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Chapter 9 EXERCISES

Exercise 9-1Requirement 1
(1) (2) Ceiling

Inventories: Additional Issues

(3) Floor

(4)

(5)

Product Gloves Bats Balls Uniforms

RC $330,000 240,000 110,000 560,000

NRV $300,000 320,000 125,000 950,000

NRV-NP Designated (NP= Market Value 20% [Middle value of cost) of (1)-(3)] $228,000 268,000 95,000 830,000 $300,000 268,000 110,000 830,000 Totals

Cost $360,000 260,000 150,000

Inventory Value [Lower of (4) or (5)] $300,000 260,000 110,000

600,000 600,000 $1,370,000 $1,270,000

The inventory value is $1,270,000. Requirement 2 Loss from write-down of inventory: $1,370,000 1,270,000 = $100,000

Exercise 9-2
4,500,000 Purchases Freight-in
Alternate Exercise and Problem Solutions

Merchandise inventory, January 1, 2011 $ 14,500,000 1,000,000


The McGraw-Hill Companies, Inc., 2011 9-1

Cost of goods available for sale Less: Cost of goods sold: Sales Less: Estimated gross profit of 40% Estimated loss from fire

20,000,000 $23,000,000 (9,200,000)

(13,800,000) $ 6,200,000

Exercise 9-3
Beginning inventory Plus: Net purchases Net markups Less: Net markdowns Goods available for sale $68,250 Cost-to-retail percentage: $97,500 Less: Net sales Estimated ending inventory at retail Estimated ending inventory at cost (70% x $52,500) Estimated cost of goods sold (45,000) $52,500 (36,750) $31,500 = 70% Cost $40,000 28,250 ______ 68,250 Retail $60,000 37,000 2,000 (1,500) 97,500

Exercise 9-4
Beginning inventory Plus: Purchases Freight-in Less: Purchase returns Plus: Net markups
The McGraw-Hill Companies, Inc., 2011 9-2

Cost $ 180,000 1,479,000 30,000 (60,000)

Retail $ 300,000 2,430,000 (105,000) 90,000 2,715,000

Intermediate Accounting, 6/e

$1,629,000 Cost-to-retail percentage: $2,715,000 Less: Net markdowns Goods available for sale Less: Normal spoilage Net sales Estimated ending inventory at retail Estimated ending inventory at cost (60% x $267,000) Estimated cost of goods sold _______ 1,629,000 (45,000) 2,670,000 (63,000) (2,340,000) $ 267,000 (160,200) $1,468,800 = 60%

Exercise 9-5
Beginning inventory Plus: Net purchases Net markups Less: Net markdowns Goods available for sale (excluding beginning inventory) Goods available for sale (including beginning inventory) $213,840 Base year cost-to-retail percentage: $396,000 $360,000 2011 cost-to-retail percentage: $750,000 Less: Net sales Estimated ending inventory at current year retail prices Estimated ending inventory at cost (below) Estimated cost of goods sold = 48% = 54%

Cost $213,840 360,000 _______ 360,000 573,840

Retail $ 396,000 765,000 18,000 (33,000) 750,000 1,146,000

(690,000) $456,000 (238,838) $335,002


The McGraw-Hill Companies, Inc., 2011 9-3

Alternate Exercise and Problem Solutions

___________________________________________________________________________ Step 1 Ending Inventory at Base Year Retail Prices $456,000 $456,000 (above) = $447,059 1.02 $396,000 (base) 51,059 (2011) x 1.00 x 54% = x 1.02 x 48% = $213,840 24,998 $238,838 Step 2 Inventory Layers at Base Year Retail Prices Step 3 Inventory Layers Converted to Cost

Ending Inventory at Year-end Retail Prices

Total ending inventory at dollar-value LIFO retail cost ......................

Exercise 9-61.

To increase inventory by $1.6 million and increase retained earnings to what it would have been if 2010 cost of goods sold had been calculated correctly.

The McGraw-Hill Companies, Inc., 2011 9-4

Intermediate Accounting, 6/e

Analysis: 2010 Beginning inventory Purchases Less: Ending inventory Cost of goods sold Revenues Less: Cost of goods sold Less: Other expenses Net income Retained earnings 2011 Beginning inventory Purchases U O U

O U U

U = Understated O = Overstated

($ in millions)

Inventory ........................................................... Retained earnings ..........................................

1.6 1.6

2.

The 2010 financial statements that were incorrect as a result of the error would be retrospectively restated to reflect the correct cost of goods sold, (income tax expense if taxes are considered), net income, ending inventory, and retained earnings when those statements are reported again for comparative purposes in the 2011 annual report. Because retained earnings is one of the accounts incorrect, the correction to that account is reported as a prior period adjustment to the 2010 retained earnings balance in the comparative statements of shareholders equity. Also, a disclosure note should describe the nature of the error and the impact of its correction on each years net income, income before extraordinary items, and earnings per share.

3.

4.

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2011 9-5

PROBLEMS
Problem 9-11. Average cost
Beginning inventory Plus: Purchases Freight-in Less: Purchase returns Plus: Net markups Less: Net markdowns Goods available for sale $564,000 Cost-to-retail percentage: $940,000 Less: Normal spoilage Sales: Net sales ($700,000 - 20,000) Employee discounts Estimated ending inventory at retail Estimated ending inventory at cost (60% x $249,000) Estimated cost of goods sold (5,000) (680,000) (6,000) $249,000 (149,400) $414,600 = 60% Cost $140,000 420,000 16,000 (12,000) _______ 564,000 Retail $280,000 690,000 (18,000) 24,000 (36,000) 940,000

The McGraw-Hill Companies, Inc., 2011 9-6

Intermediate Accounting, 6/e

Problem 9-1 (concluded) 2. Conventional (average, LCM) Beginning inventory Plus: Purchases Freight-in Less: Purchase returns Plus: Net markups $564,000 Cost-to-retail percentage: $976,000 Less: Net markdowns Goods available for sale Normal spoilage Sales: Net sales ($700,000 - 20,000) Employee discounts Estimated ending inventory at retail Estimated ending inventory at cost (57.79% x $249,000) Estimated cost of goods sold _______ 564,000 (36,000) 940,000 (5,000) (680,000) (6,000) $249,000 (143,897) $420,103 = 57.79% Cost $140,000 420,000 16,000 (12,000) Retail $280,000 690,000 (18,000) 24,000 976,000

Problem 9-2 ($ in 000s)


Beginning inventory Plus: Net purchases Freight-in Net markups
Alternate Exercise and Problem Solutions

Cost $ 128 1,072 59

Retail $ 200 1,600 6

The McGraw-Hill Companies, Inc., 2011 9-7

Less: Purchase returns Net markdowns Goods available for sale (excluding beginning inventory) Goods available for sale (including beginning inventory) $128 Base layer cost-to-retail percentage: $200 $1,129 2011 layer cost-to-retail percentage: $1,590 Less: Net sales Estimated ending inventory at current year retail prices Estimated ending inventory at cost (calculated below) Estimated cost of goods sold = 71% = 64%

(2) ___ 1,129 1,257

(3) (13) 1,590 1,790

(1,465) $ 325 (205) $1,052

___________________________________________________________________________ Step 1 Ending Inventory at Base Year Retail Prices $325 $325 (above) = $301 1.08 $200 (base) 101 (2011) x 1.00 x 64% = x 1.08 x 71% = $128 77 $205 Step 2 Inventory Layers at Base Year Retail Prices Step 3 Inventory Layers Converted to Cost

Ending Inventory at Year-end Retail Prices

Total ending inventory at dollar-value LIFO retail cost ......................

The McGraw-Hill Companies, Inc., 2011 9-8

Intermediate Accounting, 6/e