E9-1 (L01) LCNRV

The inventory of Oheto Company on December 31, 2017, consists of the following items.

Cost per Net Realizable

Part Quantity Unit Value
110 600 $ 95 $ 100
111 1,000 60 52
112 500 80 76
113 200 170 180
120 400 205 208
121 1,600 16 1
122 300 240 235

Part No. 121 is obsolete and has a realizable value of $1 each as scrap.

Instructions:
1. Determine the inventory as of December 31, 2017, by the LCNRV method, applying this
method to each item.
2. Determine the inventory by the LCNRV method, applying the method to the total of the
inventory.

Per Unit
Net Realizable Lower-of-Cost-
Part No. Quantity Cost Total Cost Total NRV
Value or-NRV
110
111
112
113
120
121
122
Totals

1. Inventory value based on LCNRV - each item:

2. Inventory value based on LCNRV - total inventory:
Solution: E9-1 (L01) LCNRV
The inventory of Oheto Company on December 31, 2017, consists of the following items.

Cost per Net Realizable

Part Quantity Unit Value
110 600 $ 95 $ 100
111 1,000 60 52
112 500 80 76
113 200 170 180
120 400 205 208
121 1,600 16 1
122 300 240 235

Part No. 121 is obsolete and has a realizable value of $1 each as scrap.

Instructions:
1. Determine the inventory as of December 31, 2017, by the LCNRV method, applying this
method to each item.
2. Determine the inventory by the LCNRV method, applying the method to the total of the
inventory.

Per Unit
Net Realizable Lower-of-Cost-
Part No. Quantity Cost Total Cost Total NRV
Value or-NRV
110 600 $ 95 $ 100 $ 57,000 $ 60,000 $ 57,000
111 1,000 60 52 60,000 52,000 52,000
112 500 80 76 40,000 38,000 38,000
113 200 170 180 34,000 36,000 34,000
120 400 205 208 82,000 83,200 82,000
121 1,600 16 1 25,600 1,600 1,600
122 300 240 235 72,000 70,500 70,500
Totals $ 370,600 $ 341,300 $ 335,100

1. Inventory value based on LCNRV - each item: $ 335,100

2. Inventory value based on LCNRV - total inventory: $ 341,300
E9-9 (L03) Relative Sales Value Method
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.

Group No. of Lots Price per Lot

1 9 $ 3,000
2 15 4,000
3 17 2,400

Operating expenses for the year allocated to this project total $18,200. Lots unsold at the year-end
were as follows.

Group 1 5 lots
Group 2 7 lots
Group 3 2 lots

Instructions:
At the end of the fiscal year Phil Collins Realty Corporation instructs you to arrive at the net
income realized on this operation to date.

Cost Per Lot

No. Sales Cost (Cost
of Price Total Sales Allocated allcocated ÷
Group Lots Per Lot Price Relative Sales Price × Total Cost to Lots No. of Lots)
1

Calculation of number of lots sold:

Group 1
Group 2
Group 3
Calculation
No.of cost of lots sold, sales, and gross profit:
of
Lots Cost per Cost of Lots
Group Sold* Lot Sold Sales Gross Profit
1

Calculation of net income

Solution: E9-9 (L03) Relative Sales Value Method
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.

Group No. of Lots Price per Lot

1 9 $ 3,000
2 15 4,000
3 17 2,400

Operating expenses for the year allocated to this project total $18,200. Lots unsold at the year-end
were as follows.

Group 1 5 lots
Group 2 7 lots
Group 3 2 lots

Instructions:
At the end of the fiscal year Phil Collins Realty Corporation instructs you to arrive at the net
income realized on this operation to date.

Cost Per Lot

No. Sales Cost (Cost
of Price Total Sales Allocated allcocated ÷
Group Lots Per Lot Price Relative Sales Price × Total Cost to Lots No. of Lots)
1 9 $ 3,000 $ 27,000 $27,000 ÷ $127,800 × $ 89,460 $ 18,900 $ 2,100
2 15 4,000 60,000 $60,000 ÷ $127,800 × 89,460 42,000 2,800
3 17 2,400 40,800 $40,800 ÷ $127,800 × 89,460 28,560 1,680
$ 127,800 $ 89,460

Calculation of number of lots sold:

Group 1 9-5= 4
Group 2 15 - 7 = 8
Group 3 17 - 2 = 15

Calculation
No.of cost of lots sold, sales, and gross profit:
of
Lots Cost per Cost of Lots
Group Sold* Lot Sold Sales Gross Profit
1 4 $ 2,100 $ 8,400 $ 12,000 $ 3,600
2 8 2,800 22,400 32,000 9,600
3 15 1,680 25,200 36,000 10,800
27 $ 56,000 $ 80,000 $ 24,000
Calculation of net income
Sales revenue $ 80,000
Cost of goods sold 56,000
Gross profit 24,000
Operating expenses 18,200
Net income $ 5,800
P9-4 (L02) (Lower-of-Cost-or-Market)
Referring to the situation in P9-2 for Garcia Home Improvement Company, consider the following
expanded data at May 31, 2017. Assume Garcia uses LIFO inventory costing, and that the
Allowance to Reduce Inventory to NRV had a credit balance of $27,500 on May 31, 2017 before
adjustment.

Net
Replacement Realizable Normal
Cost Cost Sales Price Value Profit
Aluminum siding $ 70,000 $ 62,500 $ 64,000 $ 56,000 $ 5,100
Cedar shake siding 86,000 79,400 94,000 84,800 7,400
Louvered glass doors 112,000 124,000 186,400 168,300 18,500
Thermal windows 140,000 126,000 154,800 140,000 15,400
Total $ 408,000 $ 391,900 $ 499,200 $ 449,100 $ 46,400

Instructions (CMA adapted)

(a) (1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31,
2017.
(2) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that
would be recorded due to the change in Allowance to Reduce Inventory to Market.

(1) Calculation of the Allowance to Reduce Inventory to Market account at May 31, 2017:

NRV less
Replacement normal profit
Inventory item Cost Cost NRV (Ceiling) (Floor) LCM
Aluminum siding $ 70,000 $ 62,500 $ 56,000
Cedar shake siding 86,000 79,400 84,800
Louvered glass doors 112,000 124,000 168,300
Thermal windows 140,000 126,000 140,000
Totals $ 408,000 $ 391,900 $ 449,100

Calculation of Allowance balance at May 31, 2017:

(2) Calculation of loss to be recorded:

(b) Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories.
Solution: P9-4 (L02) (Lower-of-Cost-or-Market)
Referring to the situation in P9-2 for Garcia Home Improvement Company, consider the following
expanded data at May 31, 2017. Assume Garcia uses LIFO inventory costing, and that the
Allowance to Reduce Inventory to NRV had a credit balance of $27,500 on May 31, 2017 before
adjustment.

Net
Replacement Realizable Normal
Cost Cost Sales Price Value Profit
Aluminum siding $ 70,000 $ 62,500 $ 64,000 $ 56,000 $ 5,100
Cedar shake siding 86,000 79,400 94,000 84,800 7,400
Louvered glass doors 112,000 124,000 186,400 168,300 18,500
Thermal windows 140,000 126,000 154,800 140,000 15,400
Total $ 408,000 $ 391,900 $ 499,200 $ 449,100 $ 46,400

Instructions (CMA adapted)

(a) (1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31,
2017.
(2) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that
would be recorded due to the change in Allowance to Reduce Inventory to Market.

(1) Calculation of the Allowance to Reduce Inventory to Market account at May 31, 2017:

NRV less
Replacement normal profit
Inventory item Cost Cost NRV (Ceiling) (Floor) LCM
Aluminum siding $ 70,000 $ 62,500 $ 56,000 $ 50,900 $ 56,000
Cedar shake siding 86,000 79,400 84,800 77,400 79,400
Louvered glass doors 112,000 124,000 168,300 149,800 112,000
Thermal windows 140,000 126,000 140,000 124,600 126,000
Totals $ 408,000 $ 391,900 $ 449,100 $ 402,700 $ 373,400

Calculation of Allowance balance at May 31, 2017:

Inventory cost $ 408,000
Less: LCM valuation 373,400
Allowance at May 31, 2017 $ 34,600

(2) Calculation of loss to be recorded:

Balance prior to adjustment $ 27,500
Required balance (34,600)
Loss to be recorded $ (7,100)
(b) Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to
inventories.

The use of the lower-of-cost-or-market (LCM) rule is based on both the expense
recognition principle and the concept of conservatism. The expense recognition principle
applies because the application of the LCM rule allows for the recognition of a decline in
the utility (value) of inventory as a loss in the period in which the decline takes place.

The departure from the historical cost principle for inventory valuation is permitted on the
basis of conservatism. The general rule is that the historical cost principle is abandoned
when the future utility of an asset is no longer as great as its original cost.
P9-8 (L05) (Retail Inventory Method)
The records for the Clothing Department of Sharapova’s Discount Store are summarized
below for the month of January.

At Retail At Cost
Inventory, January 1 $ 25,000 17,000
Purchases in January 137,000 82,500
Freight-in 7,000
Purchase returns 3,000 2,300
Transfers in from suburban branch 13,000 9,200
Inventory losses due to normal breakage, etc 400
Sales revenue 95,000
Sales returns 2,400
Net markups $ 8,000
Net markdowns 4,000

Instructions
(a) Compute the inventory for this department as of January 31, at retail prices.

Cost Retail

Cost-to-retail ratio
=
(b) Compute the ending inventory using lower-of-average-cost-or-market.
Solution: P9-8 (L05) (Retail Inventory Method)
The records for the Clothing Department of Sharapova’s Discount Store are summarized
below for the month of January.

At Retail At Cost
Inventory, January 1 $ 25,000 17,000
Purchases in January 137,000 82,500
Freight-in 7,000
Purchase returns 3,000 2,300
Transfers in from suburban branch 13,000 9,200
Inventory losses due to normal breakage, etc 400
Sales revenue 95,000
Sales returns 2,400
Net markups $ 8,000
Net markdowns 4,000

Instructions
(a) Compute the inventory for this department as of January 31, at retail prices.

Cost Retail
Beginning inventory $ 17,000 $ 25,000
Purchases 82,500 137,000
Freight-in 7,000
Purchase returns (2,300) (3,000)
Transfers in from suburban branch 9,200 13,000
Totals $ 113,400 $ 172,000
Net markups 8,000
180,000
Net markdowns (4,000)
Sales revenue $ 95,000
Sales returns (2,400) (92,600)
Inventory losses due to breakage (400)
Ending inventory at retail $ 83,000

Cost-to-retail ratio
$ 113,400
= 63%
$ 180,000

(b) Compute the ending inventory using lower-of-average-cost-or-market.

Cost-to-retail ratio 63%

Ending inventory at retail $ 83,000
Ending inventory at lower-of-average-cost-or-market $ 52,290