. of
Lots
9
15
19
LO: 2, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
