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PROBLEM 9.6 (Continued)
*Computation of Gross Profit Ratio
Net sales, 2017 ................................................
€390,000
Net sales, 2018 ................................................
530,000
Total net sales .......................................
920,000
PROBLEM 9.7
(a)
Cost
Retail
Beginning inventory .............................
HK$ 17,000
HK$ 25,000
Purchases .............................................
82,500
137,000
Freight-in ...............................................
7,000
Sales ......................................................
HK$(95,000)
Sales returns ................................
2,400
(92,600)
Inventory losses due to
breakage ................................
(400)
Ending inventory at retail ....................
HK$ 83,000
PROBLEM 9.8
Cost
Retail
Beginning inventory ............................
$ 250,000
$ 390,000
Purchases ............................................
914,500
1,460,000
Purchase returns .................................
(60,000)
(80,000)
Sales .....................................................
(1,410,000)
—
Sales returns .......................................
97,500
(1,312,500)
Inventory losses due to breakage ......
(4,500)
Employee discounts ...........................
(8,000)
Ending inventory at retail ...................
$ 500,000
PROBLEM 9.9
(a)
Cost
Retail
Inventory (beginning) .......................
£ 52,000
£ 78,000
Purchases .........................................
272,000
423,000
Purchase returns ..............................
(5,600)
(8,000)
Cost-to-retail ratio =
£335,000
= 67%
£500,000
Ending inventory at LCNRV
(67% of £96,400) ............................
£ 64,588
(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 9.10
(a) The inventory section of Maddox’s statement of financial position at
November 30, 2019, including required footnotes, is presented below.
Also presented below are supporting calculations.
Current assets
Inventory Section (Note 1.)
Note 1. Lower-of-cost (first-in, first-out) or-net realizable value is
Note 2. Seventy-five percent of bar end shifters finished goods
inventory in the amount of $136,500 ($182,000 X .75) is
PROBLEM 9.10 (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
(b) The decline in the net realizable value of inventory below cost may be
reported using one of two alternate methods, the cost-of-goods-sold
method or the loss method. The decline in the net realizable value of
(c) Purchase contracts for which a firm 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 and a loss is expected
PROBLEM 9.11
(a) Schedule A
Item
On Hand
Quantity
Cost
NRV
Lower-of-Cost-
or-NRV
A
1,100
NT$7.50
NT$9.00
NT$7.50
Schedule B
Item
Cost
Lower-of-Cost-or-NRV
Difference
A
1,100 X NT$7.50 = NT$8,250
1,100 X NT$7.50 = NT$8,250
None
(b) Cost of Goods Sold ................................................................
790
Allowance to Reduce Inventory to NRV ..........................
790
PROBLEM 9.11 (Continued)
(c)
To: Jay Shin, Clerk
From: Accounting Manager
This memo responds to your questions regarding our use of lower-of-cost-
or-net realizable value for inventory valuation. Simply put, value inventory
at whichever is the lower: the actual cost or the net realizable value of the
inventory at the time of valuation.
The term net realizable value, on the other hand, is more complicated. As
you have already noticed, this value is the estimated selling price minus
any estimated costs to complete and sell the item. This net realizable value
is then compared to the actual cost in determining the lower-of-cost-or-net
realizable value.
PROBLEM 9.11 (Continued)
Proceed in the same way, always choosing the lowest among cost, and net
realizable value.
OR
Loss Due to Decline of Inventory to NRV ............................
790
Allowance to Reduce Inventory to NRV .....................
790
Schedule A
Item
On Hand
Quantity
Cost
NRV
Lower-of- Cost-
or-NRV
A
1,100
NT$7.50
NT$9.00
NT$7.50
Schedule B
Item
Cost
Lower-of-Cost-or-NRV
Difference
A
1,100 X NT$7.50 = NT$8,250
1,100 X NT$7.50 = NT$8,250
None
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 9.1 (Time 15–25 minutes)
CA 9.2 (Time 20–30 minutes)
Purpose—to provide the student with an opportunity to examine ethical issues related to lower-of-cost-
or-net realizable value on an individual-product basis. A relatively straightforward case.
CA 9.3 (Time 15–20 minutes)
CA 9.4 (Time 25–30 minutes)
Purpose—to provide the student with an opportunity to discuss the main features of the retail inventory
CA 9.5 (Time 15–25 minutes)
Purpose—the student discusses which costs are inventoriable, the theoretical arguments for the lower-
CA 9.6 (Time 10–15 minutes)
Purpose—to provide the student with a case that allows examination of ethical issues related to the
recording of purchase commitments.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 9.1
(a) The purpose of using the LCNRV method is to reflect the decline of inventory value below its
original cost. A departure from cost is justified on the basis that a loss of utility should be reported
as a charge against the revenues in the period in which it occurs.
(d) Conceptually, the LCNRV method has some deficiencies. First, decreases in the value of the asset
and the charge to expense are recognized in the period in which loss in utility occurs—not in the
period of sale. On the other hand, increases in the value of the asset are recognized only at the
point of sale. This situation is inconsistent and can lead to distortions in the presentation of income
data.
CA 9.2
(a) The accountant’s ethical responsibility is to provide fair and complete financial information. In this
case, the cost-of-goods-sold method distorts the cost of goods sold and hides the decline in
market value.
