Exam 8: Inventories: Special Valuation Issues

Exhibit 8-3 The J. Love Company uses a periodic inventory accounting system and values its inventory by using the lower of cost or market rule. The allowance method is used in applying the lower of cost or market rule. The company adjusts and closes its books annually on December 31. Below are the cost and market values of the company's year-end inventories for a three-year period: \ 70,000 46,000 58,000 \ 70,000 56,000 64,000 December 31,2014 December 31, 2015 December31,2016 -Refer to Exhibit 8-3. Which of the following journal entries would be correct as of December 31, 2015, to apply the lower of cost or market rule to the valuation of inventory?

Leslie, Ltd. used the LIFO retail inventory method to determine its ending inventory. The accounting records for the company contained the following relevant information: \ 79,000 91,000 2500 5,000 4,000 \4 8,000 12,000 Net purchases Sales Begining inventory Net markups Net markdowns What is the cost of the ending inventory?

The most common approach to implementing the lower of cost or market rule for inventory valuation is to apply it

Reporting inventory at the lower of cost or market provides a representationally faithful value of inventory therefore the application of the lower of cost or market rule is consistent with the materiality principle.

Which one of the following statements is true with regard to the lower of cost or market rule?

A purchase on credit is omitted from the purchases account, but ending inventory is correct. What is the effect of this error on the balance sheet for the current year? What is the effect on the income statement for the current year?

When comparing the lower of cost to market

For valuation of inventory, the lower of cost or market rule may be applied to

The Peter Park Company began operations in early 2013. At December 31, 2013, the company's ending inventory's cost was $12,950. The market value of the inventory at this date was $11,800. Peterson values its inventory at lower of cost or market applied on an individual item basis and uses a perpetual inventory system. Below is information relating to Peter's inventory at December 31, 2014: Required: a.Assuming that the company uses the allowance method, prepare the required entry at December 31, 2013, to record the inventory at lower of cost or market. b.Prepare a schedule to calculate the inventory's value as of December 31, 2014, using the lower of cost or market method. The schedule should contain the following column headings: Item, Upper Constraint, Lower Constraint, Applicable Unit Inventory Value, Number of Units, and Total Inventory Value. c.Prepare the required entry at December 31, 2014, to record the inventory at lower of cost or market. Assume the allowance method is used.

The accountant for Frieda Company did not record a purchase of merchandise on credit or include the items in the ending inventory. Assuming a periodic inventory system, the effect of these omissions on assets, liabilities, and retained earnings would be

Information: Required: Assuming that no corrections were made in any year, compute the correct income for each of the three years.

The accountant for Suzanne Company made the following errors related to inventory in 2015: 1.The beginning inventory for 2014 was understated by $1,350 due to an error in the physical count. 2.A $1,500 purchase of merchandise on credit was not recorded or included in ending inventory. Assuming a periodic inventory system, how would Sue's cost of goods sold, gross profit, and net income be affected in 2015 by these errors?

Caroline's Music Store uses the average cost retail inventory method to determine its ending inventory. The accounting records for the current year for Caroline's contained the following information: \ 137,750 \ 108,000 Purchases 34,000 28,000 Beginning inventory 156,900 Sales 21,500 Net markups 7,500 Net markdowns 14,500 Employee discounts What is the cost-to-retail percentage to be used for ending inventory calculations?

When using the cost-to-retail ratio, net markups and markdowns are

Which one of the following statements regarding the gross profit method is true?

Exhibit 8-2 The Dormer Company uses the gross profit method to estimate its inventory in interim financial statements. The markup on cost is 50%. The following information is available: \ 12,500 January 1, 2014, inventory balance 25,000 Purchases 24,000 Sales during January -Refer to Exhibit 8-2. The estimated cost of goods sold at January 31, 2014, is

Given the following information for the Lawrence Company: Required: Determine the lower of cost or market for each inventory item.

If the net markdowns are excluded from the calculation of the cost-to-retail ratio in the retail inventory method, the ending inventory's valuation is lower because of which of the following effects on the cost-to-retail ratio?

Guinea, Inc. adopted the dollar-value LIFO retail inventory method on January 1, 2013, when the price index was 100. The following information was taken from company records on December 31, 2013, when the price index was 110. Required: Compute the cost of the December 31, 2013, inventory. (Round off calculations to the nearest dollar.)

As a result of taking a physical inventory count on December 31, 20104 the Cookie Company inventory was determined to be $425,000. The auditors for Cookie suspected an inventory shortage and used the gross profit method to estimate the ending inventory. The accounting records for the company contained the following information: \ 330,000 Inventory (1/1/14) 1,770,000 Purchases (2014) 2,200,000 Sales (2014) 100,000 Sales returns (2014) 25\% of sales Gross profit ratio Using the gross profit method, what did the auditors estimate as the amount of the inventory shortage at December 31, 2014?