Question & Answer

Michael Bolton Company follows the practice of pricing its inventory at the lower-of-cost-or-market, on an individual-item basis.

Item

No. Quantity

Cost

per Unit

Cost to

Replace

Estimated

Selling Price

Cost of Completion and Disposal

Normal

Profi t

1320 1,200 $3.20 $3.00 $4.50 $0.35 $1.25

1333 900 2.70 2.30 3.50 0.50 0.50

1426 800 4.50 3.70 5.00 0.40 1.00

1437 1,000 3.60 3.10 3.20 0.25 0.90

1510 700 2.25 2.00 3.25 0.80 0.60

1522 500 3.00 2.70 3.80 0.40 0.50

1573 3,000 1.80 1.60 2.50 0.75 0.50

1626 1,000 4.70 5.20 6.00 0.50 1.00

Instructions

From the information above, determine the amount of Bolton Company inventory.

Smashing Pumpkins Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2014, consists of products D, E, F, G, H, and I. Relevant per-unit data for these products appear below.

Item Item Item Item Item Item

D E F G H I

Estimated selling price $120 $110 $95 $90 $110 $90

Cost 75 80 80 80 50 36

Replacement cost 120 72 70 30 70 30

Estimated selling expense 30 30 30 25 30 30

Normal profi t 20 20 20 20 20 20

Instructions

Using the lower-of-cost-or-market rule, determine the proper unit value for balance sheet reporting purposes at December 31, 2014, for each of the inventory items above.

The inventory of 3T Company on December 31, 2014, consists of the following items.

Part No. Quantity Cost per Unit Cost to Replace per Unit

110 600 $ 90 $100

111 1,000 60 52

112 500 80 76

113 200 170 180

120 400 205 208

121a 1,600 16 14

122 300 240 235

aPart No. 121 is obsolete and has a realizable value of $0.20 each as scrap.

Instructions

(a) Determine the inventory as of December 31, 2014, by the lower-of-cost-or-market method, applying this method directly to each item.

(b) Determine the inventory by the lower-of-cost-or-market method, applying the method to the total of the inventory.

Use the information for Boyne Inc. from BE9-8, and assume the price level increased from 100 at the beginning of the year to 115 at year-end. Compute ending inventory at cost using the dollar-value LIFO retail method.

Use the information for Boyne Inc. from BE9-8. Compute ending inventory at cost using the LIFO retail method.

In its 2012 annual report, Gap Inc. reported inventory of $1,615 million on January 25, 2012, and

$1,620 million on January 29, 2011, cost of sales of $9,275 million for fiscal year 2012, and net sales of $14,549 million. Compute Gap’s inventory turnover and the average days to sell inventory for the fiscal year 2012.

Boyne Inc. had beginning inventory of $12,000 at cost and $20,000 at retail. Net purchases were $120,000 at cost and $170,000 at retail. Net markups were $10,000; net markdowns were $7,000; and sales revenue was $147,000. Compute ending inventory at cost using the conventional retail method.

Fosbre Corporation’s April 30 inventory was destroyed by fire. January 1 inventory was $150,000, and purchases for January through April totaled $500,000. Sales revenue for the same period were $700,000.

Fosbre’s normal gross profit percentage is 35% on sales. Using the gross profit method, estimate Fosbre’s April 30 inventory that was destroyed by fire.

Use the information for Kemper Company from BE9-5. In 2015, Kemper paid $1,000,000 to obtain the raw materials which were worth $950,000. Prepare the entry to record the purchase.

Kemper Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2015 at a cost of $1,000,000. At December 31, 2014, the raw materials to be purchased have a market value of $950,000. Prepare any necessary December 31, 2014, entry.

Bell, Inc. buys 1,000 computer game CDs from a distributor who is discontinuing those games. The purchase price for the lot is $8,000. Bell will group the CDs into three price categories for resale, as indicated below.1 2

Group No. of CDs Price per CD

1 100 $ 5

2 800 10

3 100 15

Determine the cost per CD for each group, using the relative sales value method.

Kumar Inc. uses a perpetual inventory system. At January 1, 2014, inventory was $214,000 at both cost and market value. At December 31, 2014, the inventory was $286,000 at cost and $265,000 at market value. Prepare the necessary December 31 entry under (a) the cost-of-goods-sold method and (b) the loss method.

Floyd Corporation has the following four items in its ending inventory.

Replacement

Cost

Net Realizable

Value (NRV)

NRV Less

Item Cost Normal Profi t Margin

Jokers $2,000 $2,050 $2,100 $1,600

Penguins 5,000 5,100 4,950 4,100

Riddlers 4,400 4,550 4,625 3,700

Scarecrows 3,200 2,990 3,830 3,070

Determine the final lower-of-cost-or-market inventory value for each item.

Presented below is information related to Rembrandt Inc.’s inventory. (per unit) Skis Boots Parkas

Historical cost $190.00 $106.00 $53.00

Selling price 212.00 145.00 73.75

Cost to distribute 19.00 8.00 2.50

Current replacement cost 203.00 105.00 51.00

Normal profi t margin 32.00 29.00 21.25

Determine the following: (a) the two limits to market value (i.e., the ceiling and the floor) that should be used in the lower-of-cost-or-market computation for skis, (b) the cost amount that should be used inthe lower-of-cost-or-market comparison of boots, and (c) the market amount that should be used to valueparkas on the basis of the lower-of-cost-or-market.

What modifications to the conventional retail method are necessary to approximate a LIFO retail flow?

Of what significance is inventory turnover to a retail store?

Deere and Company reported inventory in its balance sheet as follows.

Inventories $1,999,100,000 What additional disclosures might be necessary to present athe inventory fairly?

(a) Determine the ending inventory under the conventional retail method for the furniture department of

Mayron Department Stores from the following data.

Cost Retail

Inventory, Jan. 1 $ 149,000 $ 283,500

Purchases 1,400,000 2,160,000

Freight-in 70,000

Markups, net 92,000

Markdowns, net 48,000

Sales revenue 2,175,000

(b) If the results of a physical inventory indicated an inventory at retail of $295,000, what inferences would you draw?

The conventional retail inventory method yields results that are essentially the same as those yielded by the lowerof- cost-or-market method. Explain. Prepare an illustration of how the retail inventory method reduces inventory to market.

What conditions must exist for the retail inventory method to provide valid results?

A fire destroys all of the merchandise of Assante Company on February 10, 2014. Presented below is information compiled up to the date of the fire.

Inventory, January 1, 2014 $ 400,000

Sales revenue to February 10, 2014 1,950,000

Purchases to February 10, 2014 1,140,000

Freight-in to February 10, 2014 60,000

Rate of gross profi t on selling price 40%

What is the approximate inventory on February 10, 2014?

Adriana Co., with annual net sales of $5 million, maintains a markup of 25% based on cost. Adriana’s expenses average 15% of net sales. What is Adriana’s gross profit and net profit in dollars?

Distinguish between gross profit as a percentage of cost and gross profit as a percentage of sales price. Convert the following gross profit percentages based on cost to gross profit percentages based on sales price: 25% and 331/3%. Convert the following gross profit percentages based on sales price to gross profit percentages based on cost: 331/3% and 60%.

What are the major uses of the gross profit method?

At December 31, 2014, Ashley Co. has outstanding purchase commitments for 150,000 gallons, at $6.20 per gallon, of a raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower. Assuming that the market price as of December 31, 2014, is $5.90, how would you treat this situation in the accounts?