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Chapter Nine Exercise 9-3 Tatum Company has four products in its inventory. Information about the December 31, 2021, inventory is as follows:

1. Determine the carrying value of inventory at December 31, 2021, assuming the lower of cost or net realizable value (LCNRV) rule is applied to individual products. Product

Cost

NRV

Inventory Value

101

$120,000

$110,000

$100,000

102

90,000

110,000

90,000

103

60,000

50,000

50,000

104

30,000

50,000

30,000

$300,000

$270,000

2. Assuming that inventory write-downs are common for Tatum Company, record any necessary year-end adjusting entry. No

Transaction

1

1

General Journal Cost of Goods Sold Inventory

Debit

Credit

30,000 30,000

Explanation Write-down of inventory: $300,000-270,000=$30,000 *If the write-down of inventory was considered substantial and unusual, the debit would have been to a Loss on inventory write-down account.

Exercise 9-6 Tatum Company has four products in its inventory. Information about the December 31, 2021, inventory is as follows:

The normal profit is 25% of total cost. 1. Determine the carrying value of inventory at December 31, 2021, assuming the lower of cost or market (LCM) rule is applied to individual products. Product

Total Cost

Replacement Cost

NRV

NRV-NP

Market

Inventory Value

101

$120,000

$100,000

$100,000

$70,000

$100,000

$100,000

102

90,000

85,000

110,000

87,500

87,500

87,500

103

60,000

40,000

50,000

40,000

40,000

40,000

104

30,000

28,000

50,000

42,500

42,500

30,000

Totals

$300,000

Explanation

The inventory value is $257,500 *NP = 25% of total cost

$257,500

2. Assuming that inventory write-downs are common for Tatum Company, record any necessary year-end adjusting entry. No

Transaction

1

1

General Journal

Debit

Cost of Goods Sold

Credit

42,500

Inventory

42,500

Explanation Write-down of inventory: $300,000 − 257,500 = $42,500 If the write-down of inventory was considered unusual, the debit would have been to a separate Loss account. Exercise 9-26 For each of the following inventory errors occurring in 2021, determine the effect of the error on 2021's cost of goods sold, net income, and retained earnings using understated (U), overstated (O), or no effect (NE). Assume that the error is not discovered until 2022 and that a periodic inventory system is used. Ignore income taxes. Cost of Goods Sold

Net Income

Retained Earnings

1

Overstatement of ending inventory

U

O

O

2

Overstatement of purchases

O

U

U

3

Understatement of beginning inventory

U

O

O

4

Freight-in charges are understated

U

O

O

5

Understatement of ending inventory

O

U

U

6

Understatement of purchases

U

O

O

7

Overstatement of beginning inventory

O

U

U

8

Understatement of purchases plus understatement of ending inventory by the same amount

NE

NE

NE

Problem 9-5 Smith Distributors, Inc., supplies ice cream shops with various toppings for making sundaes. On November 17, 2021, a fire resulted in the loss of all of the toppings stored in one section of the warehouse. The company must provide its insurance company with an estimate of the amount of inventory lost. The following information is available from the company's accounting records:

1. Calculate the estimated cost of each of the toppings lost in the fire. Toppings Fruit

Estimates Cost of Lost Inventory $10,000

Marshmallow

4,500

Chocolate

2,000

Explanation

Exercise 9-14 Campbell Corporation uses the retail method to value its inventory. The following information is available for the year 2021:

Determine the December 31, 2021, inventory by applying the conventional retail method using the information provided. Cost

Retail

$190,000

$280,000

Purchases

600,000

840,000

Freight-in

8,000

Beginning inventory

Net markups

Cost-to-Retail Ratio

20,000 1,140,000

Net Markdowns Goods available for sale

(4,000) 798,000

1,136,000

Cost-to-retail Percentage

70.00%

Net Sales

(800,000)

Estimated ending inventory at retail Estimated ending inventory at cost

336,000 235,200

Explanation Cost-to-retail percentage: Loading… Estimated ending inventory at cost (70% Loading…336,000) = $235,200

Exercise 9-15 The Crosby Company owns a chain of hardware stores throughout the state. The company uses a periodic inventory system and the retail inventory method to estimate ending inventory and cost of goods sold. The following data are available for the three months ending March 31, 2021:

Complete the table below to estimate the LIFO cost of ending inventory and cost of goods sold for the three months ending March 31, 2021, using the information provided. Assume stable retail prices during the period.

Beginning inventory Net Purchases

Cost

Retail

$160,000

$280,000

607,760

840,000

Net Markups

20,000

Net Markdowns

(4,000)

Goods available for sale (excluding beg. inventory)

607,760

856,000

Goods available for sale (including beg. inventory)

767,760

1,136,000

Cost-to-Retail Ratio

Cost-to-retail Percentage (beginning)

57.14%

Cost-to-retail Percentage (current)

71.00%

Net Sales

(800,000)

Estimated ending inventory at retail

$336,000

Estimated ending inventory at cost

(199,752)

Estimates cost of goods sold

$568,008

Explanation Cost-to-retail percentage: Loading…

Estimated ending inventory at cost:

Exercise 9-19 On January 1, 2021, the Brunswick Hat Company adopted the dollar-value LIFO retail method. The following data are available for 2021:

Calculate the estimated ending inventory and cost of goods sold for 2021 using the information provided. Ending inventory at retail Ending inventory at cost Cost of goods sold Explanation

Base year Cost-to-retail percentage: Loading… 2021 Cost-to-retail percentage: Loading…

$150,000 $77,004 $106,776

Exercise 9-20 Canova Corporation adopted the dollar-value LIFO retail method on January 1, 2021. On that date, the cost of the inventory on hand was $15,000 and its retail value was $18,750. Information for 2021 and 2022 is as follows:

1. What is the cost-to-retail percentage for the inventory on hand at 1/1/2021? Cost-to-retail Percentage

80%

Explanation Base year Cost-to-retail percentage: Loading… 2. Calculate the inventory value at the end of 2021 and 2022 using the dollar-value LIFO retail method. 2021 Ending Inventory Explanation

2022 $16,281

$18,491

Problem 9-11 On January 1, 2021, HGC Camera Store adopted the dollar-value LIFO retail inventory method. Inventory transactions at both cost and retail, and cost indexes for 2021 and 2022 are as follows:

Estimate the 2021 and 2022 ending inventory and cost of goods sold using the dollar-value LIFO retail inventory method. 2021

2022

Estimated ending inventory at retail

$65,720

$77,000

Estimated ending inventory at cost

43,970

50,975

Estimated cost of goods sold

90,630

100,461

Explanation Employee discounts must be accounted for in the calculation of net sales. 2021: Sales if no employee discount = $3,300 / 0.80 = $4,125 Employee discount = $4,125 − $3,300 = $825

2022: Sales if no employee discount = $5,280 / 0.80 = $6,600 Employee discount = $6,600 − $5,280 = $1,320

Chapter Nine Quiz 1. For companies using FIFO or average cost, inventory is valued at: a. Lower of cost or net realizable value 2. Montana Co. has determined its year-end inventory on a FIFO basis to be $629,000. Information pertaining to that inventory is as follows: What should be the reported value of Montana’s inventory?

a. $571,000 Explanation NRV = $571,000 which is less than cost. Replacement cost is not considered in the valuation. 3. Green Acres Co. has elected to use the dollar-value LIFO retail method to value its inventory. The following data has been accumulated from the accounting records: Pertinent retail price indexes:

Estimate the cost of ending inventory for December 31, 2021 a. Estimated Ending Inventory Explanation

$577,500 ÷ 1.10 = $525,000

$347,910

4. Cindy Lou Linens uses the conventional retail method to estimate its ending inventories. The company records sales net of employee discounts. The following partial data has been summarized for the year ended December 31, 2021:

Compute the net markup for Cindy Lou Linens during 2021 a. Net Markups

$49,100

Explanation

5. Littleton Company uses a periodic inventory system and the LIFO retail method to estimate its ending inventories. The following partial data has been summarized for December 31, 2021:

Determine the cost-to-retail percentage used by Littleton. Assume stable retail prices during the period a. Cost-to-retail Percentage

75.7%...