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# Exercise 9-1(lower of cost or market)

Herman Company has 3 products in its ending inventory. Specific per unit data for each of the products are as follows: Product 1 Product 2 Product 3 Cost \$ 20 \$ 90 \$ 50 Replacement cost 18 85 40 Selling price 40 120 70 Disposal costs 6 40 10 Normal profit margin 5 30 12 Required: what unit values should Herman use for each of its products when applying the LCM rule to ending inventory?

(1) (2) Ceiling (3) Floor (4) Designated Market Value [Middle value of (1), (2) & (3)] \$29 80 48 (5) Per Unit Inventory Value [Lower of (4) and (5)] \$20 80 48

Product 1 2 3

RC \$18 85 40

NRV (*) \$ 34 80 60

## NRV-NP (**) \$29 50 48

Cost \$20 90 50

* Selling price less disposal costs. ** NRV less normal profit margin

## Exercise 9-3(lower of cost or market)

Tatum company has 4 products in its inventory. Information about December 31, 2011, inventory is as follows: Product total cost total replacement cost total Net Realizable value 101 120, 000 \$ 110,000 \$ 100,000 102 90, 000 85,000 110,000 103 60, 000 40,000 50,000 104 30, 000 28,000 50,000 The normal gross profit percentage in 25% of cost.

Required:
Determine the balance sheet inventory carrying at the December 31, 2011, assuming the LCM rule is applied to individual products. 2. Assuming the Tatum recognizes an inventory write-down as a separate income statement item, determine the amount of the loss. Requirement 1 1.

(1)

(2) Ceiling

(3) Floor NRV-NP (NP= 25% of cost) \$70,000 87,500 35,000 42,500

(4)

(5)

## NRV \$100,000 110,000 50,000 50,000

Designated Market Value [Middle value of (1), (2) & (3)] \$100,000 87,500 40,000 42,500 Totals

Inventory Value [Lower of (4) and (5)] Cost \$120,000 90,000 60,000 30,000 \$300,000 \$100,000 87,500 40,000 30,000 \$257,500

The inventory value is \$257,500. Requirement 2 Loss from write-down of inventory: \$300,000 - 257,500 = \$42,500

## Exercise 9-5 (lower of cost or market)

The inventory of Royal Decking consisted of 5 products. Information about the December 31, 2011, inventory is as follows: Per Unit Product Cost Replacement Cost Selling Price A \$ 40 \$ 35 \$ 60 B 80 70 100 C 40 55 80 D 100 70 130 E 20 28 30 Disposal costs consist only of a sales commission equal to 10% of salling price and shipping costs equal to 5% of cost. The normal gross profit percentage is 30% selling price. Required: what unit value should Royal Decking use for each of its products when applying the LCM rule to units of accepted accounting principles? Answer: (1) (2) Ceiling (3) Floor (4) (5) Per Unit Inventory Value [Lower of (4) and (5)] Cost \$40 80 40 100 20 \$35 70 40 73 20

Product A B C D E

RC \$35 70 55 70 28

## NRV-NP (**) \$34 56 46 73 17

Designated Market Value [Middle value of (1), (2) & (3)] \$35 70 55 73 26

* Selling price less disposal costs. Disposal costs = 10% of selling price + 5% of cost. ** NRV less normal profit margin

## Problem 1(lower of cost or market)

Decker Company has 5 products in its inventory. Information about the December 31, 2011, inventory follows: Product Quantity Unit Cost Unit Replacement Cost Unit Selling Price A 1,000 \$ 10 \$ 12 \$ 16 B 800 15 11 18 C 600 3 2 8 D 200 7 4 6 E 600 14 12 13 The selling cost of each product consists of a 15% sales commission. The normal profit percentage for each product is 40% of the selling price. Required: 1. Determine the balance sheet inventory carrying value at December 31, 2011, assuming the LCM rule is applied to individual products. 2. Determine the balance sheet inventory carrying value at December 31, 2011, assuming the LCM rule is applied to the entire inventory. Also, assuming that the Decker recognizes an inventory write-down as a separate income statement item, determine the amount of the loss. Answer: Requirement 1 Product NRV per unit NRV-NP per unit A \$16 - (15% x \$16) = \$13.60 \$13.60 - (40% x \$16) = \$7.20 B \$18 - (15% x \$18) = \$15.30 \$15.30 - (40% x \$18) = \$8.10 C \$ 8 - (15% x \$8) = \$ 6.80 \$ 6.80 - (40% x \$ 8) = \$3.60 D \$ 6 - (15% x \$6) = \$ 5.10 \$ 5.10 - (40% x \$ 6) = \$2.70 E \$13 - (15% x \$13) = \$11.05 \$11.05 - (40% x \$13) = \$5.85

(1)

(2)

(3)

(4)

(5)

Ceiling

Floor Designated Market Value [Middle value of (1), (2) & (3)] \$12,000 8,800 2,160 800 6,630 \$30,390 Inventory Value [Lower of (4) and (5)] Cost \$10,000 12,000 1,800 1,400 8,400 \$33,600 \$10,000 8,800 1,800 800 6,630 \$28,030

## NRV-NP \$7,200 6,480 2,160 540 3,510 Totals

Inventory carrying value would be \$28,030. Requirement 2 Inventory carrying value would be \$30,390, the lower of aggregate inventory cost (\$33,600) and aggregate inventory market (\$30,390). The amount of the loss from inventory write-down is \$3,210 (\$33,600 - 30,390).

## Problem 2 (lower of cost or market)

Almaden Hardware Store sells two distinct types of products, tools, and paint products. Information pertaining to its 2011 year-end inventory is as follows: Inventory by product Type Quantity Per Unit Cost Designated Market Tools: Hammers 100 \$ 5.00 \$ 5.50 Saws 200 10.00 9.00 Screwdrivers 300 2.00 2.60 Paint products: 1-gallon cans 500 6.00 5.00 Paint brushes 100 4.00 4.50 Required: 1. Determine the balance sheet inventory carrying value at year-end, assuming the LCM rule is applied to (a) individual products, (b) product type, and (c) total inventor. 2. Assuming that the company recognizes an inventory write-down as a separate income statement item, for each of the LCM application determine the amount of the loss.

Requirement 1 Lower-of-cost-or-market (a) (b) By Individual By Products Product Type

## (c) By Total Inventory

Designated Market Value Product Tools: Hammers Saws Screwdrivers Total tools Paint products: 1-gallon cans \$3,000 \$2,500 \$ 500 2,000 600 \$3,100 \$ 550 1,800 780 \$3,130 Cost

2,500

## 400 2,950 \$5,800 \$6,050 \$6,080

Requirement 2 (a) Individual products \$6,500 - 5,800 = \$700 (b) Product type \$6,500 - 6,050 = \$450 (c) Total inventory \$6,500 - 6,080 = \$420

## Exercise 9-8 (gross profit method)

On September 22, 2011, a flood destroyed the entire merchandise inventory on hand in a warehouse owned by the Rocklin Sporting Goods Company. The following information is available from the records of the companys periodic inventory system: Inventory, January 1, 2011 \$ 140,000 Net purchases, January 1 through September 22 370,000 Net sales, January 1 through September 22 550,000 Gross profit ratio 25% Required: Estimate the cost of inventory destroyed in the flood using the gross profit method.

Beginning inventory (from records) Plus: Net purchases (from records) 370,000 Cost of goods available for sale 510,000 Less: Cost of goods sold: Net sales Less: Estimated gross profit of 25% Estimated cost of goods sold (412,500) Estimated cost of inventory destroyed \$ 97,500 \$140,000

\$550,000 (137,500)

## Exercise 9-9 (gross profit method)

On November 21, 2011, a fire at Hodge Companys warehouse caused severe damage to its entire inventory of Product Tex. Hodge estimates that all useable damaged goods can be sold for \$ 12,000. The following information was available from the record of Hodges periodic inventory system: Inventory November 1 \$ 100,000 Net purchases from November 1, to the day of the fire ` `` 140,000 Net sales from November 1, to the day of fire 220,000 Based on recent history, Hodges gross profit ratio on Product Tex is 35% of net sales. Require: calculated the estimated loss on the inventory from the fire, using the gross profit method.

Beginning inventory (from records) Plus: Net purchases (from records) 140,000 Cost of goods available for sale 240,000 Less: Cost of goods sold: Net sales Less: Estimated gross profit of 35% Estimated cost of goods sold (143,000) Estimated ending inventory 97,000 Less: Value of usable damaged goods (12,000) Estimated loss from fire \$100,000

\$220,000 (77,000)

\$ 85,000

## Exercise 9-10 (gross profit method)

A fire destroyed a warehouse of the Goren Group, Inc., on May 4, 2011. Accounting record on that day indicated the following:

Merchandise inventory, January 1, 2011 Purchased to date Freight-in Sales to date The gross profit ratio has averaged 20% of sales for the past 4 years. Required: use the gross profit method to estimate the cost of the inventory destroyed in the fire.

## \$ 1,900,000 5,800,000 400,000 8,200,000

Merchandise inventory, January 1, 2011 Purchases Freight-in Cost of goods available for sale Less: Cost of goods sold: Sales Less: Estimated gross profit of 20% Estimated loss from fire \$1,900,000 5,800,000 400,000 8,100,000 \$8,200,000 (1,640,000)

(6,560,000) \$1,540,000

## Exercise 9-11 (gross profit method)

Royal Gorge Company use the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statement required by its bank. Inventory on hand at the end of October was \$ 58,500. The following information for the month of November was available from company records: Purchases \$ 110,000 Freight-in 3,000 Sales 180,000 Sales returns 5,000 Purchases returns 4,000 In addition, the controller is aware of \$ 8,000 of inventory that was stolen during November from one of the companys warehouse. Required: 1. Calculate the estimated inventory at the end of November, assuming a gross profit ratio of 40%. 2. Calculate the estimated inventory at the end of November, assuming a markup on cost of 100%.

Requirement 1

Beginning inventory (from records) \$ 58,500 Plus: Net purchases (\$110,000 4,000) Freight-in (from records) 3,000 Cost of goods available for sale 167,500 Less: Cost of goods sold: Net sales (\$180,000 5,000) \$175,000 Less: Estimated gross profit of 40% Estimated cost of goods sold (105,000) Estimated cost of inventory before theft 62,500 Less: Stolen inventory Estimated ending inventory \$ 54,500

106,000

(70,000)

(8,000)

Requirement 2

Beginning inventory (from records) \$ 58,500 Plus: Net purchases (\$110,000 4,000) Freight-in (from records) 3,000 Cost of goods available for sale 167,500 Less: Cost of goods sold:

106,000

Net sales (\$180,000 5,000) \$175,000 Less: Estimated gross profit of 50%* Estimated cost of goods sold (87,500) Estimated cost of inventory before theft 80,000 Less: Stolen inventory Estimated ending inventory \$ 72,000

(87,500)

(8,000)

*Gross profit as a % of cost (1 + Gross profit as a % of cost) = Gross profit as a % of sales. 100% 200% = 50%

## Problem 3 (gross profit method)

Smith Distributors, Inc. , supplies ice cream shops with various toppings for making sundaes. On November 17, 2011, a fire resulted in the loss of all of the toppings stored in one section of the warehouse. The company must provide its insurance company with an estimate of the amount of inventory lost. The following information is available from the companys accounting records: Fruit Toppings \$ 20,000 150,000 200,000 20% Marshmallow Toppings \$ 7,000 36,000 55,000 30% Chocolate Toppings \$ 3,000 12,000 20,000 35%

Inventory, January 1,2011 Net purchases through Nov, 17 Net sales through Nov, 17 Historical gross profit ratio

Required: 1. Calculate the estimated cost of each of the toppings lost in the fire. 2. What factors could cause the estimates to be over-or understated?

Requirement 1 Fruit Toppings Estimate of cost of goods sold: Cost percentage x Net sales Marshmallow Toppings Chocolate Topping

## 65% \$20,000 \$13,000 \$ 3,000 12,000 15,000 13,000 \$ 2,000

Beginning inventory Plus: Net purchases Cost of goods available for sale Less: Estimate of cost of goods sold Estimate of cost of inventory lost

Requirement 2 1. 2. The two main factors that could cause the estimates of the inventory lost to be over or understated are: The historical cost percentages used may not be representative of the current relationship between cost and selling price. Theft or spoilage losses may not be appropriately considered in the cost percentage.

## Exercise 9-13 (Retail inventory method: average cost)

San Lorenzo General store uses a periodic inventory system and the retail inventory method to estimate ending inventory and cost of goods sold. The following data are available for the month of October 2011: Cost Retail Beginning inventory \$ 35,000 \$ 50,000 Net purchases 19,120 31,600 Net markups 1,200 Net markdowns 800 Net sales 32,000

Estimate the average cost of ending inventory and cost of goods sold for October. Do not approximate LCM.

Cost

Retail

Beginning inventory Plus: Net purchases Net markups Less: Net markdowns Goods available for sale \$54,120 Cost-to-retail percentage: \$82,000 Less: Net sales Estimated ending inventory at retail Estimated ending inventory at cost (66% x \$50,000) Estimated cost of goods sold = 66%

## Exercise 9-14 (Conventional retail method)

Campbell Corporation uses the retail method to value its inventory. The following information is available for the year 2011: Cost Retail Merchandise inventory, January 1, 2011 \$ 190,000 \$ 280,000 Purchases 600,000 840,000 Freight-in 8,000 Net markups 20,000 Net markdowns 4,000 Net sales 800,000

Required: Determine the December 31, 2011, inventory that approximates average cost, lower of cost or market. Answer:
Cost Beginning inventory Plus: Purchases Freight-in Net markups \$798,000 Cost-to-retail percentage: Less: Net markdowns Goods available for sale Less: Net sales Estimated ending inventory at retail Estimated ending inventory at cost (70% x \$336,000) = 70% \$1,140,000 _______ 798,000 (4,000) 1,136,000 (800,000) \$ 336,000 \$235,200 \$190,000 600,000 8,000 Retail \$ 280,000 840,000 20,000 1,140,000

## Exercise 9-15 (Retail inventory method: LIFO)

Crosby Company owns a chain of hardware stores throughout the state. The company uses a periodic inventory system and the retail inventory method to estimate ending inventory and cost of goods sold. The following data are available for the three months ending March 31, 2011: Cost Retail Beginning inventory \$ 160,000 \$ 280,000 Net purchases 607,760 840,000 Net markups 20,000 Net markdowns 4,000 Net sales 800,000 Required: estimate the LIFO cost of ending inventory and cost of goods sold for the three months ending March 31, 2011. Assumed stable retail prices during the period.

Beginning inventory Plus: Net purchases Net markups Less: Net markdowns Goods available for sale (excluding beg. Inventory) Goods available for sale (including beg. Inventory) \$607,760 Cost-to-retail percentage: = 71% \$856,000 (800,000) \$ 336,000 Cost \$280,000 56,000 x 71% = \$336,000 \$160,000 39,760 \$199,760 Cost \$160,000 607,760 _______ 607,760 767,760 Retail \$ 280,000 840,000 20,000 (4,000) 856,000 1,136,000

Less: Net sales Estimated ending inventory at retail Estimated ending inventory at cost: Retail Beginning inventory Current periods layer Total Estimated cost of goods sold

(199,760) \$568,000

## Exercise 10-1(Acquisition costs: land and building)

On March 1, 2011, Beldon Corporation purchased land as a factory site for \$ 60,000. An old building on the property was demolished, and construction began on a new building that was completed on December 15, 2011. Costs incurred during this period are listed below: Demolition of old building \$ 4,000 Architects fees (for new building) 12,000 Legal fee for title investigation of land 2,000 Property taxes on land (for period beginning March 1, 2011) 3,000 Construction costs 500,000 Interest on construction loan 5,000 Salvaged materials resulting from the demolition of the old building were sold for \$ 2,000.

Required: determine the amounts that Beldon should capitalize as the cost of land and the new building.

Capitalized cost of land: Purchase price Demolition of old building Less: Sale of materials Legal fees for title investigation \$60,000 \$4,000 (2,000) 2,000 2,000

Total cost of land Capitalized cost of building: Construction costs Architect's fees Interest on construction loan Total cost of building

\$64,000

## Exercise 10-9 (Acquisition cost: noninterest-bearing note)

On January 1, 2011, Byner company purchased a used tractor. Byner paid \$ 5,000 down and signed a noninterest-bearing note requiring \$ 25,000 to be paid on December 31, 2013. The fair value of the tracto is not determinable. An interest of 10% properly reflects the time value of money for this type of loan agreement. The companys fiscal year-end is Decemver 31.

Required:

1. Prepare the journal entry to record the acquisition of the tractor. Round computations to the nearest dollar. 2. How much interest expense will the company include in its 2011 and 2012 income statements for this note? 3. What is the amount of the liability the company will report in its 2011 and 2012 balance sheets for this note?

Requirement 1 Tractor (\$5,000 cash + 18,783 present value of note).............................................................. Discount on note payable (difference) ..................................................................................... ........................................................................................................................................... Cash ................................................................................................................................................. 5,000 .......................................................................................................Note payable (face amount) ............................................................................................................................................... 25,000

23,783 6,217

## PV = \$25,000 (.75131) = \$18,783 Present value of \$1: n = 3, i = 10% (from Table 2)

Requirement 2

2011: Interest expense (\$18,783 x 10%) = \$1,878 2012: Interest expense [(\$18,783 + 1,878) x 10%] = 2,066
Requirement 3

2011: \$25,000 (\$6,217 1,878) = \$20,661 2012: \$25,000 (\$6,217 1,878 2,066) = 22,727

## Exercise 10-14 (Nonmonetary exchange)

Cedric Company recently traded in an older model computer for a new model. The old models book value was \$ 180,000 (original cost of \$ 400,000 less \$ 220,000 in accumulated depreciation) and its fair value was \$ 200,000. Cedric paid \$ 60,000 to complete the exchange which has commercial substance. Required: prepare the journal entry to record the exchange.

Equipment - new (\$200,000 + 60,000) Accumulated depreciation (account balance) Cash 260,000 220,000 60,000

400,000 20,000

## Exercise 10-15 (Nonmonetary exchange)

[This is a variation of the previous exercise.] Required: Assume the same facts as in exercise 14, except that the fair value of the old equipment is \$ 170,000. Prepare the journal entry?

Equipment - new (\$170,000 + 60,000) Loss (\$180,000 - 170,000) Accumulated depreciation (account balance) Cash Equipment - old (account balance) 230,000 10,000 220,000 60,000 400,000

## Exercise 10-16 (Nonmonetary exchange)

The Bronco Corporation exchanged land for equipment. The land had a book value of \$ 120,000 and a fair value of \$ 150,000. Bronco paid the owner of the equipment \$ 10,000 to complete the exchange which has commercial substance. Required: 1. What is the fair value of the equipment? 2. Prepare the journal entry to record the exchange?

Requirement 1 Fair value of land + Cash given = Fair value of equipment \$150,000 + 10,000 = \$160,000 Requirement 2 Equipment (\$150,000 + 10,000)................................................................................................ 160,000 ........................................................................................................................................... Cash ............................................................................................................................................... 10,000 ......................................................................................................................Land (book value) ............................................................................................................................................. 120,000 ................................................................................................................................. Gain (\$150,000 - 120,000) ............................................................................................................................................... 30,000

## Exercise 10-17 (Nonmonetary exchange)

Assuming the same face as #16 except the Bronco received \$ 10, 000 from the owner of the equipment to complete the exchange. Required: 1. What is the fair value of the equipment?

10