![Intermediate Accounting [PDF]](https://pdfs.asia/img/200x200/intermediate-accounting.jpg)
32 0 648 KB
Intermediate Accounting IFRS Edition-2nd Questions & Solutions Chapter 9
Inventories: Additional Valuation Issues
Donald E. Kieso Jerry J. Weygandt Terry D. Warfield
BRIEF EXERCISES 1
BE9-1 Presented below is information related to Rembrandt Inc.’s inventory. (per unit)
Skis
Boots
Parkas
Historical cost Selling price Cost to sell Cost to complete
$190.00 212.00 19.00 32.00
$106.00 145.00 8.00 29.00
$53.00 73.75 2.50 21.25
Determine the following: (a) the net realizable value for each item, and (b) the carrying value of each item under LCNRV. 1
BE9-2 Floyd Corporation has the following four items in its ending inventory.
Item
Cost
Net Realizable Value (NRV)
Jokers Penguins Riddlers Scarecrows
€2,000 5,000 4,400 3,200
€2,100 4,950 4,625 3,830
Determine (a) the LCNRV for each item, and (b) the amount of write-down, if any, using (1) an item-byitem LCNRV evaluation and (2) a total-group LCNRV evaluation. 1
BE9-3 Kumar Inc. uses a perpetual inventory system. At January 1, 2015, inventory was R$214,000,000 at both cost and net realizable value. At December 31, 2015, the inventory was R$286,000,000 at cost and R$265,000,000 at net realizable value. Prepare the necessary December 31 entry under (a) the cost-of-goodssold method and (b) the loss method.
2
BE9-4 Keyser’s Fleece Inc. holds a drove of sheep. Keyser shears the sheep on a semiannual basis and then sells the harvested wool into the specialty knitting market. Keyser has the following information related to the shearing sheep at January 1, 2015, and during the first six months of 2015. Shearing sheep Carrying value (equal to net realizable value), January 1, 2015 Change in fair value due to growth and price changes Change in fair value due to harvest Wool harvested during the first 6 months (at NRV)
€74,000 4,700 (575) 9,000
Prepare the journal entry(ies) for Keyser’s biological asset (shearing sheep) for the first six months of 2015. 2
BE9-5 Refer to the data in BE9-4 for Keyser’s Fleece Inc. Prepare the journal entries for (a) the wool harvested in the first six months of 2015, and (b) when the wool harvested is sold for €10,500 in July 2015.
3
BE9-6 Benke Inc. buys 1,000 computer game CDs from a distributor who is discontinuing those games. The purchase price for the lot is ¥8,000. Benke will group the CDs into three price categories for resale, as indicated below (yen in thousands). Group
No. of CDs
Price per CD
1 2 3
100 800 100
¥ 5 10 15
Determine the cost per CD for each group, using the relative standalone sales value method. 4
BE9-7 Kemper Company signed a long-term, non-cancelable purchase commitment with a major supplier to purchase raw materials in 2016 at a cost of $1,000,000. At December 31, 2015, the raw materials to be purchased have a fair value of $950,000. Prepare any necessary December 31 entry.
4
BE9-8 Use the information for Kemper Company from BE9-7. In 2016, Kemper paid $1,000,000 to obtain the raw materials which were worth $950,000. Prepare the entry to record the purchase.
5
BE9-9 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 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.
426 Chapter 9 Inventories: Additional Valuation Issues 6
BE9-10 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 were $147,000. Compute ending inventory at cost using the conventional retail method.
7
BE9-11 In its 2013 annual report, Inditex (ESP) reported inventory of €1,581.297 on January 31, 2013, and €1,297.009 on January 31, 2012. For 2013, cost of sales was €6,486.825 and net sales were €15,946.143 (all amounts in millions). Compute Inditex’s inventory turnover and average days to sell inventory for fiscal year 2013.
EXERCISES 1
E9-1 (LCNRV) The inventory of Oheto Company on December 31, 2015, consists of the following items. Part No.
Quantity
Cost per Unit
110 111 112 113 120 121a 122
600 1,000 500 200 400 1,600 300
$ 95 60 80 170 205 16 240
a
Net Realizable Value per Unit $100 52 76 180 208 1 235
Part No. 121 is obsolete and has a realizable value of $1 each as scrap.
Instructions (a) Determine the inventory as of December 31, 2015, by the LCNRV method, applying this method to each item. (b) Determine the inventory by the LCNRV method, applying the method to the total of the inventory. 1
E9-2 (LCNRV) Riegel Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2015, consists of products D, E, F, G, H, and I. Relevant perunit data for these products appear below.
Estimated selling price Cost Cost to complete Selling costs
Item D
Item E
Item F
Item G
Item H
Item I
€120 75 30 10
€110 80 30 18
€95 80 25 10
€90 80 35 20
€110 50 30 10
€90 36 30 20
Instructions Using the LCNRV rule, determine the proper unit value for statement of financial position reporting purposes at December 31, 2015, for each of the inventory items above. 1
E9-3 (LCNRV) Sedato Company follows the practice of pricing its inventory at LCNRV, on an individualitem basis. Item No.
Quantity
Cost per Unit
Estimated Selling Price
Cost to Complete and Sell
1320 1333 1426 1437 1510 1522 1573 1626
1,200 900 800 1,000 700 500 3,000 1,000
$3.20 2.70 4.50 3.60 2.25 3.00 1.80 4.70
$4.50 3.40 5.00 3.20 3.25 3.90 2.50 6.00
$1.60 1.00 1.40 1.35 1.40 0.80 1.20 1.50
Instructions From the information above, determine the amount of Sedato Company inventory.
Exercises 427 1
E9-4 (LCNRV—Journal Entries) Dover Company began operations in 2015 and determined its ending inventory at cost and at LCNRV at December 31, 2015, and December 31, 2016. This information is presented below.
12/31/15 12/31/16
Cost £346,000 410,000
Net Realizable Value £322,000 390,000
Instructions (a) Prepare the journal entries required at December 31, 2015, and December 31, 2016, assuming inventory is recorded at LCNRV and a perpetual inventory system using the cost-of-goods-sold method. (b) Prepare journal entries required at December 31, 2015, and December 31, 2016, assuming inventory is recorded at cost and a perpetual system using the loss method. (c) Which of the two methods above provides the higher net income in each year? 1
E9-5 (LCNRV—Valuation Account) Presented below is information related to Knight Enterprises.
Inventory at cost Inventory at LCNRV Purchases for the month Sales for the month
Jan. 31
Feb. 28
Mar. 31
Apr. 30
$15,000 14,500
$15,100 12,600 17,000 29,000
$17,000 15,600 24,000 35,000
$14,000 13,300 26,500 40,000
Instructions (a) From the information, prepare (as far as the data permit) monthly income statements in columnar form for February, March, and April. The inventory is to be shown in the statement at cost; the gain or loss due to market fluctuations is to be shown separately (using a valuation account). (b) Prepare the journal entry required to establish the valuation account at January 31 and entries to adjust it monthly thereafter. 1
E9-6 (LCNRV—Error Effect) LaGreca Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2015, included product X. Relevant per-unit data for product X are as follows. Estimated selling price Cost Estimated selling expenses Normal profit
€50 40 14 9
There were 1,000 units of product X on hand at December 31, 2015. Product X was incorrectly valued at €38 per unit for reporting purposes. All 1,000 units were sold in 2016. Instructions Compute the effect of this error on net income for 2015 and the effect on net income for 2016, and indicate the direction of the misstatement for each year. 2
E9-7 (Valuation at Net Realizable Value) Matsumura Dairy began operations on April 1, 2015, with the purchase of 200 milking cows for ¥6,700,000. It has completed the first month of operations and has the following information for its milking cows at the end of April 2015 (yen in thousands). Milking cows Change in fair value due to growth and price changes* Decrease in fair value due to harvest Milk harvested during April 2015 (at net realizable value)
¥(200,000) (12,000) 72,000
*Due to a very high rate of calving in the past month, there is a glut of milking cows on the market.
Instructions (a) Prepare the journal entries for Matsumura’s biological asset (milking cows) for the month of April 2015. (b) Prepare the journal entry for the milk harvested by Matsumura during April 2015. (c) Matsumura sells the milk harvested in April on the local milk exchange and receives ¥74,000. Prepare the summary journal entry to record the sale of the milk.
428 Chapter 9 Inventories: Additional Valuation Issues 2
E9-8 (Valuation at Net Realizable Value) Mt. Horeb Alpaca Co. has a herd of 150 alpaca. The alpaca are sheared once a quarter to harvest very valuable alpaca wool that is used in designer sweaters. Mt. Horeb has the following information related to the alpaca herd at July 1, 2015, and during the first quarter of the fiscal year. Alpaca Carrying value (equal to net realizable value), July 1, 2015 Change in fair value due to growth and price changes Decrease in fair value due to harvest Alpaca wool harvested during the first quarter (at net realizable value)
$120,000 7,700 (975) 13,000
Instructions (a) Prepare the journal entries for Mt. Horeb’s biological asset (Alpaca herd) for the first quarter. (b) Prepare the journal entries for the Alpaca wool harvested in the first quarter. (c) Prepare the journal entry when the Alpaca wool is sold for $14,500. (d) Briefly discuss the impact on income of the following events related to the alpaca biological asset: (1) a female alpaca gives birth to a baby alpaca, and (2) an older alpaca can only be sheared once every other quarter due to irritation caused by repeated shearing over its life. 3
E9-9 (Relative Standalone Sales Value Method) Larsen 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 £30,000. These building lots were all of the same size. However, owing to differences in location, the lots were offered for sale at different prices as follows. Group
No. of Lots
Price per Lot
1 2 3
9 15 19
£3,000 4,000 2,000
Operating expenses for the year allocated to this project total £18,200. Lots unsold at the year-end were as follows. Group 1 Group 2 Group 3
5 lots 7 lots 2 lots
Instructions At the end of the fiscal year, Larsen Realty Corporation instructs you to arrive at the net income realized on this operation to date. 2
E9-10 (Relative Standalone Sales Value Method) During 2015, Crawford Furniture Company purchases a carload of wicker chairs. The manufacturer sells the chairs to Crawford for a lump sum of £60,000 because it is discontinuing manufacturing operations and wishes to dispose of its entire stock. Three types of chairs are included in the carload. The three types and the estimated selling price for each are listed below. Type
No. of Chairs
Estimated Selling Price Each
Lounge chairs Armchairs Straight chairs
400 300 800
£90 80 50
During 2015, Crawford sells 200 lounge chairs, 100 armchairs, and 120 straight chairs. Instructions What is the amount of gross profit realized during 2015? What is the amount of inventory of unsold straight chairs on December 31, 2015? 4
E9-11 (Purchase Commitments) Prater Company has been having difficulty obtaining key raw materials for its manufacturing process. The company therefore signed a long-term, non-cancelable purchase commitment with its largest supplier of this raw material on November 30, 2015, at an agreed price of $400,000. At December 31, 2015, the raw material had declined in price to $375,000. Instructions What entry would you make on December 31, 2015, to recognize these facts?
Exercises 429 4
E9-12 (Purchase Commitments) At December 31, 2015, Volkan Company has outstanding non-cancelable purchase commitments for 40,000 gallons, at €3.00 per gallon, of raw material to be used in its manufacturing process. The company prices its raw material inventory at lower-of-cost-or-net realizable value. Instructions (a) Assuming that the market price as of December 31, 2015, is €3.30, how would this matter be treated in the accounts and statements? Explain. (b) Assuming that the market price as of December 31, 2015, is €2.70 instead of €3.30, how would you treat this situation in the accounts and statements? (c) Give the entry in January 2016, when the 40,000-gallon shipment is received, assuming that the situation given in (b) above existed at December 31, 2015, and that the market price in January 2016 was €2.70 per gallon. Give an explanation of your treatment.
5
E9-13 (Gross Profit Method) Each of the following gross profit percentages is expressed in terms of cost. 1. 20%. 2. 25%.
3. 331/3%. 4. 50%.
Instructions Indicate the gross profit percentage in terms of sales for each of the above. 5
E9-14 (Gross Profit Method) Astaire Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May. Inventory, May 1 Purchases (gross) Freight-in Sales Sales returns Purchase discounts
€ 160,000 640,000 30,000 1,000,000 70,000 12,000
Instructions (a) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of sales. (b) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of cost. 5
E9-15 (Gross Profit Method) Zidek Corp. requires an estimate of the cost of goods lost by fire on March 9. Merchandise on hand on January 1 was $38,000. Purchases since January 1 were $92,000; freight-in, $3,400; purchase returns and allowances, $2,400. Sales are made at 331/3% above cost and totaled $120,000 to March 9. Goods costing $10,900 were left undamaged by the fire; remaining goods were destroyed. Instructions (a) Compute the cost of goods destroyed. (b) Compute the cost of goods destroyed, assuming that the gross profit is 331/3% of sales.
5
E9-16 (Gross Profit Method) Castlevania Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation’s books disclosed the following. Beginning inventory Purchases for the year Purchase returns
R$170,000 450,000 30,000
Sales Sales returns Rate of gross margin on net sales
R$650,000 24,000 30%
Merchandise with a selling price of R$21,000 remained undamaged after the fire. Damaged merchandise with an original selling price of R$15,000 had a net realizable value of R$5,300. Instructions Compute the amount of the loss as a result of the fire, assuming that the corporation had no insurance coverage. 5
E9-17 (Gross Profit Method) You are called by Yao Ming of Rocket Co. on July 16 and asked to prepare a claim for insurance as a result of a theft that took place the night before. You suggest that an inventory be taken immediately. The following data are available (amounts in thousands). Inventory, July 1 Purchases—goods placed in stock July 1–15 Sales—goods delivered to customers (gross) Sales returns—goods returned to stock
¥ 38,000 90,000 116,000 4,000
430 Chapter 9 Inventories: Additional Valuation Issues Your client reports that the goods on hand on July 16 cost ¥30,500, but you determine that this figure includes goods of ¥6,000 received on a consignment basis. Your past records show that sales are made at approximately 25% over cost. Rocket’s insurance covers only goods owned. Instructions Compute the claim against the insurance company. 5
E9-18 (Gross Profit Method) Sliver Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost. Lumber Millwork Hardware
25% 30% 40%
On August 18, a fire destroyed the office, lumber shed, and a considerable portion of the lumber stacked in the yard. To file a report of loss for insurance purposes, the company must know what the inventories were immediately preceding the fire. No detail or perpetual inventory records of any kind were maintained. The only pertinent information you are able to obtain are the following facts from the general ledger, which was kept in a fireproof vault and thus escaped destruction. Inventory, Jan. 1, 2015 Purchases to Aug. 18, 2015 Sales to Aug. 18, 2015
Lumber
Millwork
Hardware
$ 250,000 1,500,000 2,050,000
$ 90,000 375,000 533,000
$ 45,000 160,000 245,000
Instructions Submit your estimate of the inventory amounts immediately preceding the fire. 5
E9-19 (Gross Profit Method) Presented below is information related to Jerrold Corporation for the current year. Beginning inventory Purchases
£ 600,000 1,500,000
Total goods available for sale Sales
£2,100,000 2,300,000
Instructions Compute the ending inventory, assuming that (a) gross profit is 40% of sales, (b) gross profit is 60% of cost, (c) gross profit is 35% of sales, and (d) gross profit is 25% of cost. 6
E9-20 (Retail Inventory Method) Presented below is information related to Luzon Company. Beginning inventory Purchases (net) Net markups Net markdowns Sales
Cost
Retail
R$ 58,000 122,000
R$100,000 200,000 20,000 30,000 186,000
Instructions (a) Compute the ending inventory at retail. (b) Compute a cost-to-retail percentage (round to two decimals) under the following conditions. (1) Excluding both markups and markdowns. (2) Excluding markups but including markdowns. (3) Excluding markdowns but including markups. (4) Including both markdowns and markups. (c) Which of the methods in (b) above (1, 2, 3, or 4) does the following? (1) Provides the most conservative estimate of ending inventory. (2) Provides an approximation of LCNRV. (3) Is used in the conventional retail method. (d) Compute ending inventory at LCNRV (round to nearest dollar). (e) Compute cost of goods sold based on (d). (f) Compute gross margin based on (d).
Problems 431 6
E9-21 (Retail Inventory Method) Presented below is information related to Kuchinsky Company. Cost Beginning inventory Purchases Markups Markup cancellations Markdowns Markdown cancellations Sales
Retail
€ 200,000 1,425,000
€
280,000 2,140,000 95,000 15,000 35,000 5,000 2,250,000
Instructions Compute the inventory by the conventional retail inventory method. 6
E9-22 (Retail Inventory Method) The records of Mandy’s Boutique report the following data for the month of April. Sales Sales returns Markups Markup cancellations Markdowns Markdown cancellations Freight on purchases
£95,000 2,000 10,000 1,500 9,300 2,800 2,400
Purchases (at cost) Purchases (at sales price) Purchase returns (at cost) Purchase returns (at sales price) Beginning inventory (at cost) Beginning inventory (at sales price)
£55,000 88,000 2,000 3,000 30,000 46,500
Instructions Compute the ending inventory by the conventional retail inventory method. 7
E9-23 (Analysis of Inventories) The financial statements of AB InBev’s (BEL) 2012 annual report disclosed the following information. (in millions)
31 December 2012
31 December 2011
Inventories
$2,500
$2,466 Fiscal Year
Sales Cost of sales Net income
2012
2011
$39,758 16,447 9,434
$39,046 16,634 7,959
Instructions Compute AB InBev’s (a) inventory turnover and (b) average days to sell inventory for 2012.
PROBLEMS 1
P9-1 (LCNRV) Remmers Company manufactures desks. Most of the company’s desks are standard models and are sold on the basis of catalog prices. At December 31, 2015, the following finished desks appear in the company’s inventory. Finished Desks 2015 catalog selling price FIFO cost per inventory list 12/31/15 Estimated cost to complete and sell 2016 catalog selling price
A
B
C
D
€450 470 50 500
€480 450 110 540
€900 830 260 900
€1,050 960 200 1,200
The 2015 catalog was in effect through November 2015, and the 2016 catalog is effective as of December 1, 2015. All catalog prices are net of the usual discounts.
432 Chapter 9 Inventories: Additional Valuation Issues Instructions At what amount should each of the four desks appear in the company’s December 31, 2015, inventory, assuming that the company has adopted a lower-of-FIFO-cost-or-net realizable value approach for valuation of inventories on an individual-item basis? 1
P9-2 (LCNRV) Garcia Home Improvement Company installs replacement siding, windows, and louvered glass doors for single-family homes and condominium complexes. The company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2015. Jim Alcide, controller for Garcia, has gathered the following data concerning inventory. At May 31, 2015, the balance in Garcia’s Raw Materials Inventory account was £408,000, and Allowance to Reduce Inventory to NRV had a credit balance of £27,500. Alcide summarized the relevant inventory cost and market data at May 31, 2015, in the schedule below. Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Garcia’s May 31, 2015, financial statements for inventory under the LCNRV rule as applied to each item in inventory. Devereaux expressed concern over departing from the historical cost principle.
Aluminum siding Cedar shake siding Louvered glass doors Thermal windows Total
Cost
Sales Price
Net Realizable Value
£ 70,000 86,000 112,000 140,000
£ 64,000 94,000 186,400 154,800
£ 56,000 84,800 168,300 140,000
£408,000
£499,200
£449,100
Instructions (a) (1) Determine the proper balance in Allowance to Reduce Inventory to Net Realizable Value at May 31, 2015. (2) For the fiscal year ended May 31, 2015, determine the amount of the gain or loss that would be recorded (using the loss method) due to the change in Allowance to Reduce Inventory to Net Realizable Value. (b) Explain the rationale for the use of the LCNRV rule as it applies to inventories. 1
P9-3 (LCNRV—Cost-of-Goods-Sold and Loss) Malone Company determined its ending inventory at cost and at LCNRV at December 31, 2015, December 31, 2016, and December 31, 2017, as shown below. 12/31/15 12/31/16 12/31/17
Cost
LCNRV
$650,000 780,000 905,000
$650,000 712,000 830,000
Instructions (a) Prepare the journal entries required at December 31, 2016, and at December 31, 2017, assuming that a perpetual inventory system and the cost-of-goods-sold method of adjusting to LCNRV is used. (b) Prepare the journal entries required at December 31, 2016, and at December 31, 2017, assuming that a perpetual inventory is recorded at cost and reduced to LCNRV using the loss method. 2
P9-4 (Valuation at Net Realizable Value) Finn Berge realized his lifelong dream of becoming a vineyard owner when he was able to purchase the Hillside Vineyard at an estate auction in August 2015 for €750,000. Finn retained the Hillside name for his new business. The purchase was risky because the growing season was coming to an end, the grapes must be harvested in the next several weeks, and Finn has limited experience in carrying off a grape harvest. At the end of the first quarter of operations, Finn is feeling pretty good about his early results. The first harvest was a success; 300 bushels of grapes were harvested with a value of €30,000 (based on current local commodity prices at the time of harvest). And, given the strong yield from area vineyards during this season, the net realizable value of Finn’s vineyard has increased by €15,000 at the end of the quarter. After storing the grapes for a short period of time, Finn was able to sell the entire harvest for €35,000. Instructions (a) Prepare the journal entries for the Hillside biological asset (grape vines) for the first quarter of operations (the beginning carrying and net realizable value is €750,000). (b) Prepare the journal entry for the grapes harvested during the first quarter. (c) Prepare the journal entry to record the sale of the grapes harvested in the first quarter.
Problems 433 (d) Determine the total effect on income for the quarter related to the Hillside biological asset and agricultural produce. (e) Looking to the next growing season, Finn is doing some forecasting, based on the following two developments: (1) demand for the type of grapes his vineyard produces is expected to increase, and (2) there are new producing vineyards coming on line that will increase the supply of similar grapevines in the market. Briefly discuss how these developments are likely to affect the value of Hillside’s biological assets and agricultural produce in the next growing season. 5
P9-5 (Gross Profit Method) Yu Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. Corporate records disclose the following (yen in thousands). Inventory (beginning) Purchases Purchase returns
¥ 80,000 290,000 28,000
Sales Sales returns Gross profit % based on net selling price
¥415,000 21,000 35%
Merchandise with a selling price of ¥30,000 remained undamaged after the fire, and damaged merchandise has a residual value of ¥8,150. The company does not carry fire insurance on its inventory. Instructions Prepare a formal labeled schedule computing the fire loss incurred. (Do not use the retail inventory method.) 5
P9-6 (Gross Profit Method) On April 15, 2015, fire damaged the office and warehouse of Stanislaw Corporation. The only accounting record saved was the general ledger, from which the trial balance below was prepared.
STANISLAW CORPORATION TRIAL BALANCE MARCH 31, 2015 Cash Accounts receivable Inventory, December 31, 2014 Land Equipment Accumulated depreciation—equipment Other assets Accounts payable Other expense accruals Share capital—ordinary Retained earnings Sales revenue Purchases Miscellaneous expenses
€ 20,000 40,000 75,000 35,000 110,000 € 41,300 3,600 23,700 10,200 100,000 52,000 135,000 52,000 26,600 €362,200
€362,200
The following data and information have been gathered. 1. The fiscal year of the corporation ends on December 31. 2. An examination of the April bank statement and canceled checks revealed that checks written during the period April 1–15 totaled €13,000: €5,700 paid to accounts payable as of March 31, €3,400 for April merchandise shipments, and €3,900 paid for other expenses. Deposits during the same period amounted to €12,950, which consisted of receipts on account from customers with the exception of a €950 refund from a vendor for merchandise returned in April. 3. Correspondence with suppliers revealed unrecorded obligations at April 15 of €15,600 for April merchandise shipments, including €2,300 for shipments in transit (f.o.b. shipping point) on that date.
434 Chapter 9 Inventories: Additional Valuation Issues 4. Customers acknowledged indebtedness of €46,000 at April 15, 2015. It was also estimated that customers owed another €8,000 that will never be acknowledged or recovered. Of the acknowledged indebtedness, €600 will probably be uncollectible. 5. The companies insuring the inventory agreed that the corporation’s fire-loss claim should be based on the assumption that the overall gross profit ratio for the past 2 years was in effect during the current year. The corporation’s audited financial statements disclosed this information: Year Ended December 31 Net sales Net purchases Beginning inventory Ending inventory
2014
2013
€530,000 280,000 50,000 75,000
€390,000 235,000 66,000 50,000
6. Inventory with a cost of €7,000 was salvaged and sold for €3,500. The balance of the inventory was a total loss. Instructions Prepare a schedule computing the amount of inventory fire loss. The supporting schedule of the computation of the gross profit should be in good form. 6
P9-7 (Retail Inventory Method) The records for the Clothing Department of Wei’s Discount Store are summarized below for the month of January (HK$ in thousands). Inventory, January 1: at retail HK$25,000; at cost HK$17,000 Purchases in January: at retail HK$137,000; at cost HK$82,500 Freight-in: HK$7,000 Purchase returns: at retail HK$3,000; at cost HK$2,300 Transfers-in from suburban branch: at retail HK$13,000; at cost HK$9,200 Net markups: HK$8,000 Net markdowns: HK$4,000 Inventory losses due to normal breakage, etc.: at retail HK$400 Sales at retail: HK$95,000 Sales returns: HK$2,400
Instructions (a) Compute the inventory for this department as of January 31, at retail prices. (b) Compute the ending inventory using lower-of-average-cost-or-net realizable value. 6
P9-8 (Retail Inventory Method) Presented below is information related to Waveland Inc.
Inventory, 12/31/15 Purchases Purchase returns Purchase discounts Gross sales (after employee discounts) Sales returns Markups Markup cancellations Markdowns Markdown cancellations Freight-in Employee discounts granted Loss from breakage (normal)
Cost
Retail
$250,000 914,500 60,000 18,000 — — — — — — 42,000 — —
$ 390,000 1,460,000 80,000 — 1,410,000 97,500 120,000 40,000 45,000 20,000 — 8,000 4,500
Instructions Assuming that Waveland Inc. uses the conventional retail inventory method, compute the cost of its ending inventory at December 31, 2015.
Problems 435 6
P9-9 (Retail Inventory Method) Fuque Inc. uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October 2015. Inventory, October 1, 2015 At cost At retail Purchases (exclusive of freight and returns) At cost At retail Freight-in Purchase returns At cost At retail Markups Markup cancellations Markdowns (net) Normal spoilage and breakage Sales
£ 52,000 78,000 272,000 423,000 16,600 5,600 8,000 9,000 2,000 3,600 10,000 390,000
Instructions (a) Using the conventional retail method, prepare a schedule computing estimated LCNRV inventory for October 31, 2015. (b) A department store using the conventional retail inventory method estimates the cost of its ending inventory as £60,000. An accurate physical count reveals only £47,000 of inventory at LCNRV. List the factors that may have caused the difference between the computed inventory and the physical count. 1
4 7
P9-10 (Statement and Note Disclosure, LCNRV, and Purchase Commitment) Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1983, Maddox has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Maddox’s fiscal year, November 30, 2015, are shown below. The inventories are stated at cost before any year-end adjustments. Finished goods Work in process Raw materials Factory supplies
$647,000 112,500 264,000 69,000
The following information relates to Maddox’s inventory and operations. 1. The finished goods inventory consists of the items analyzed below.
Cost
Net Realizable Value
$ 67,500 94,500 108,000
$ 67,000 89,000 110,000
270,000
266,000
Standard model Click adjustment model
83,000 99,000
90,050 97,550
Total bar end shifters
182,000
187,600
78,000 117,000
77,650 119,300
Down tube shifter Standard model Click adjustment model Deluxe model Total down tube shifters Bar end shifter
Head tube shifter Standard model Click adjustment model Total head tube shifters Total finished goods
195,000
196,950
$647,000
$650,550
436 Chapter 9 Inventories: Additional Valuation Issues 2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment. 3. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan. 4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20 percent above the current market price. The net realizable value of the rest of the raw materials is $127,400. 5. The net realizable value of the work in process inventory is $108,700. 6. Included in the cost of factory supplies are obsolete items with an historical cost of $4,200. The net realizable value of the remaining factory supplies is $65,900. 7. Maddox applies the LCNRV method to each of the three types of shifters in finished goods inventory. For each of the other three inventory accounts, Maddox applies the LCNRV method to the total of each inventory account. 8. Consider all amounts presented above to be material in relation to Maddox’s financial statements taken as a whole. Instructions (a) Prepare the inventory section of Maddox’s statement of financial position as of November 30, 2015, including any required note(s). (b) Without prejudice to your answer to (a), assume that the net realizable value of Maddox’s inventories is less than cost. Explain how this decline would be presented in Maddox’s income statement for the fiscal year ended November 30, 2015. (c) Assume that Maddox has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2015, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Maddox after November 30, 2015. Discuss the impact, if any, that this purchase commitment would have on Maddox’s financial statements prepared for the fiscal year ended November 30, 2015. 1
P9-11 (LCNRV) Taipai Co. follows the practice of valuing its inventory at the LCNRV. The following information is available from the company’s inventory records as of December 31, 2015 (amounts in thousands).
Item
Quantity
Unit Cost
A B C D E
1,100 800 1,000 1,000 1,400
NT$7.50 8.20 5.60 3.80 6.40
Estimated Selling Price/Unit
Completion & Selling Cost/Unit
NT$10.50 9.40 7.20 6.30 6.70
NT$1.50 1.30 1.75 1.80 0.70
Instructions Jay Shin is an accounting clerk in the accounting department of Taipai Co., and he cannot understand how completion and selling costs affect the determination of net realizable value. Jay is very confused, and he is the one who records inventory purchases and calculates ending inventory. You are the manager of the department and an accountant. (a) Calculate the LCNRV using the “individual-item” approach. (b) Show the journal entry he will need to make in order to write down the ending inventory from cost to market. (c) Then, write a memo to Jay explaining what net realizable value is as well as how it is computed. Use your calculations to aid in your explanation.
C O N C E P T S F O R A N A LY S I S CA9-1 (LCNRV) You have been asked by the financial vice president to develop a short presentation on the LCNRV method for inventory purposes. The financial VP needs to explain this method to the president because it appears that a portion of the company’s inventory has declined in value.
Concepts for Analysis 437 Instructions The financial vice president asks you to answer the following questions. (a) What is the purpose of the LCNRV method? (b) What is meant by “net realizable value”? (c) Do you apply the LCNRV method to each individual item, to a category, or to the total of the inventory? Explain. (d) What are the potential disadvantages of the LCNRV method? CA9-2 (LCNRV) The net realizable value of Lake Corporation’s inventory has declined below its cost. Allyn Conan, the controller, wants to use the loss method to write down inventory because it more clearly discloses the decline in the net realizable value and does not distort the cost of goods sold. His supervisor, financial vice president Bill Ortiz, prefers the cost-of-goods-sold method to write down inventory because it does not call attention to the decline in net realizable value. Instructions Answer the following questions. (a) What, if any, is the ethical issue involved? (b) Is any stakeholder harmed if Bill Ortiz’s preference is used? (c) What should Allyn Conan do? CA9-3 (LCNRV) Ogala Corporation purchased a significant amount of raw materials inventory for a new product that it is manufacturing. Ogala uses the LCNRV rule for these raw materials. The net realizable value of the raw materials is below the original cost. Ogala uses the FIFO inventory method for these raw materials. In the last 2 years, each purchase has been at a lower price than the previous purchase, and the ending inventory quantity for each period has been higher than the beginning inventory quantity for that period. Instructions (a) (1) At which amount should Ogala’s raw materials inventory be reported on the statement of financial position? Why? (2) In general, why is the LCNRV rule used to report inventory? (b) What would have been the effect on ending inventory and cost of goods sold had Ogala used the average-cost inventory method instead of the FIFO inventory method for the raw materials? Why? CA9-4 (Retail Inventory Method) Saurez Company, your client, manufactures paint. The company’s president, Maria Saurez, has decided to open a retail store to sell Saurez paint as well as wallpaper and other supplies that would be purchased from other suppliers. She has asked you for information about the conventional retail method of pricing inventories at the retail store. Instructions Prepare a report to the president explaining the retail method of pricing inventories. Your report should include the following points. (a) Description and accounting features of the method. (b) The conditions that may distort the results under the method. (c) A comparison of the advantages of using the retail method with those of using cost methods of inventory pricing. (d) The accounting theory underlying the treatment of net markdowns and net markups under the method. CA9-5 (Cost Determination, LCNRV, Retail Method) Olson Corporation, a retailer and wholesaler of brand-name household lighting fixtures, purchases its inventories from various suppliers. Instructions (a) (1) What criteria should be used to determine which of Olson’s costs are inventoriable? (2) Are Olson’s administrative costs inventoriable? Defend your answer. (b) (1) Olson uses the LCNRV rule for its wholesale inventories. What are the theoretical arguments for that rule? (2) The net realizable value of the inventories is below the original cost. What amount should be used to value the inventories? Why? (c) Olson calculates the estimated cost of its ending inventories held for sale at retail using the conventional retail inventory method. How would Olson treat the beginning inventories and net markdowns in calculating the cost ratio used to determine its ending inventories? Why?
438 Chapter 9 Inventories: Additional Valuation Issues CA9-6 (Purchase Commitments) Prophet Company signed a long-term purchase contract to buy timber from the government forest service at $300 per thousand board feet. Under these terms, Prophet must cut and pay $6,000,000 for this timber during the next year. Currently, the market governmental price is $250 per thousand board feet. At this rate, the market price is $5,000,000. Hu Cho, the controller, wants to recognize the loss in value on the year-end financial statements, but the financial vice president, Rondo Star, argues that the loss is temporary and should be ignored. Cho notes that market price has remained near $250 for many months, and he sees no sign of significant change. Instructions (a) What are the ethical issues, if any? (b) Is any particular stakeholder harmed by the financial vice president’s decision? (c) What should the controller do?
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9-1
Item
Cost
NRV
LCNRV
Skis
$190.00
$161.00
$161.00
Boots
106.00
108.00
106.00
Parkas
53.00
50.00
50.00
BRIEF EXERCISE 9-2 (a)
Item
Cost
NRV
LCNRV
€ 2,000
€ 2,100
€ 2,000
Penguins
5,000
4,950
4,950
Riddlers
4,400
4,625
4,400
Scarecrows
3,200
3,830
3,200
€14,600
€15,505
€14,550
Item-by-item Jokers
Total (b)
1. Penguins only: €50 2. None on a whole group: €15,505 > €14,600.
BRIEF EXERCISE 9-3 (a)
Cost-of-goods-sold-method Cost of Goods Sold ............................................... 21,000,000 Allowance to Reduce Inventory to NRV .....
(b)
21,000,000
Loss method Loss Due to Decline of Inventory to NRV ........... 21,000,000 Allowance to Reduce Inventory to NRV .....
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
21,000,000
(For Instructor Use Only)
9-11
BRIEF EXERCISE 9-4 Biological Assets – Shearing Sheep .........................
4,125*
Unrealized Holding Gain or Loss – Income .....
4,125
*€4,700 – €575 = €4,125.
BRIEF EXERCISE 9-5 Wool Inventory ............................................................
9,000
Unrealized Holding Gain or Loss – Income .....
9,000
Cash .............................................................................
10,500
Cost of Goods Sold ....................................................
9,000
Wool Inventory ...................................................
9,000
Sales Revenue....................................................
10,500
BRIEF EXERCISE 9-6
Group
Number of CDs
Sales Price per CD
1 2 3
100 800 100
¥ 5 ¥10 ¥15
*¥500/¥10,000 = 5/100
Total Sales Price
Relative Sales Price
¥
500 8,000 1,500 ¥10,000
Total Cost
5/100* X ¥8,000 = 80/100 X ¥8,000 = 15/100 X ¥8,000 =
Cost Allocated to CDs ¥ 400 6,400 1,200 ¥8,000
Cost per CD ¥ 4** ¥ 8 ¥12
**¥400/100 = ¥4
BRIEF EXERCISE 9-7 Unrealized Holding Loss—Income ............................ Purchase Commitment Liability .......................
9-12
Copyright © 2014 John Wiley & Sons, Inc.
50,000
Kieso, IFRS, 2/e, Solutions Manual
50,000
(For Instructor Use Only)
BRIEF EXERCISE 9-8 Purchases (Inventory) ...................................................... Purchase Commitment Liability ...................................... Cash .........................................................................
950,000 50,000 1,000,000
BRIEF EXERCISE 9-9 Beginning inventory ......................................................... Purchases ......................................................................... Cost of goods available ................................................... Sales .................................................................................. €700,000 Less gross profit (35% X €700,000) ................................ 245,000 Estimated cost of goods sold ................................ Estimated ending inventory destroyed in fire ......
€150,000 500,000 650,000
455,000 €195,000
BRIEF EXERCISE 9-10 Cost
Retail
Beginning inventory .............................................
$ 12,000
$ 20,000
Net purchases .......................................................
120,000
170,000
Net markups ..........................................................
—
10,000
Totals .....................................................................
$132,000
200,000
Deduct: Net markdowns ...........................................
7,000
Sales .............................................................
147,000
Ending inventory at retail ...........................
$ 46,000
Cost-to-retail ratio: $132,000 ÷ $200,000 = 66% Ending inventory at LCNRV (66% X $46,000) = $30,360
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-13
BRIEF EXERCISE 9-11 Inventory turnover: €6,486,825,000 €1,581,297,000 + €1,297,009,000
= 4.51 times
2 Average days to sell inventory: 365 ÷ 4.49 = 81.3 days
9-14
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
SOLUTIONS TO EXERCISES EXERCISE 9-1 (15–20 minutes) Per Unit Part No. 110 111 112 113 120 121 122 Totals
Quantity 600 1,000 500 200 400 1,600 300
(a)
$335,100.
(b)
$341,300.
Cost $ 95 60 80 170 205 16 240
NRV $100.00 52.00 76.00 180.00 208.00 1.00 235.00
Total Cost $ 57,000 60,000 40,000 34,000 82,000 25,600 72,000 $370,600
Total NRV $ 60,000 52,000 38,000 36,000 83,200 1,600 70,500 $341,300
Lower-ofCost-orNRV $ 57,000 52,000 38,000 34,000 82,000 1,600 70,500 $335,100
EXERCISE 9-2 (10–15 minutes)
Item D E F G H I
Net Realizable Value €80* 62 60 35 70 40
Cost €75 80 80 80 50 36
LCNRV €75 62 60 35 50 36
*Estimated selling price – Estimated selling costs and cost to complete = €120 – €30 – €10 = €80.
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-15
EXERCISE 9-3 (15–20 minutes)
Item No.
Cost per Unit
Net Realizable Value
LCNRV
Quantity
1320 1333 1426 1437 1510 1522 1573 1626
$3.20 2.70 4.50 3.60 2.25 3.00 1.80 4.70
$2.90* 2.40 3.60 1.85 1.85 3.10 1.30 4.50
$2.90 2.40 3.60 1.85 1.85 3.00 1.30 4.50
1,200 900 800 1,000 700 500 3,000 1,000
Final Inventory Value $ 3,480 2,160 2,880 1,850 1,295 1,500 3,900 4,500 $21,565
*$4.50 – $1.60 = $2.90. EXERCISE 9-4 (10–15 minutes)
(a)
(b)
December 31, 2015 Cost of Goods Sold (€346,000 – €322,000) ............ Allowance to Reduce Inventory to NRV .......
24,000
December 31, 2016 Allowance to Reduce Inventory to NRV ................ Cost of Goods Sold ........................................
4,000
December 31, 2015 Loss Due to Decline of Inventory to NRV .............. Allowance to Reduce Inventory to NRV .......
24,000
24,000
4,000
December 31, 2016 Allowance to Reduce Inventory to NRV ................ Recovery of Inventory Loss ..........................
9-16
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
24,000
4,000* 4,000
(For Instructor Use Only)
EXERCISE 9-4 (Continued) *Cost of inventory at 12/31/15 ..................................... LCNRV at 12/31/15 ..................................................... Allowance amount needed to reduce inventory to NRV (a) .................................................................
£346,000 (322,000)
Cost of inventory at 12/31/16 .................................... LCNRV at 12/31/16 ..................................................... Allowance amount needed to reduce inventory to NRV (b) ................................................................
£410,000 (390,000)
Recovery of previously recognized loss
(c)
£ 24,000
£ 20,000
= (a) – (b) = £24,000 – £20,000 = £4,000.
Both methods of recording lower-of-cost-or-NRV adjustments have the same effect on net income.
EXERCISE 9-5 (20–25 minutes) (a) Sales Cost of goods sold Inventory, beginning Purchases Cost of goods available Inventory, ending Cost of goods sold Gross profit Gain (loss) due to market fluctuations of inventory*
Copyright © 2014 John Wiley & Sons, Inc.
February
March
April
$29,000
$35,000
$40,000
15,000 17,000 32,000 15,100 16,900 12,100
15,100 24,000 39,100 17,000 22,100 12,900
17,000 26,500 43,500 14,000 29,500 10,500
(2,000) $10,100
1,100 $14,000
700 $11,200
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-17
EXERCISE 9-5 (Continued) *
Jan. 31
Feb. 28
Mar. 31
Apr. 30
Inventory at cost Inventory at LCNRV Allowance amount needed to reduce inventory to NRV Gain (loss) due to market fluctuations of inventory**
$15,000 (14,500)
$15,100 (12,600)
$17,000 (15,600)
$14,000 (13,300)
$
$ 2,500
$ 1,400
$
700
$ (2,000)
$ 1,100
$
700
500
**$500 – $2,500 = $(2,000) $2,500 – $1,400 = $1,100 $1,400 – $700 = $700
(b)
9-18
January 31 Loss Due to Decline of Inventory to NRV ................. Allowance to Reduce Inventory to NRV ..........
500
February 28 Loss Due to Decline of Inventory to NRV ................. Allowance to Reduce Inventory to NRV ..........
2,000
March 31 Allowance to Reduce Inventory to NRV ................... Recovery of Inventory Loss .............................
1,100
April 30 Allowance to Reduce Inventory to NRV ................... Recovery of Inventory Loss .............................
700
Copyright © 2014 John Wiley & Sons, Inc.
500
2,000
Kieso, IFRS, 2/e, Solutions Manual
1,100
700
(For Instructor Use Only)
EXERCISE 9-6 (10–15 minutes) Net realizable value Cost Lower-of-cost-or-NRV
€50 – €14 = €36 €40 €36
€38 figure used – €36 correct value per unit = €2 per unit. €2 X 1,000 units = €2,000. If ending inventory is overstated, net income will be overstated. If beginning inventory is overstated, net income will be understated. Therefore, net income for 2015 was overstated by €2,000 and net income for 2016 was understated by €2,000. EXERCISE 9-7 (10–15 minutes) (a)
Unrealized Holding Gain or Loss – Income ............
212,000
Biological Assets – Milking Cows ..................... (b)
Milk Inventory ............................................................
212,000 72,000
Unrealized Holding Gain or Loss – Income ...... (c)
72,000
Cash ...........................................................................
74,000
Cost of Goods Sold ...................................................
72,000
Milk Inventory ......................................................
72,000
Sales Revenue.....................................................
74,000
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-19
EXERCISE 9-8 (10–15 minutes) (a)
Biological Assets – Shearing Alpaca ($7,700 – $975) ........................................................
6,725
Unrealized Holding Gain or Loss – Income ...... (b)
Wool Inventory ...........................................................
6,725 13,000
Unrealized Holding Gain or Loss – Income ...... (c)
13,000
Cash ............................................................................
14,500
Cost of Goods Sold ...................................................
13,000
Wool Inventory ....................................................
13,000
Sales Revenue ....................................................
14,500
(d) (1) The birth of a baby Alpaca may result in a gain on the initial recognition of the biological asset. (2) Losses may result as the fair value of the older Alpaca will likely decrease because the shearing is more limited than with the other Alpacas.
9-20
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
2,000
19
Copyright © 2014 John Wiley & Sons, Inc.
1,360
17 £53,040
23,120
21,760
Kieso, IFRS, 2/e, Solutions Manual
85,000
£38,000/£125,000 X
18,200
Operating expenses
£ 6,760
24,960
£78,000
£24,960
10,880
10,240
£ 3,840
Gross Profit
85,000
£60,000/£125,000 X
Gross profit
Net income
Total Cost
£27,000/£125,000 X £85,000
Relative Sales Price
53,040
£78,000
34,000
32,000
£12,000
Sales
£125,000
38,000
60,000
£ 27,000
Total Sales Price
Cost of goods sold (see schedule)
Sales (see schedule)
29
2,720
£2,040 £ 8,160
8
4
Cost of Lots Sold
4,000
15
Cost Per Lot
£3,000
9
Number of Lots Sold
Sales Price Per Lot
No. of Lots
£85,000
25,840
40,800
£18,360
Cost Allocated to Lots
1,360
2,720
£2,040
Cost Per Lot (Cost Allocated/ No. of Lots)
EXERCISE 9-9 (15–20 minutes)
(For Instructor Use Only)
9-21
9-22
Copyright © 2014 John Wiley & Sons, Inc.
120
Straight chairs
(800 – 120) X £30 = £20,400
Inventory of straight chairs
100
Armchairs 30
48
£54
Chairs 200
Cost per Chair
Number of Chairs Sold
Lounge chairs
50
800
Straight chairs
80
£90
300
400
No. of Chairs
Armchairs
Lounge chairs
Chairs
Sales Price per Chain Total Cost
6,000 £32,000
£19,200
8,000
£18,000
Sales
£40,000/£100,000 X
£24,000/£100,000 X
£12,800
2,400
3,200
£ 7,200
Gross Profit
60,000
60,000
£36,000/£100,000 X £60,000
Relative Sales Price
3,600
4,800
£10,800
Cost of Chairs Sold
£100,000
40,000
24,000
£36,000
Total Sales Price
£60,000
24,000
14,400
£21,600
Cost Allocated to Chairs
30
48
£54
Cost per Chair
EXERCISE 9-10 (12–17 minutes)
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
EXERCISE 9-11 (5–10 minutes) Unrealized Holding Gain or Loss—Income ($400,000 – $375,000) .......................................... Purchase Commitment Liability...................
25,000 25,000
EXERCISE 9-12 (15–20 minutes) (a)
If the commitment is material in amount, there should be a footnote in the statement of financial position stating the nature and extent of the commitment. The footnote may also disclose the market price of the materials. The excess of market price over contracted price is a gain contingency that should not be recognized in the accounts until it is realized.
(b)
The drop in the market price of the commitment should be charged to operations in the current year if it is material in amount. The following entry would be made: Unrealized Holding Gain or Loss—Income ............ 12,000* Purchase Commitment Liability ......................
12,000
*(€3.00 – €2.70) X 40,000 The entry is made because a loss in utility has occurred during the period in which the market decline took place. The account credited in the above entry should be included among the current liabilities on the statement of financial position, with an appropriate footnote indicating the nature and extent of the commitment. This liability indicates the minimum obligation on the commitment contract at the present time— the amount that would have to be forfeited in case of breach of contract. (c)
Assuming the €12,000 market decline entry was made on December 31, 2015, as indicated in (b), the entry when the materials are received in January 2016 would be: Raw Materials (€40,000 X €2.70) ............................... 108,000 Purchase Commitment Liability (€40,000 X €3.00).. 12,000 Accounts Payable .............................................
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
120,000
9-23
EXERCISE 9-12 (Continued) This entry records the raw materials at the current cost, eliminates the €12,000 liability set up at December 31, 2015, and records the contractual liability for the purchase. This permits operations to be charged this year with the €108,000, the other €12,000 of the cost having been charged to operations in 2015. EXERCISE 9-13 (8–13 minutes) (1)
20% = 16.67% OR 16 2/3%. 100% + 20%
(2)
25% = 20%. 100% + 25%
(3)
(4)
33 1/3% 100% + 33 1/3%
= 25%.
50% = 33.33% OR 33 1/3%. 100% + 50%
EXERCISE 9-14 (10–15 minutes) (a)
9-24
Inventory, May 1 (at cost) ................................... Purchases (at cost) ............................................. Purchase discounts ............................................ Freight-in .............................................................. Goods available (at cost) ........................... Sales (at selling price)......................................... Sales returns (at selling price) ........................... Net sales (at selling price) .................................. Less: Gross profit (25% of €930,000)................ Sales (at cost) .......................................... Approximate inventory, May 31 (at cost) ....................................
Copyright © 2014 John Wiley & Sons, Inc.
€160,000 640,000 (12,000) 30,000 818,000 €1,000,000 (70,000) 930,000 232,500
Kieso, IFRS, 2/e, Solutions Manual
697,500 €120,500
(For Instructor Use Only)
EXERCISE 9-14 (Continued) (b) Gross profit as a percent of sales must be computed: 25% = 20% of sales. 100% + 25% Inventory, May 1 (at cost) ................................. Purchases (at cost) ........................................... Purchase discounts .......................................... Freight-in ........................................................... Goods available (at cost) ........................ Sales (at selling price) ...................................... Sales returns (at selling price) ......................... Net sales (at selling price) ................................ Less: Gross profit (20% of €930,000) ............. Sales (at cost) ........................................ Approximate inventory, May 31 (at cost) ...................................
€160,000 640,000 (12,000) 30,000 818,000 €1,000,000 (70,000) 930,000 186,000 744,000 € 74,000
EXERCISE 9-15 (15–20 minutes) (a)
Merchandise on hand, January 1 .................... Purchases .......................................................... Less: Purchase returns and allowances........ Freight-in ........................................................... Total merchandise available (at cost) .... Cost of goods sold* .......................................... Ending inventory ............................................... Less: Undamaged goods ................................ Estimated fire loss ............................................ *Gross profit =
$ 38,000 92,000 (2,400) 3,400 131,000 (90,000) 41,000 10,900 $ 30,100
33 1/3% = 25% of sales. 100% + 33 1/3%
Cost of goods sold = 75% of sales of $120,000 = $90,000.
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-25
EXERCISE 9-15 (Continued) (b)
Cost of goods sold = 66 2/3% of sales of $120,000 = $80,000 Total merchandise available (at cost)..............................
$51,000
[$131,000 [as computed in (a)] – $80,000] Less: Undamaged goods .................................................
10,900
Estimated fire loss.............................................................
$40,100
EXERCISE 9-16 (15–20 minutes) Beginning inventory ...................................................
R$170,000
Purchases ....................................................................
450,000 620,000
Purchase returns ........................................................
(30,000)
Goods available (at cost) ...........................................
590,000
Sales............................................................................. R$650,000 Sales returns ...............................................................
(24,000)
Net sales ......................................................................
626,000
Less: Gross profit (30% X R$626,000) .....................
(187,800)
438,200
Estimated ending inventory (unadjusted for damage) ....................................................................
151,800
Less: Goods on hand—undamaged (at cost) R$21,000 X (1 – 30%) .......................................
14,700
Less: Goods on hand—damaged (at net realizable value) ...............................................
5,300
Fire loss on inventory.................................................
R$131,800
9-26
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
EXERCISE 9-17 (10–15 minutes) Beginning inventory (at cost) .................................... Purchases (at cost) .................................................... Goods available (at cost) .................................. Sales (at selling price)................................................ Less sales returns ...................................................... Net sales ...................................................................... Less: Gross profit* (20% of ¥112,000) ..................... Net sales (at cost) ........................................... Estimated inventory (at cost) .................................... Less: Goods on hand (¥30,500 – ¥6,000) .................
¥ 38,000 90,000 128,000 ¥116,000 4,000 112,000 22,400 89,600 38,400 24,500
Claim against insurance company ...........................
¥ 13,900
25% = 20% of selling price 100% + 25%
*Computation of gross profit:
EXERCISE 9-18 (15–20 minutes)
Inventory 1/1/15 (cost) Purchases to 8/18/15 (cost) Cost of goods available Deduct cost of goods sold* Inventory 8/18/15
Lumber
Millwork
Hardware
$ 250,000 1,500,000 1,750,000 1,640,000 $ 110,000
$ 90,000 375,000 465,000 410,000 $ 55,000
$ 45,000 160,000 205,000 175,000 $ 30,000
*(See computations on next page)
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-27
EXERCISE 9-18 (Continued) Computation for cost of goods sold:* $2,050,000 = $1,640,000 1.25
Lumber:
Millwork:
$533,000 1.30
= $410,000
Hardware:
$245,000 1.40
= $175,000
*Alternative computation for cost of goods sold: Markup on selling price:
Cost of goods sold:
Lumber:
25% = 20% or 1/5 100% + 25%
$2,050,000 X 80% = $1,640,000
Millwork:
30% = 3/13 100% + 30%
$533,000 X 10/13 = $410,000
Hardware:
40% = 2/7 100% + 40%
$245,000 X 5/7 = $175,000
9-28
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
EXERCISE 9-19 (20–25 minutes) Ending inventory: (a)
Gross profit is 40% of sales Total goods available for sale (at cost) .........
(b)
£2,100,000
Sales (at selling price) ....................................
£2,300,000
Less: Gross profit (40% of sales) .................
920,000
Sales (at cost) ......................................
1,380,000
Ending inventory (at cost) ..................
£ 720,000
Gross profit is 60% of cost 60% 100% + 60%
= 37.5% markup on selling price
Total goods available for sale (at cost) .........
(c)
£2,100,000
Sales (at selling price) ....................................
£2,300,000
Less: Gross profit (37.5% of sales) ..............
862,500
Sales (at cost) ......................................
1,437,500
Ending inventory (at cost) ..................
£ 662,500
Gross profit is 35% of sales Total goods available for sale (at cost) .........
£2,100,000
Sales (at selling price) ....................................
£2,300,000
Less: Gross profit (35% of sales) .................
805,000
Sales (at cost) ......................................
1,495,000
Ending inventory (at cost) ..................
£ 605,000
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-29
EXERCISE 9-19 (Continued) (d)
Gross profit is 25% of cost 25% 100% + 25%
= 20% markup on selling price
Total goods available for sale (at cost) ........ Sales (at selling price).................................... Less: Gross profit (20% of sales).................. Sales (at cost) ....................................... Ending inventory (at cost) .............................
£2,100,000 £2,300,000 460,000 1,840,000 £ 260,000
EXERCISE 9-20 (20–25 minutes) (a)
(b)
9-30
Cost
Retail
Beginning inventory ....................................... R$ 58,000 Purchases ....................................................... 122,000 Net markups .................................................... — Totals ...................................................... R$180,000
R$100,000 200,000 20,000 320,000
Net markdowns ............................................... Sales price of goods available ...................... Deduct: Sales ................................................. Ending inventory at retail...............................
(30,000) 290,000 186,000 R$104,000
1.
R$180,000 ÷ R$300,000 = 60%
2.
R$180,000 ÷ R$270,000 = 66.67%
3.
R$180,000 ÷ R$320,000 = 56.25%
4.
R$180,000 ÷ R$290,000 = 62.07%
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
EXERCISE 9-20 (Continued) (c)
1. 2. 3.
Method 3. Method 3. Method 3.
(d)
56.25% X R$104,000 = R$58,500
(e)
R$180,000 – R$58,500 = R$121,500
(f)
R$186,000 – R$121,500 = R$64,500
EXERCISE 9-21 (12–17 minutes)
Beginning inventory .......................... Purchases .......................................... Totals ......................................... Add: Net markups Markups ................................... Markup cancellations .............. Totals ..................................................
Cost € 200,000 1,425,000 1,625,000
_________ €1,625,000
Deduct: Net markdowns Markdowns ............................... Markdown cancellations .......... Sales price of goods available ......... Deduct: Sales .................................... Ending inventory at retail ................. Cost-to-retail ratio =
€1,625,000 €2,500,000
Retail € 280,000 2,140,000 2,420,000 €95,000 (15,000)
35,000 (5,000)
80,000 2,500,000
30,000 2,470,000 2,250,000 € 220,000
= 65%
Ending inventory at cost = 65% X €220,000 = €143,000
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-31
EXERCISE 9-22 (20–25 minutes)
Beginning inventory .............................. Purchases ............................................... Purchase returns ................................... Freight on purchases ............................ Totals ............................................. Add: Net markups Markups ........................................ Markup cancellations .................. Net markups ........................................... Totals .............................................
Cost £30,000 55,000 (2,000) 2,400 85,400 £10,000 (1,500) _______ £85,400
Deduct: Net markdowns Markdowns .................................... Markdown cancellations .............. Net markdowns ...................................... Sales price of goods available .............. Deduct: Net sales (£95,000 – £2,000) ... Ending inventory, at retail ..................... Cost-to-retail ratio =
£85,400 £140,000
Retail £ 46,500 88,000 (3,000) _______ 131,500
8,500 140,000
9,300 (2,800) 6,500 133,500 93,000 £ 40,500
= 61%
Ending inventory at cost = 61% X £40,500 = £24,705
EXERCISE 9-23 (10–15 minutes) (a)
Inventory turnover: 2012 $16,447 = 6.62 times $2,500 + $2,466 2
(b)
9-32
Average days to sell inventory: 2012 365 ÷ 6.62 = 55.1 days Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
SOLUTIONS TO PROBLEMS PROBLEM 9-1
Item
Cost
Net Realizable Value*
A B C D
€470 450 830 960
€ 450 430 640 1,000
Lower-ofCost-orNRV €450 430 640 960
*Net Realizable Value = 2016 catalog selling price less estimated costs to complete and sell. (2016 catalog prices are in effect as of 12/01/15.)
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-35
PROBLEM 9-2
(a)
1.
The balance in the Allowance to Reduce Inventory to NRV at May 31, 2015, should be £15,200, as calculated in Exhibit 1 below. Cost
NRV
LCNRV
£ 70,000
£ 56,000
£ 56,000
86,000
84,800
84,800
Louvered glass doors
112,000
168,300
112,000
Thermal windows
140,000
140,000
140,000
£408,000
£449,100
£392,800
Aluminum siding Cedar shake siding
Totals Inventory cost LCNRV valuation
Allowance at May 31, 2015
2.
£408,000 392,800 £ 15,200
For the fiscal year ended May 31, 2015, the gain that would be recorded due to the change in the Allowance to Reduce Inventory to Net Realizable Value would be £12,300, as calculated below. Balance prior to adjustment ................................ Required balance ................................................. Gain to be recorded .............................................
9-36
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
£27,500 (15,200) £(12,300)
(For Instructor Use Only)
PROBLEM 9-2 (Continued) (b)
The use of the lower-of-cost-or-net realizable value (LCNRV) rule is based on both the expense recognition principle and the concept of conservatism. The expense recognition principle applies because the application of the LCNRV 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.
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-37
PROBLEM 9-3
(a)
Cost-of-Goods-Sold Method December 31, 2016 Cost of Goods Sold .................................................. Allowance to Reduce Inventory to NRV ........ ($780,000 – $712,000)
68,000 68,000
December 31, 2017 Cost of Goods Sold .................................................. Allowance to Reduce Inventory to NRV [($905,000 – $830,000) – $68,000] ................ (b)
Loss Method December 31, 2016 Loss Due to Decline of Inventory to NRV ............... Allowance to Reduce Inventory to NRV ........ ($780,000 – $712,000)
7,000 7,000
68,000
December 31, 2017 Loss Due to Decline of Inventory to NRV ............... Allowance to Reduce Inventory to NRV [($905,000 – $830,000) – $68,000] ................
9-38
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
68,000
7,000 7,000
(For Instructor Use Only)
PROBLEM 9-4
(a)
(b)
(c)
Biological Assets—Grape Vineyard ....................... Unrealized Holding Gain or Loss – Income ...
15,000
Grape Inventory ........................................................ Unrealized Holding Gain or Loss – Income ...
30,000
Cash .......................................................................... Cost of Goods Sold .................................................. Grape Inventory................................................ Sales Revenue ..................................................
35,000 30,000
15,000
30,000
30,000 35,000
(d)
Unrealized Holding Gain or Loss – Income ........... Unrealized Holding Gain or Loss – Income ........... Gross Profit on Sold Grapes ................................... Total Effect on Income .............................................
(e)
The increase in demand for the type of grapes that Finn produces should increase the sales prices received for the grapes, increase the value of the harvested grapes since the value is based on the current commodity price, and increase the potential that the full harvest will be sold. The new producing vineyards coming on line next year will have negative effects on both the value of any increase in the grape vineyard (biological asset) and the value of the harvested grapes. The new vineyards may also increase supply and decrease prices as a result.
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
€15,000 30,000 5,000 €50,000
9-39
PROBLEM 9-5
Beginning inventory .....................................................
¥ 80,000
Purchases ......................................................................
290,000 370,000
Purchase returns ..........................................................
(28,000)
Total goods available ...................................................
342,000
Sales............................................................................... Sales returns .................................................................
¥415,000 (21,000) 394,000
Less: Gross profit (35% of ¥394,000) .........................
137,900
Ending inventory (unadjusted for damage) ................
(256,100) 85,900
Less: Goods on hand—undamaged (¥30,000 X [1 – 35%]) .........................................
19,500
Inventory damaged .......................................................
66,400
Less: Residual value of damaged inventory .............
8,150
Fire loss on inventory...................................................
¥ 58,250
9-40
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 9-6
STANISLAW CORPORATION Computation of Inventory Fire Loss April 15, 2015 Inventory, 1/1/15 ............................................ Purchases, 1/1/ – 3/31/15 .............................. April merchandise shipments paid .............. Unrecorded purchases on account ............. Total ..................................................... Less: Shipments in transit........................... Merchandise returned ....................... Merchandise available for sale..................... Less estimated cost of sales: Sales, 1/1/ – 3/31/15 ............................ Sales, 4/1/ – 4/15/15 Receivables acknowledged at 4/15/15 ..................................... Estimated receivables not acknowledged ............................ Total ............................................... Add collections, 4/1/ – 4/15/15 (€12,950 – €950) ............................... Total ............................................... Less receivables, 3/31/15 ................... Total sales 1/1/ – 4/15/15 .............. Less gross profit (45%* X €161,000) ............ Estimated merchandise inventory ............... Less: Sale of salvaged inventory ................ Inventory fire loss..........................................
Copyright © 2014 John Wiley & Sons, Inc.
€ 75,000 52,000 3,400 15,600 146,000 €
2,300 950
3,250 142,750
135,000
€46,000 8,000 54,000 12,000 66,000 40,000
Kieso, IFRS, 2/e, Solutions Manual
26,000 161,000 72,450
(For Instructor Use Only)
88,550 54,200 3,500 € 50,700
9-41
PROBLEM 9-6 (Continued) *Computation of Gross Profit Ratio Net sales, 2013 .................................................
€390,000
Net sales, 2014 .................................................
530,000
Total net sales .......................................
920,000
Beginning inventory ........................................
€ 66,000
Net purchases, 2013 ........................................
235,000
Net purchases, 2014 ........................................
280,000
Total ........................................................
581,000
Less: Ending inventory ..................................
75,000
506,000
Gross profit ...........................................
€414,000
Gross profit ratio (€414,000 ÷ €920,000) ........
45%
9-42
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 9-7
(a)
Cost
Retail
Beginning inventory................. HK$ 17,000
HK$ 25,000
Purchases .................................
82,500
137,000
Freight-in ...................................
7,000
Purchase returns ......................
(2,300)
(3,000)
9,200
13,000
Totals ............................... HK$113,400
172,000
Transfers in from suburban branch .................................... Net markups .............................
8,000 180,000
Net markdowns ........................
(4,000)
Sales ..........................................
HK$(95,000)
Sales returns ............................
2,400
(92,600)
Inventory losses due to breakage ................................
(400)
Ending inventory at retail ........
Cost-to-retail ratio =
(b)
HK$113,400 HK$180,000
HK$ 83,000
= 63%
Ending inventory at LCNRV (63% of HK$83,000) ............................
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
HK$ 52,290
(For Instructor Use Only)
9-43
PROBLEM 9-8
Cost
Retail
Beginning inventory ............................ $ 250,000
$ 390,000
Purchases .............................................
914,500
Purchase returns .................................
(60,000)
(80,000)
Purchase discounts .............................
(18,000)
—
Freight-in ..............................................
42,000
—
Markups ................................................
1,460,000
$
Markup cancellations ..........................
120,000
—
(40,000)
80,000
Totals ........................................... $1,128,500
1,850,000
Markdowns ...........................................
(45,000)
Markdown cancellations .....................
20,000
Sales......................................................
(1,410,000)
Sales returns ........................................
97,500
— (25,000) — (1,312,500)
Inventory losses due to breakage ......
(4,500)
Employee discounts ............................
(8,000)
Ending inventory at retail ....................
Cost-to-retail ratio =
$1,128,500 $1,850,000
$ 500,000
= 61%
Ending inventory at cost (61% of $500,000) ..............................
9-44
Copyright © 2014 John Wiley & Sons, Inc.
$ 305,000
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 9-9
(a)
Cost Inventory (beginning)........................ Purchases .......................................... Purchase returns ............................... Freight-in ............................................ Totals ........................................ Markups ............................................. Markup cancellations ........................
Retail
£ 52,000 272,000 (5,600) 16,600 £335,000
£ 78,000 423,000 (8,000) — 493,000 £ 9,000 (2,000)
7,000 500,000 (3,600) (10,000) (390,000) £ 96,400
Net markdowns ................................. Normal spoilage and breakage ........ Sales ................................................... Ending inventory at retail .................
Cost-to-retail ratio =
£335,000 £500,000
= 67%
Ending inventory at LCNRV (67% of £96,400) ............................. (b)
£ 64,588
The difference between the inventory estimate per retail method and the amount per physical count may be due to: 1. Theft losses (shoplifting or pilferage). 2. Spoilage or breakage above normal. 3. Differences in cost/retail ratio for purchases during the month, beginning inventory, and ending inventory. 4. Markups on goods available for sale inconsistent between cost of goods sold and ending inventory. 5. A wide variety of merchandise with varying cost/retail ratios. 6. Incorrect reporting of markdowns, additional markups, or cancellations.
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-45
PROBLEM 9-10
(a)
The inventory section of Maddox’s statement of financial position at November 30, 2015, including required footnotes, is presented below. Also presented below are supporting calculations. Current assets Inventory Section (Note 1.) Finished goods (Note 2.)........................... Work-in-process ........................................ Raw materials ............................................ Factory supplies ........................................ Total inventories ........................................
9-46
$643,000 108,700 237,400 64,800 $1,053,900
Note 1.
Lower-of-cost (first-in, first-out) or-net realizable value is applied on a major category basis for finished goods, and on a total inventory basis for work-in-process, raw materials, and factory supplies.
Note 2.
Seventy-five percent of bar end shifters finished goods inventory in the amount of $136,500 ($182,000 X .75) is pledged as collateral for a bank loan, and one-half of the head tube shifters finished goods is held by catalog outlets on consignment.
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 9-10 (Continued) Supporting Calculations
Down tube shifters at NRV ............ Bar end shifters at cost .................. Head tube shifters at cost .............. Work-in-process at NRV ................ Derailleurs at NRV .......................... Remaining items at NRV ................ Supplies at cost .............................. Totals .................................... 1 2
Finished Goods $266,000 182,000 195,000
Work-inProcess
Raw Materials
Factory Supplies
$108,700 $110,0001 127,400 $643,000
$108,700
$237,400
$64,8002 $64,800
$264,000 X 1/2 = $132,000; $132,000 ÷ 1.2 = $110,000. $69,000 – $4,200 = $64,800.
(b)
The decline in the net realizable value of inventory below cost may be reported using one of two alternate methods, the cost-of-goods-sold method or the loss method. The decline in the net realizable value of inventory may be reflected in Maddox’s income statement as a separate loss item for the fiscal year ended November 30, 2015. The loss amount may also be written off directly, increasing the cost of goods sold on Maddox’s income statement. The loss must be reported in continuing operations. The loss must be included in the income statement since it is material to Maddox’s financial statements.
(c)
Purchase contracts for which a firm price has been established should be disclosed on the financial statements of the buyer. If the contract price is greater than the current market price and a loss is expected when the purchase takes place, an unrealized holding loss amounting to the difference between the contracted price and the current market price should be recognized on the income statement in the period during which the price decline takes place. Also, an estimated liability on purchase commitments should be recognized on the statement of financial position. The recognition of the loss is unnecessary if a firm sales commitment exists which precludes the loss.
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-47
PROBLEM 9-11
Schedule A
(a)
Item
On Hand Quantity
Cost
NRV
Lower-of-Costor-NRV
A B C D E
1,100 800 1,000 1,000 1,400
NT$7.50 8.20 5.60 3.80 6.40
NT$9.00 8.10 5.45 4.50 6.00
NT$7.50 8.10 5.45 3.80 6.00
Schedule B Item A B C D E
(b)
Cost 1,100 X NT$7.50 = NT$8,250 800 X NT$8.20 = NT$6,560 1,000 X NT$5.60 = NT$5,600 1,000 X NT$3.80 = NT$3,800 1,400 X NT$6.40 = NT$8,960
Lower-of-Cost-or-NRV Difference 1,100 X NT$7.50 = NT$8,250 None 800 X NT$8.10 = NT$6,480 NT$ 80 1,000 X NT$5.45 = NT$5,450 NT$150 1,000 X NT$3.80 = NT$3,800 None 1,400 X NT$6.00 = NT$8,400 NT$560 NT$790
Cost of Goods Sold ................................................... Allowance to Reduce Inventory to NRV ..........
790 790
OR Loss Due to Decline of Inventory to NRV ............... Allowance to Reduce Inventory to NRV ........
9-48
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
790 790
(For Instructor Use Only)
PROBLEM 9-11 (Continued) (c) To:
Jay Shin, Clerk
From:
Accounting Manager
Date:
January 14, 2016
Subject:
Instructions on determining lower-of-cost-or-net realizable value for inventory valuation
This memo responds to your questions regarding our use of lower-of-costor-net realizable value for inventory valuation. Simply put, value inventory at whichever is the lower: the actual cost or the net realizable value of the inventory at the time of valuation. The term cost is relatively simple. It refers to the amount our company paid for our inventory including costs associated with preparing the inventory for sale. The term net realizable value, on the other hand, is more complicated. As you have already noticed, this value is the estimated selling price minus any estimated costs to complete and sell the item. This net realizable value is then compared to the actual cost in determining the lower-of-cost-or-net realizable value. Refer to Item A on the attached schedule. The values for the cost and net realizable value are NT$7.50, and NT$9.00 (NT$10.50 – NT$1.50), respectively. Compare the net realizable value with the actual cost, choosing the lower to value Item A in inventory. In this case, NT$7.50 is the value chosen to value inventory. Thus, inventory for Item A amounts to NT$8,250. (See Schedule B, Item A.)
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-49
PROBLEM 9-11 (Continued) Proceed in the same way, always choosing the lowest among cost, and net realizable value. After you have aggregated the total lower-of-cost-or-net realizable value for all items, you will be likely to have a loss on inventory which must be accounted for. In our example, the loss is NT$790. You can journalize this loss in one of two ways: Cost of Goods Sold ............................................................... Allowance to Reduce Inventory to NRV .....................
790 790
OR Loss Due to Decline of Inventory to NRV ............................ Allowance to Reduce Inventory to NRV .....................
790 790
This memo should answer your questions about which value to choose when valuing inventory at lower-of-cost-or-net realizable value. Schedule A
Item A B C D E
On Hand Quantity 1,100 800 1,000 1,000 1,400
Cost NT$7.50 8.20 5.60 3.80 6.40
NRV NT$9.00 8.10 5.45 4.50 6.00
Lower-of- Costor-NRV NT$7.50 8.10 5.45 3.80 6.00
Schedule B Item A B C D E
9-50
Cost 1,100 X NT$7.50 = NT$8,250 800 X NT$8.20 = NT$6,560 1,000 X NT$5.60 = NT$5,600 1,000 X NT$3.80 = NT$3,800 1,400 X NT$6.40 = NT$8,960
Lower-of-Cost-or-NRV 1,100 X NT$7.50 = NT$8,250 800 X NT$8.10 = NT$6,480 1,000 X NT$5.45 = NT$5,450 1,000 X NT$3.80 = NT$3,800 1,400 X NT$6.00 = NT$8,400
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
Difference None NT$ 80 NT$150 None NT$560 NT$790
(For Instructor Use Only)
SOLUTIONS TO CONCEPTS FOR ANALYSIS CA 9-1 (a) The purpose of using the LCNRV method is to reflect the decline of inventory value below its original cost. A departure from cost is justified on the basis that a loss of utility should be reported as a charge against the revenues in the period in which it occurs. (b) The term “net realizable value” in LCNRV generally means the estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. (c) The LCNRV method may be applied either directly to each inventory item, to a category, or to the total inventory. The application of the rule to the inventory total, or to the total components of each category, ordinarily results in an amount that more closely approaches cost than it would if the rule were applied to each individual item. Under the first two methods, increases in net realizable value offset, to some extent, the decreases in net realizable value. The most common practice is, however, to price the inventory on an item-by-item basis. Many companies favor the individual item approach because tax rules in certain jurisdictions require that an individual item basis be used unless it involves practical difficulties. In addition, the individual item approach gives the most conservative valuation for statement of financial position purposes. (d) Conceptually, the LCNRV method has some deficiencies. First, decreases in the value of the asset and the charge to expense are recognized in the period in which loss in utility occurs—not in the period of sale. On the other hand, increases in the value of the asset are recognized only at the point of sale. This situation is inconsistent and can lead to distortions in the presentation of income data. Second, net realizable value reflects the future service potential of the asset and, for that reason, it is conceptually sound. But net realizable value cannot often be measured with any certainty. From the standpoint of accounting theory, there is little to justify the LCNRV rule. Although conservative from the statement of financial position point of view, it permits the income statement to show a larger net income in future periods than would be justified if the inventory were carried forward at cost. The rule is applied only in those cases where strong evidence indicates that market declines in inventory prices have occurred that will result in losses when such inventories are disposed of.
CA 9-2 (a) The accountant’s ethical responsibility is to provide fair and complete financial information. In this case, the cost-of-goods-sold method distorts the cost of goods sold and hides the decline in market value. (b) If Ortiz’s cost-of-goods-sold method is used, management may have difficulty in calculations that involve the cost of goods sold. For example, these calculations are useful in establishing profit margins and determining selling prices; but from the investors’ and shareholders’ viewpoint, it is not good policy to hide declines in market value.
9-52
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
CA 9-2 (Continued) (c) Conan should use the loss method to disclose the decline in market value and avoid distorting cost of goods sold. However, he faces an ethical dilemma if Ortiz will not accept the method Conan wants to use. He should consider various alternatives including the extremes of simply accepting her boss’s decision to quitting if Ortiz will not change his mind. Conan should assess the consequences of each possible alternative and weigh them carefully before he decides what to do.
CA 9-3 (a) (1) Ogala’s inventory should be reported at net realizable value consistent with the LCNRV rule since net realizable value is below original cost. (2) The LCNRV rule is used to report the inventory in the statement of financial position at its future utility value. It also recognizes a decline in the utility of inventory in the income statement in the period in which the decline occurs. (b) Generally, ending inventory would have been higher and cost of goods sold would have been lower had Ogala used the average cost inventory method in a period of declining prices. Inventory quantities increased and average cost associates all purchase prices with inventory. However, in this instance, there would have been no effect on ending inventory or cost of goods sold had Ogala used the average inventory method because Ogala’s inventory would have been reported at net realizable value according to the LCNRV rule. Net realizable value of the inventory is less than either its average cost or FIFO cost.
CA 9-4 (a) The retail inventory method can be employed to estimate retail, wholesale, and manufacturing finished goods inventories. The valuation of inventory under this method is arrived at by reducing the ending inventory at retail to an estimate of LCNRV. The retail value of ending inventory can be computed by (1) taking a physical inventory, or by (2) subtracting net sales and net markdowns from the total retail value of merchandise available for sale (i.e., the sum of beginning inventory at retail, net purchases at retail, and net markups). The reduction of ending inventory at retail to an estimate of the lower-ofcost-or-market is accomplished by applying to it an estimated cost ratio arrived at by dividing the retail value of merchandise available for sale as computed in (2) above into the cost of merchandise available for sale (i.e., the sum of beginning inventory, net purchases, and other inventoriable costs). (b) Since the retail method is based on an estimated cost ratio involving total merchandise available during the period, its validity depends on the underlying assumption that the merchandise in ending inventory is a representative mixture of all merchandise handled. If this condition does not exist, the cost ratio may not be appropriate for the merchandise in ending inventory and can result in significant error. Where there are a number of inventory subdivisions for which differing rates of markup are maintained, there is no assurance that the ending inventory mix will be representative of the total merchandise handled during the period. In such cases, accurate results can be obtained by subclassifications by rate of markup.
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-53
CA 9-4 (Continued) Seasonal variations in the rate of markup will nullify the ending inventory “representative mix” assumption. Since the estimated cost ratio is based on total merchandise handled during the period, the same rate of markup should prevail throughout the period. Because of seasonal variations it may be necessary to use data for the last six months, quarter, or month to compute a cost ratio that is appropriate for ending inventory. Material quantities of special sale merchandise handled during the period may also bias the result of this method because merchandise data included in arriving at the estimated cost ratio may not be proportionately represented in ending inventory. This condition may be avoided by accumulating special sale merchandise data in separate accounts. Distortion of the ending inventory approximation under this method is often caused by an inadequate system of inventory control. Adequate accounting controls are necessary for the accurate accumulation of the data needed to arrive at a valid cost ratio. Physical controls are equally important because, for interim purposes, this method is usually applied without taking a physical inventory. (c) The advantages of using the retail method as compared to cost methods include the following: 1. Approximate inventory values can be determined without maintaining perpetual inventory records. 2. The preparation of interim financial statements is facilitated. 3. Losses due to fire or other casualty are readily determined. 4. Clerical work in pricing the physical inventory is reduced. 5. The cost of merchandise can be kept confidential in intracompany transfers. (d) The treatments to be accorded net markups and net markdowns must be considered in light of their effects on the estimated cost ratio. If both net markups and net markdowns are used in arriving at the cost ratio, ending inventory will be converted to an estimated average cost figure. Excluding net markdowns will result in the inventory being stated at an estimate of the LCNRV. The lower cost ratio arrived at by excluding net markdowns permits the pricing of inventory at an amount that reflects its current utility. The assumption is that net markdowns represent a loss of utility that should be recognized in the period of markdown. Ending inventory is therefore valued on the basis of its revenue-producing potential and may be expected to produce a normal gross profit if sold at prevailing retail prices in the next period.
CA 9-5 (a) (1) Olson’s inventoriable cost should include all costs incurred to get the lighting fixtures ready for sale to the customer. It includes not only the purchase price of the fixtures but also the other associated costs incurred on the fixtures up to the time they are ready for sale to the customer, for example, freight-in. (2) No, administrative costs are assumed to expire with the passage of time and not to attach to the product. Furthermore, administrative costs do not relate directly to inventories, but are incurred for the benefit of all functions of the business.
9-54
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
CA 9-5 (Continued) (b) (1) The LCNRV rule is used for valuing inventories because of the concept of conservatism and because the decline in the utility of the inventories below their cost should be recognized as a loss in the current period. (2) The net realizable value should be used to value the inventories because the net realizable value is less than the cost. To carry the inventories at NRV provides a means of measuring residual usefulness of an inventory expenditure. (c) Olson’s beginning inventories at cost and at retail would be included in the calculation of the cost ratio. Net markdowns would be excluded from the calculation of the cost ratio. This procedure reduces the cost ratio because there is a larger denominator for the cost ratio calculation. Thus, the concept of conservatism is being followed and a LCNRV valuation is approximated.
CA 9-6 (a) Accounting standards require that when a contracted price is in excess of market, as it is in this case (market is $5,000,000 and the contract price is $6,000,000), and it is expected that losses will occur when the purchase is made, losses should be recognized in the period during which such declines in market prices take place. It would be unethical to ignore recognition of the loss now if a loss is expected to occur when the purchase is affected. (b) If the loss is material, new and continuing shareholders are harmed by nonrecognition of the loss. Cho’s position as an accounting professional also is affected if he accepts a financial report he knows violates accounting standards. (c) If the preponderance of the evidence points to a loss when the purchase is affected, the controller should recognize the amount of the loss in the period in which the price decline occurs. In this case the loss is measured at $1,000,000 and recorded as follows: Unrealized Holding Gain or Loss—Income ........................................ Purchase Commitment Liability ................................................
1,000,000 1,000,000
Cho should insist on statement preparation in accordance with accounting standards. If Star will not accept Cho’s position, Cho will have to consider alternative courses of action such as contacting higher-ups at Prophet and assess the consequences of each course of action.
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
9-55
