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Exam 9: Inventories: Additional Issues

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Question 31

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Cornhusker Can Co. uses the conventional retail method to estimate ending inventories. The following data has been summarized for year ended December 31, 2009: Required: Estimate the cost of ending inventory applying the conventional retail method. Assume that sales are recorded net of employee discounts. $\begin{array} { l c r } & \text { Cost } & \text { Retail } \\\text { Inventory, January 1 } & \$ 80,000 & \$ 126,000 \\\text { Purchases } & 166,000 & 244,000 \\\text { Net markups } & & 9,100 \\\text { Net markdowns } & & 8,200 \\\text { Normal spoilage } & & 13,200 \\\text { Employee discounts } & & 15,600 \\\text { Net sales } & & 238,000\end{array}$

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Question 32

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The purpose of ceilings and floors in LCM is to prevent profit distortion.

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B) False

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Question 33

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Using the dollar-value LIFO retail method for inventory,:

In the year 2009, the internal auditors of Blooper Inc. discovered that goods costing $12 million that were shipped f.o.b. shipping point in December of 2008 were in transit on 12/31/08. The goods were recorded as a purchase in December of 2008 but were not included in the 2008 year-end inventory. Required: Prepare the journal entry needed in 2009 to correct the error. Also, briefly describe any other measures Blooper would take in connection with correcting the error. (Ignore income taxes.) Analysis:

Briefly explain the difference between the LIFO retail method and the dollar-value LIFO retail method.

Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to the total inventory.

Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to classes of feeds.

On July 5, 2009, a fire destroyed the entire inventory of Kinard Music Mart. The following information is available from its accounting records: Required: Compute the estimated cost of inventory lost in the fire. $\begin{array}{lr}\text { Inventory, January 1, 2009 } & \$ 211,000 \\\text { Purchases, Jan. 1 - July } 5 & 500,000 \\\text { Sales, Jan. 1 - July 5 } & 900,000 \\\text { Normal gross margin } & 30 \%\end{array}$

Orlando Company has used the average cost method for inventory valuation since it began business in 2005, but has elected to change to the FIFO method starting in 2008. Year-end inventory valuations under each method are shown below: Required: What journal entry, if any, would Orlando record in 2008 for the cumulative effect of the change in accounting principle (ignore income taxes)?

Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to individual trees.

Zanesville Pots Co. uses the conventional retail method to estimate ending inventories. The following data has been summarized for the year ended December 31, 2009: Required: Estimate the cost of ending inventory applying the conventional retail method. $\begin{array} { l c r } & \text { Cost } & { \text { Retail } } \\\text { Inventory, January 1 } & \$ 88,000 & \$ 132,000 \\\text { Purchases } & 163,000 & 240,000 \\\text { Net markups } & & 10,100 \\\text { Net markdowns } & & 9,200 \\\text { Normal spoilage } & & 43,200 \\\text { Net sales } & & 213,000\end{array}$

The following footnote appeared in the 2009 Annual report to shareholders of Upton Systems Inc. Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company provides inventory allowances based on excess and obsolete inventories. Another footnote in the annual report stated: The Company recorded a provision for inventory, including purchase commitments, totaling $1.40 billion during fiscal 2009, which included an additional excess inventory charge as previously discussed. This additional excess inventory charge was due to a sudden and significant decrease in demand for the Company's products and was calculated in accordance with the Company's accounting policy. A skeptic may conclude that Upton's policy and practices threaten earnings quality. Discuss how it may do so.

Trask Inc. uses the average cost retail method to estimate its ending inventory. Partial information at June 30, 2009, is as follows: Required: Assuming Trask's cost-to-retail = 60%, compute Trask's beginning inventory at retail. $\begin{array} { l c r } & \text { Cost } & \text { Retail } \\\text { Beginning inventory } & \$ 62,000 & ? ? ? \\\text { Net purchases } & 238,000 & 319,000 \\\text { Net sales } & & 430,000 \\\text { Ending inventory } & 42,000 &\end{array}$

In applying the LCM rule, the inventory of supplies would be valued at:

Harlequin Co. has used the dollar-value LIFO retail method since it began operations in early 2008 (its base year) . Its beginning inventory for 2009 was $36,000 at cost and $72,000 at retail prices. At the end of 2009, it computed its estimated ending inventory at retail to be $120,000. Assuming its cost-to-retail percentage for 2009 transactions was 60%, what is the inventory balance that Harlequin Co. would report in its 12/31/09 balance sheet?

When computing the cost-to-retail percentage for the average cost retail method, included in the denominator are:

If the quantity of goods held in inventory decreased during the period, the dollar amount of ending inventory cannot exceed the dollar amount of beginning inventory.

Briefly explain how a material adjustment to inventory due to application of the lower-of-cost-or-market rule should be reported in the financial statements.

The conventional retail inventory method is based on:

To the nearest thousand, estimated ending inventory is: