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Chapter 9: Q7Q (page 474)

Question:In some instances, accounting principles require a departure from valuing inventories at cost alone. Determine the proper unit inventory price in the following cases, under the lower-of-cost-or-market rule. Cases 1 2 3 4 5 Cost \(15.90 \)16.10 \(15.90 \)15.90 $15.90 Net realizable value 14.50 19.20 15.20 10.40 16.40 Net realizable value less normal profit 12.80 17.60 13.75 8.80 14.80 Market (replacement cost) 14.80 17.20 12.80 9.70 16.80

Short Answer

Expert verified

The inventory price for Case 1 equals $14.50, Case 2 equals $16.10, Case 3 equals $13.75, case 4 equals $9.70, and Case 5 equals $15.90.

Step by step solution

01

Step-by-step-solutionStep1

The designated market value of the inventory is determined as follows:

Cases

Net realizable value

Net realizable value less normal profit

Replacement cost

Designated market value

Case 1

$14.50

$12.80

$14.80

$14.50

Case 2

19.20

17.60

17.20

17.60

Case 3

15.20

13.75

12.80

13.75

Case 4

10.40

8.80

9.70

9.70

Case 5

$16.40

$14.80

$16.80

$16.40

02

Step 2:

The inventory price as per the lower-of-cost-or-market-value method is determined as follows:

Cases

Cost

Designated market value

Lower-of-cost-or-market-value

Case 1

$15.90

$14.50

$14.50

Case 2

16.10

17.60

16.10

Case 3

15.90

13.75

13.75

Case 4

15.90

9.70

9.70

Case 5

$15.90

$16.40

$15.90

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Most popular questions from this chapter

Fiedler Co. follows the practice of valuing its inventory at the lower-ofcost-or-market. The following information is available from the company’s inventory records as of December 31, 2017. Item Quantity Unit Cost Replacement Cost/Unit Estimated Selling Price/Unit Completion & Disposal Cost/Unit Normal Profit Margin/Unit A 1,100 \(7.50 \)8.40 \(10.50 \)1.50 $1.80 B 800 8.20 7.90 9.40 0.90 1.20 C 1,000 5.60 5.40 7.20 1.15 0.60 D 1,000 3.80 4.20 6.30 0.80 1.50 E 1,400 6.40 6.30 6.70 0.70 1.00Instructions Greg Forda is an accounting clerk in the accounting department of Fiedler Co., and he cannot understand why the market value keeps changing from replacement cost to net realizable value to something that he cannot even figure out. Greg 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 lower-of-cost-or-market 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) Write a memo to Greg explaining what designated market value is as well as how it is computed. Use your calculations to aid in your explanation

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 costof-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?

Presented below is information related to Rembrandt Inc.’s inventory, assuming Rembrandt uses lower-of-LIFO cost-or-market. (per unit) Skis Boots Parkas Historical cost \(190.00 \)106.00 $53.00 Selling price 212.00 145.00 73.75 Cost to distribute 19.00 8.00 2.50 Current replacement cost 203.00 105.00 51.00 Normal profit margin 32.00 29.00 21.25 Determine the following: (a) the two limits to market value (i.e., the ceiling and the floor) that should be used in the lower-of cost-or-market computation for skis, (b) the cost amount that should be used in the lower-of-cost-or-market comparison of boots, and (c) the market amount that should be used to value parkas on the basis of the lower-of-cost-or-market.

All of the following are key differences between GAAP and IFRS with respect to accounting for inventories except the: (a) definition of the lower-of-cost-or-market test for inventory valuation differs between GAAP and IFRS. (b) average-cost method is prohibited under IFRS. (c) inventory basis determination for write-downs differs between GAAP and IFRS. (d) guidelines are more principles-based under IFRS than they are under GAAP.

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 revenue was $147,000. Compute ending inventory at cost using the conventional retail method
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