Valuing Inventory and Recording Entries Using Relative Sales Value Method

Arizona Developers purchased for cash and subdivided a tract of land that cost $990,000. The subdivisions were divided on the following basis.

• 10% used for streets, alleys, and parks
• 50% divided into 100 lots selling at $4,000 each
• 30% divided into 200 lots selling at $3,000 each
• 10% divided into 100 lots selling at $2,000 each

a. Prepare the entry for the purchase of the lots. Use the relative sales value method to allocate the total cost of $990,000 to the three categories of lots. Assume a perpetual inventory system.

Account Name		Dr.	Cr.
	InventoryLot Category 1	Answer	Answer
	InventoryLot Category 2	Answer	Answer
	InventoryLot Category 3	Answer	Answer
	AnswerCashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained EarningsPrior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A	Answer	Answer

b. During the final month of the year, the paving was completed (included in the $990,000 cost) and several sales occurred. Inventory remaining at the first year-end was: 20 of the $4,000 lots; 50 of the $3,000 lots; and 10 of the $2,000 lots.

	InventoryLot Category 1	Answer
	InventoryLot Category 2	Answer
	InventoryLot Category 3	Answer
	Total	Answer

1. Compute the valuation of inventory at the first year-end.
3. Prepare the entry for sales and cost of goods sold for each category of lots 1, 2 and 3 separately. Assume cash sales.

Account Name	Dr.	Cr.
Cash	Answer	Answer
AnswerCashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained EarningsPrior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A	Answer	Answer
AnswerCashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained EarningsPrior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A	Answer	Answer
Inventory	Answer	Answer
To record sale of lots in category 1
Cash	Answer	Answer
AnswerCashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained EarningsPrior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A	Answer	Answer
AnswerCashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained EarningsPrior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A	Answer	Answer
Inventory	Answer	Answer
To record sale of lots in category 2
Cash	Answer	Answer
AnswerCashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained EarningsPrior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A	Answer	Answer
AnswerCashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained EarningsPrior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A	Answer	Answer
Inventory	Answer	Answer
To record sale of lots in category 3