Question
(1) Lower of Cost or Market Stiles Corporation uses the lower of cost or market rule for each of two products in its ending inventory.
(1) Lower of Cost or Market
Stiles Corporation uses the lower of cost or market rule for each of two products in its ending inventory. A profit margin of 30% on the selling price is considered normal for each product. Specific data for each product are as follows:
| Product A | Product B | |
|---|---|---|
| Historical cost | $80 | $96 |
| Replacement cost | 70 | 98 |
| Estimated cost of disposal | 32 | 30 |
| Estimated selling price | 150 | 120 |
Required:Assume that Stiles uses the FIFO inventory method. What is the correct inventory value for each product?
| Product A | $ per unit |
| Product B | $ per unit |
Assume that Stiles uses the LIFO inventory method. What is the correct inventory value for each product?
| Product A | $ per unit |
| Product B | $ per unit |
For Product A, the use of a constraint prevents an excessive write-down of inventory. If the constraint were not imposed, an excessive loss would be recognized in the period of the write-down followed by an excessive profit in future periods. Therefore, the imposition of the constraint prevents the profit distortion that would occur by an understatement of inventory and overstatement of losses in the current period.
For Product B, the use of a " " constraint prevents inventory from being valued at an amount that exceeds the amount the company could realize by seliling it.
(2) Lower of Cost or Market
The following information for Tuell Company is available:
| Case | |||||
| 1 | 2 | 3 | 4 | 5 | |
| Cost | $5.00 | $5.00 | $5.00 | $5.00 | $5.00 |
| Net realizable value | 5.10 | 5.50 | 4.80 | 4.20 | 4.70 |
| Net realizable value less normal profit | 4.80 | 5.30 | 4.70 | 4.00 | 4.60 |
| Replacement cost | 5.30 | 5.20 | 4.60 | 4.10 | 4.80 |
Required:
| 1. | Assume Tuell uses the LIFO inventory method. What is the correct inventory value in each of the preceding situations under U.S. GAAP? If required, round your answers to the nearest cent. |
| Case | Inventory value | |
| 1 | $ | |
| 2 | $ | |
| 3 | $ | |
| 4 | $ | |
| 5 | $ | |
| 2. | Assume Tuell uses the average cost inventory method. What is the correct inventory value in each of the preceding situations under U.S. GAAP? If required, round your answers to the nearest cent. |
| Case | Inventory value | |
| 1 | $ | |
| 2 | $ | |
| 3 | $ | |
| 4 | $ | |
| 5 | $ | |
| 3. | What is the correct inventory value in each of the preceding situations if Tuell uses IFRS? If required, round your answers to the nearest cent. |
| Case | Inventory value | |
| 1 | $ | |
| 2 | $ | |
| 3 | $ | |
| 4 | $ | |
| 5 | $ | |
(3) Lower of Cost or Market
The following information is taken from Aden Company's records:
| Product | Group | Units | Cost/Unit | Market/Unit |
|---|---|---|---|---|
| A | 1 | 600 | $1.00 | $0.80 |
| B | 1 | 250 | 1.50 | 1.55 |
| C | 2 | 150 | 5.00 | 5.25 |
| D | 2 | 100 | 6.50 | 6.40 |
| E | 3 | 80 | 25.00 | 24.60 |
Required:
What is the correct inventory value if the company applies the lower of cost or market to each of the following? If required, round your answers to the nearest cent.
Individual items
| Product A | $ | |
| Product B | ||
| Product C | ||
| Product D | ||
| Product E | ||
| Total inventory value | $ |
Groups of items
| Group 1 | $ | |
| Group 2 | ||
| Group 3 | ||
| Total inventory value | $ |
The inventory as a whole
| Total inventory value | $ |
(4) Gross Profit Method: Estimation of Fire Loss
On September 28, 2016, a fire destroyed the entire merchandise inventory of Carroll Corporation. The following information is available:
| Sales, January 1September 28, 2016 | $560,000 |
| Inventory, January 1, 2016 | $170,000 |
| Merchandise purchases, January 1September 28, 2016 (including $60,000 of goods in transit on September 28, 2016, shipped FOB shipping point) | $472,000 |
| Markup percentage on cost | 25% |
Required:
What is the estimated inventory on September 28, 2016, immediately prior to the fire?
| CARROLL CORPORATION | |
| Calculation of estimated inventory on | |
| September 28, 2016 (prior to the fire) | |
| $ | |
| $ | |
| $ | |
(5) Retail Inventory Method
Harmes Company is a clothing store that uses the retail inventory method. The following information relates to its operations during 2016:
| Cost | Retail | |
|---|---|---|
| Inventory, January 1 | $28,400 | $40,200 |
| Purchases | 65,200 | 100,000 |
| Markups (net) | 1,900 | |
| Markdowns (net) | 400 | |
| Sales | 80,000 |
Required:
1. Compute the ending inventory by the retail inventory method for the following cost flow assumption: FIFO. Round the cost-to-retail ratio to three decimal places. If necessary, round dollar amounts to the nearest whole dollar.
| HARMES COMPANY | ||
| Calculation of ending inventory by retail inventory method | ||
| FIFO 2016 | ||
| Cost | Retail | |
| $ | $ | |
| $ | $ | |
| $ | $ | |
| $ | ||
| $ | ||
2. Compute the ending inventory by the retail inventory method for the following cost flow assumption: Average cost. Round the cost-to-retail ratio to three decimal places. If necessary, round dollar amounts to the nearest whole dollar.
| HARMES COMPANY | ||
| Calculation of ending inventory by retail inventory method | ||
| Average Cost 2016 | ||
| Cost | Retail | |
| $ | $ | |
| $ | $ | |
| $ | ||
| $ | ||
3. Compute the ending inventory by the retail inventory method for the following cost flow assumption: LIFO. Round the cost-to-retail ratio to three decimal places. If necessary, round dollar amounts to the nearest whole dollar.
| HARMES COMPANY | ||
| Calculation of ending inventory by retail inventory method | ||
| LIFO 2016 | ||
| Cost | Retail | |
| $ | $ | |
| $ | ||
| $ | $ | |
| $ | ||
| Ending inventory at LIFO cost | ||
| Beginning layer (as stated in data) | $ | |
| New layer | ||
| Total | $ | |
4. Compute the ending inventory by the retail inventory method for the following cost flow assumption: Lower of cost or market (based on average cost). Round the cost-to-retail ratio to three decimal places. If necessary, round dollar amounts to the nearest whole dollar.
| HARMES COMPANY | ||
| Calculation of ending inventory by retail inventory method | ||
| Lower of Cost or Market (based on average cost) 2016 | ||
| Cost | Retail | |
| $ | $ | |
| $ | $ | |
| $ | ||
| $ | ||
(6) Retail Inventory Method
The following data were available from Hegge Department Stores records for the year ended December 31, 2016:
| At Cost | At Retail | |
|---|---|---|
| Merchandise inventory, January 1, 2016 | $90,000 | $130,000 |
| Purchases | 330,000 | 460,000 |
| Markups | 10,000 | |
| Markdowns | 40,000 | |
| Sales | 480,000 |
Required:
Using the retail method, what is the estimate of the merchandise inventory at December 31, 2016, valued at the lower of cost or market? Round the cost-to-retail ratio to three decimal places.
| HEGGE DEPARTMENT STORE | ||
| Calculation of ending inventory by retail inventory method (Lower of cost or market ) | ||
| For the year ended December 31, 2016 | ||
| Cost | Retail | |
| Beginning inventory | $ | $ |
| Purchases | ||
| Add: Markups | ||
| $ | $ | |
| Less: Markdowns | ||
| Less: Sales | ||
| Ending inventory at retail | $ | |
| Ending inventory at LCM | $ | |
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Fundamentals of Financial Management
Authors: Eugene F. Brigham, Joel F. Houston
12th edition
978-0324597714, 324597711, 324597703, 978-8131518571, 8131518574, 978-0324597707
