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John Olerud Ltd., a local retailing concern in the Bronx, New York, has decided to change from the conventional retail inventory method to the LIFO retail method starting on January 1, 2015. The company recomputed its ending inventory for 2014 in accordance with the procedures necessary to switch to LIFO retail. The inventory computed was $212,600.
\r\nInstructions
\r\nAssuming that John Olerud Ltd.’s ending inventory for 2014 under the conventional retail inventory method was $205,000, prepare the appropriate journal entry on January 1, 2015.
Connie Chung Corporation adopted the dollar-value LIFO retail inventory method on January 1, 2013. At that time the inventory had a cost of $54,000 and a retail price of $100,000. The following information is available.8
\r\nYear-End
\r\nInventory at Retail
\r\nCurrent Year
\r\nCost—Retail %
\r\nYear-End
\r\nPrice Index
\r\n2013 $118,720 57% 106
\r\n2014 138,750 60% 111
\r\n2015 125,350 61% 115
\r\n2016 162,500 58% 125
\r\nThe price index at January 1, 2013, is 100.
\r\nInstructions
\r\nCompute the ending inventory at December 31 of the years 2013–2016. (Round to the nearest dollar.)
Amiras Corporation began operations on January 1, 2014, with a beginning inventory of $30,100 at cost and $50,000 at retail. The following information relates to 2014.
\r\nRetail
\r\nNet purchases ($108,500 at cost) $150,000
\r\nNet markups 10,000
\r\nNet markdowns 5,000
\r\nSales revenue 126,900
\r\nInstructions
\r\n(a) Assume Amiras decided to adopt the conventional retail method. Compute the ending inventory tobe reported in the balance sheet.
\r\n(b) Assume instead that Amiras decides to adopt the dollar-value LIFO retail method. The appropriate price indexes are 100 at January 1 and 110 at December 31. Compute the ending inventory to be reported in the balance sheet.
\r\n(c) On the basis of the information in part (b), compute cost of goods sold.
Presented below is information related to Langston Hughes Corporation.
\r\nPrice
\r\nIndex
\r\nLIFO
\r\nCost Retail
\r\nInventory on December 31, 2014, when dollar-value LIFO is adopted 100 $36,000 $ 74,500
\r\nInventory, December 31, 2015 110 ? 100,100
\r\nInstructions
\r\nCompute the ending inventory under the dollar-value LIFO method at December 31, 2015. The cost-toretail ratio for 2015 was 60%.
You assemble the following information for Seneca Department Store, which computes its inventory under the dollar-value LIFO method.
\r\nCost Retail
\r\nInventory on January 1, 2014 $216,000 $300,000
\r\nPurchases 364,800 480,000
\r\nIncrease in price level for year 9%
\r\nInstructions
\r\nCompute the cost of the inventory on December 31, 2014, assuming that the inventory at retail is (a) $294,300 and (b) $365,150.
Leonard Bernstein Company began operations late in 2013 and adopted the conventional retail inventory method. Because there was no beginning inventory for 2013 and no markdowns during 2013, the ending inventory for 2013 was $14,000 under both the conventional retail method and the LIFO retail method. At the end of 2014, management wants to compare the results of applying the conventional and LIFO retail methods. There was no change in the price level during 2014. The following data are available for computations.
\r\n8
\r\nCost Retail
\r\nInventory, January 1, 2014 $14,000 $20,000
\r\nSales revenue 80,000
\r\nNet markups 9,000
\r\nNet markdowns 1,600
\r\nPurchases 58,800 81,000
\r\nFreight-in 7,500
\r\nEstimated theft 2,000
Helen Keller Company began operations on January 1, 2013, adopting the conventional retail inventory system. None of the company’s merchandise was marked down in 2013 and, because there was no beginning inventory, its ending inventory for 2013 of $38,100 would have been the same under either the conventional retail system or the LIFO retail system. On December 31, 2014, the store management considers adopting the LIFO retail system and desires to know how the December 31, 2014, inventory would appear under both systems. All pertinent data regarding purchases, sales, markups, and markdowns are shown below. There has been no change in the price level.
\r\nCost Retail
\r\nInventory, Jan. 1, 2014 $ 38,100 $ 60,000
\r\nMarkdowns (net) 13,000
\r\nMarkups (net) 22,000
\r\nPurchases (net) 130,900 178,000
\r\nSales (net) 167,000
\r\nInstructions
\r\nDetermine the cost of the 2014 ending inventory under both (a) the conventional retail method and (b) the LIFO retail method.
The financial statements of ConAgra Foods, Inc.’s 2012 annual report disclose the following information. (in millions) May 27, 2012 May 29, 2011 May 30, 2010
\r\nInventories $1,870 $1,803 $1,598
\r\nFiscal Year
\r\n2012 2011
\r\nNet sales $13,263 $12,303
\r\nCost of goods sold 10,436 9,390
\r\nNet income 474 818
\r\nInstructions
\r\nCompute ConAgra’s (a) inventory turnover and (b) the average days to sell inventory for 2012 and 2011.
The records of Ellen’s Boutique report the following data for the month of April.
\r\nSales revenue $99,000 Purchases (at cost) $48,000
\r\nSales returns 2,000 Purchases (at sales price) 88,000
\r\nMarkups 10,000 Purchase returns (at cost) 2,000
\r\nMarkup cancellations 1,500 Purchase returns (at sales price) 3,000
\r\nMarkdowns 9,300 Beginning inventory (at cost) 30,000
\r\nMarkdown cancellations 2,800 Beginning inventory (at sales price) 46,500
\r\nFreight on purchases 2,400
\r\nInstructions
\r\nCompute the ending inventory by the conventional retail inventory method.
Presented below is information related to Ricky Henderson Company. Cost Retail
\r\nBeginning inventory $ 200,000 $ 280,000
\r\nPurchases 1,375,000 2,140,000
\r\nMarkups 95,000
\r\nMarkup cancellations 15,000
\r\nMarkdowns 35,000
\r\nMarkdown cancellations 5,000
\r\nSales revenue 2,200,000
\r\nInstructions
\r\nCompute the inventory by the conventional retail inventory method.
Presented below is information related to Bobby Engram Company. Cost Retail
\r\nBeginning inventory $ 58,000 $100,000
\r\nPurchases (net) 122,000 200,000
\r\nNet markups 10,345
\r\nNet markdowns 26,135
\r\nSales revenue 186,000
\r\nInstructions
\r\n(a) Compute the ending inventory at retail.
\r\n(b) Compute a cost-to-retail percentage (round to two decimals) under the following conditions.
\r\n(1) Excluding both markups and markdowns.
\r\n(2) Excluding markups but including markdowns.
\r\n(3) Excluding markdowns but including markups.
\r\n(4) Including both markdowns and markups.
\r\n(c) Which of the methods in (b) above (1, 2, 3, or 4) does the following?
\r\n(1) Provides the most conservative estimate of ending inventory.
\r\n(2) Provides an approximation of lower-of-cost-or-market.
\r\n(3) Is used in the conventional retail method.
\r\n(d) Compute ending inventory at lower-of-cost-or-market (round to nearest dollar).
\r\n(e) Compute cost of goods sold based on (d).
\r\n(f) Compute gross margin based on (d).
Presented below is information related to Aaron Rodgers Corporation for the current year.
\r\nBeginning inventory $ 600,000
\r\nPurchases 1,500,000
\r\nTotal goods available for sale $2,100,000
\r\nSales revenue 2,500,000
\r\nInstructions
\r\nCompute the ending inventory, assuming that (a) gross profit is 45% of sales; (b) gross profit is 60% of cost; (c) gross profit is 35% of sales; and (d) gross profit is 25% of cost.
Gheorghe Moresan Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost.
\r\nLumber 25%
\r\nMillwork 30%
\r\nHardware and fi ttings 40%
\r\nOn August 18, a fire destroyed the office, lumber shed, and a considerable portion of the lumber stacked in the yard. To file a report of loss for insurance purposes, the company must know what the inventories were immediately preceding the fire. No detail or perpetual inventory records of any kind were maintained. The only pertinent information you are able to obtain are the following facts from the general ledger, which was kept in a fireproof vault and thus escaped destruction.
\r\nLumber Millwork Hardware
\r\nInventory, Jan. 1, 2014 $ 250,000 $ 90,000 $ 45,000
\r\nPurchases to Aug. 18, 2014 1,500,000 375,000 160,000
\r\nSales revenue to Aug. 18, 2014 2,080,000 533,000 210,000
\r\nInstructions
\r\nSubmit your estimate of the inventory amounts immediately preceding the fire.
You are called by Tim Duncan of Spurs Co. on July 16 and asked to prepare a claim for insurance as a result of a theft that took place the night before. You suggest that an inventory be taken immediately. The following data are available.
\r\nInventory, July 1 $ 38,000
\r\nPurchases—goods placed in stock July 1–15 85,000
\r\nSales revenue—goods delivered to customers (gross) 116,000
\r\nSales returns—goods returned to stock 4,000
\r\nYour client reports that the goods on hand on July 16 cost $30,500, but you determine that this figure includes goods of $6,000 received on a consignment basis. Your past records show that sales are made at approximately 40% over cost. Duncan’s insurance covers only goods owned.
\r\nInstructions
\r\nCompute the claim against the insurance company.
Rasheed Wallace Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation’s books disclosed the following.
\r\nBeginning inventory $170,000 Sales revenue $650,000
\r\nPurchases for the year 390,000 Sales returns 24,000
\r\nPurchase returns 30,000 Rate of gross profi t on net sales 40%
\r\nMerchandise with a selling price of $21,000 remained undamaged after the fire. Damaged merchandise with an original selling price of $15,000 had a net realizable value of $5,300.
\r\nInstructions
\r\nCompute the amount of the loss as a result of the fire, assuming that the corporation had no insurance coverage.
Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Merchandise on hand on January 1 was $38,000. Purchases since January 1 were $72,000; freight-in, $3,400; purchase returns and allowances, $2,400. Sales are made at 331/3% above cost and totaled $100,000 to March 9. Goods costing $10,900 were left undamaged by the fire; remaining goods were destroyed.
\r\nInstructions
\r\n(a) Compute the cost of goods destroyed.
\r\n(b) Compute the cost of goods destroyed, assuming that the gross profit is 331/3% of sales.
Mark Price Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May.
\r\nInventory, May 1 $ 160,000
\r\nPurchases (gross) 640,000
\r\nFreight-in 30,000
\r\nSales revenue 1,000,000
\r\nSales returns 70,000
\r\nPurchase discounts 12,000
\r\nInstructions
\r\n(a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales.
\r\n(b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost.
Each of the following gross profit percentages is expressed in terms of cost.
\r\n1. 20%. 3. 331/3%.
\r\n2. 25%. 4. 50%.
\r\nInstructions
\r\nIndicate the gross profit percentage in terms of sales for each of the above.
At December 31, 2014, Indigo Girls Company has outstanding noncancelable purchase commitments for 36,000 gallons, at $3.00 per gallon, of raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower.
\r\nInstructions
\r\n(a) Assuming that the market price as of December 31, 2014, is $3.30, how would this matter be treated in the accounts and statements? Explain.
\r\n(b) Assuming that the market price as of December 31, 2014, is $2.70, instead of $3.30, how would you treat this situation in the accounts and statements?
\r\n(c) Give the entry in January 2015, when the 36,000-gallon shipment is received, assuming that the situation given in (b) above existed at December 31, 2014, and that the market price in January 2015 was $2.70 per gallon. Give an explanation of your treatment.
Marvin Gaye Company has been having difficulty obtaining key raw materials for its manufacturing process. The company therefore signed a long-term noncancelable purchase commitment with its largest supplier of this raw material on November 30, 2014, at an agreed price of $400,000. At December 31, 2014, the raw material had declined in price to $365,000.
\r\nInstructions
\r\nWhat entry would you make on December 31, 2014, to recognize these facts?
During 2014, Pretenders Furniture Company purchases a carload of wicker chairs. The manufacturer sells the chairs to Pretenders for a lump sum of $59,850 because it is discontinuing manufacturing operations and wishes to dispose of its entire stock. Three types of chairs are included in the carload. The three types and the estimated selling price for each are listed below. Type No. of Chairs Estimated Selling Price Each
\r\nLounge chairs 400 $90
\r\nArmchairs 300 80
\r\nStraight chairs 700 50
\r\nDuring 2014, Pretenders sells 200 lounge chairs, 100 armchairs, and 120 straight chairs.
\r\nInstructions
\r\nWhat is the amount of gross profit realized during 2014? What is the amount of inventory of unsold straight chairs on December 31, 2014?
Phil Collins Realty Corporation purchased a tract of unimproved land for $55,000. This land was improved and subdivided into building lots at an additional cost of $34,460. These building lots were all of the same size but owing to differences in location were offered for sale at different prices as follows.
\r\nGroup No. of Lots Price per Lot
\r\n1 9 $3,000
\r\n2 15 4,000
\r\n3 17 2,400
\r\nOperating expenses for the year allocated to this project total $18,200. Lots unsold at the year-end were
\r\nas follows.
\r\nGroup 1 5 lots
\r\nGroup 2 7 lots
\r\nGroup 3 2 lots
\r\nInstructions
\r\nAt the end of the fiscal year Phil Collins Realty Corporation instructs you to arrive at the net income realized on this operation to date.
Winans Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2013, included product X. Relevant per-unit data for product X appear below. 2
\r\nEstimated selling price $45
\r\nCost 40
\r\nReplacement cost 35
\r\nEstimated selling expense 14
\r\nNormal profi t 9
\r\nThere were 1,000 units of product X on hand at December 31, 2013. Product X was incorrectly valued at $35 per unit for reporting purposes. All 1,000 units were sold in 2014.
\r\nInstructions
\r\nCompute the effect of this error on net income for 2013 and the effect on net income for 2014, and indicate the direction of the misstatement for each year.
Presented below is information related to Candlebox Enterprises.
\r\nJ an. 31 Feb. 28 M ar. 31 A pr. 30
\r\nInventory at cost $15,000 $15,100 $17,000 $13,000
\r\nInventory at the lower-of-cost-or-market 14,500 12,600 15,600 12,300
\r\nPurchases for the month 20,000 24,000 26,500
\r\nSales revenue for the month 29,000 35,000 40,000
\r\nInstructions
\r\n(a) From the information, prepare (as far as the data permit) monthly income statements in columnar form for February, March, and April. The inventory is to be shown in the statement at cost, the gain or loss due to market fluctuations is to be shown separately, and a valuation account is to be set up for the difference between cost and the lower of cost or market.
\r\n(b) Prepare the journal entry required to establish the valuation account at January 31 and entries to adjust it monthly thereafter.
Corrs Company began operations in 2013 and determined its ending inventory at cost and at lower-of-cost-or-market at December 31, 2013, and December 31, 2014. This information is presented below.
\r\nCost Lower-of-Cost-or-Market
\r\n12/31/13 $346,000 $327,000
\r\n12/31/14 410,000 395,000
\r\nInstructions
\r\n(a) Prepare the journal entries required at December 31, 2013, and December 31, 2014, assuming that the inventory is recorded at market, and a perpetual inventory system (direct method) is used.
\r\n(b) Prepare journal entries required at December 31, 2013, and December 31, 2014, assuming that the inventory is recorded at cost and an allowance account is adjusted at each year-end under a perpetual system.
\r\n(c) Which of the two methods above provides the higher net income in each year?
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