Solutions To CH 8 A Exercises

CHAPTER 9
Inventories: Additional Valuation Issues

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
1, 2, 3,
9, 10
1, 2, 3, 5
1. Lower-of-cost-or-market.
1, 2, 3,
4, 5, 6
1, 2, 3
1, 2, 3,
4, 5, 6
2. Inventory accounting
changes; relative sales
value method; net realizable value.
7, 8
7, 8
3. Purchase commitments.
5, 6
9, 10
4. Gross profit method.
10, 11,
12, 13
11, 12, 13,

14, 15,
16, 17
4, 5
5. Retail inventory method.
14, 15, 16
18, 19, 20,

22, 23, 26
6, 7, 8,
10, 11
6. Presentation and
analysis.
17, 18
21
19
10
22, 23
12, 13, 14
11
24, 25,
26, 27
11, 13
28
13, 14
*7. LIFO retail.

*8. Dollar-value LIFO retail.
*9. Special LIFO problems.
Concepts
for Analysis
4, 5
*This material is discussed in an Appendix to the chapter.
Copyright 2013 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only)
9-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Learning Objectives
Brief
Exercises
Questions
Exercises
Problems
1.
Describe and apply the lowerof-cost-or-market rule.
1, 2, 3, 4
1, 2, 3
1, 2, 3,
4, 5, 6
1, 2, 3,
9, 10
2.
Explain when companies value

inventories at net realizable
value.
5, 6, 7
1, 2, 3
1, 2, 3,
4, 5, 6
1, 2, 3,
9, 10
3.
Explain when companies use

the relative sales value method
to value inventories.
7, 8
4.
Discuss accounting issues

related to purchase
commitments.
5, 6
9, 10
5.
Determine ending inventory by

applying the gross profit
method.
10, 11, 12,

13
11, 12, 13,

14, 15, 16,
17
4, 5
6.

applying the retail inventory
method.
14, 15, 16
18, 19, 20
6, 7, 8
7.
Explain how to report and

analyze inventory.
17, 18
21

applying the LIFO retail
methods.
19
10, 11
22, 23, 24,

25, 26,
27, 28
11, 12,
13, 14
*8.
Concepts
for
Analysis
CA9-1,
CA9-2,
CA9-3,
CA9-5
CA9-6
CA9-4,
CA9-5
*This material is discussed in an Appendix to the chapter.
9-2
ASSIGNMENT CHARACTERISTICS TABLE

Item
Description
Level of
Difficulty
Time
(minutes)
E9-1
E9-2
E9-3
E9-4
E9-5
E9-6
E9-7
E9-8
E9-9
E9-10
E9-11
E9-12
E9-13
E9-14
E9-15
E9-16
E9-17
E9-18
E9-19
E9-20
E9-21
*E9-22
*E9-23
*E9-24
*E9-25
*E9-26
*E9-27
*E9-28
Lower-of-cost-or-market.
Lower-of-cost-or-marketjournal entries.
Lower-of-cost-or-marketvaluation account.
Lower-of-cost-or-marketerror effect.
Relative sales value method.
Relative sales value method.
Purchase commitments.
Gross profit method.
Retail inventory method.
Analysis of inventories.
Retail inventory methodconventional and LIFO.
Retail inventory methodconventional and LIFO.
Dollar-value LIFO retail.
Conventional retail and dollar-value LIFO retail.
Change to LIFO retail.
Simple
Simple
Simple
Simple
Moderate
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Moderate
Simple
Simple
Moderate
Moderate
Simple
Simple
Simple
Moderate
Moderate
Simple
Simple
Moderate
Moderate
Simple
1520
1015
1520
1015
2025
1015
1520
1217
0510
1520
813
1015
1520
1520
1015
1520
2025
2025
1217
2025
1015
2535
1520
1015
510
2025
2025
1015
P9-1
P9-2
P9-3
Entries for lower-of-cost-or-marketcost-of-goodsold and loss.
Simple
Moderate
Moderate
1015
2530
3035
Moderate
Complex
Moderate
Moderate
2030
4045
2030
2030
P9-4
P9-5
P9-6
P9-7
9-3
ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Item
P9-8
P9-9
P9-10
*P9-11
*P9-12
*P9-13
*P9-14
CA9-1
CA9-2
CA9-3
CA9-4
CA9-5
CA9-6
9-4
Level of
Difficulty
Time
(minutes)

Statement and note disclosure, LCM, and purchase
commitment.
Conventional and dollar-value LIFO retail.
Retail, LIFO retail, and inventory shortage.
Change to LIFO retail.
Change to LIFO retail; dollar-value LIFO retail.
Moderate
Moderate
2030
3040
Moderate
Moderate
Moderate
Moderate
Complex
3040
3035
3040
3040
4050
Cost determination, LCM, retail method.
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
1525
2030
1520
2530
1525
1015
Description
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 9-1
(a)
Ceiling
Floor
(b)
$106.00
(c)
$51.00
$193.00 ($212 $19)

$161.00 ($212 $19 $32)
BRIEF EXERCISE 9-2

Item
Jokers
Penguins
Riddlers
Scarecrows
Cost
$2,000
5,000
4,400
3,200
Designated
Market
$2,050
4,950
4,550
3,070
LCM
$2,000
4,950
4,400
3,070
BRIEF EXERCISE 9-3

(a)
Cost-of-goods-sold method
Cost of Goods Sold..........................................................21,000
Allowance to Reduce Inventory to Market.............
21,000*
*($286,000 $265,000)
(b)
Loss method
Loss Due to Market Decline of Inventory........................21,000
Allowance to Reduce Inventory to Market.............
21,000
9-5
BRIEF EXERCISE 9-4
Group
Number
of CDs
Sales
Price
per CD
1
2
3
100
800
100
$ 5
$10
$15
*$500/$10,000 = 5/100
Total
Sales
Price
$
500
8,000
1,500
$10,000
Relative
Sales
Price
Cost
Allocated
to CDs
Total
Cost
5/100* X $8,000 =
80/100 X $8,000 =
15/100 X $8,000 =
$ 400
6,400
1,200
$8,000
Cost
per CD
$ 4**
$ 8
$12
**$400/100 = $4
BRIEF EXERCISE 9-5

Unrealized Holding LossIncome (Purchase
Commitments)................................................................
Estimated Liability on Purchase
Commitments ($1,000,000 $950,000)...............
50,000
50,000
BRIEF EXERCISE 9-6

Purchases (Inventory)...................................................... 950,000
Estimated Liability on Purchase Commitments............. 50,000
Cash..........................................................................
1,000,000
BRIEF EXERCISE 9-7

Beginning inventory.....................................................
Purchases.....................................................................
Cost of goods available...............................................
Sales revenue...............................................................
Less gross profit (35% X 700,000)..............................
Estimated cost of goods sold.....................................
Estimated ending inventory destroyed in fire...........
9-6
$700,000
245,000
$150,000
500,000
650,000
455,000
$195,000
BRIEF EXERCISE 9-8
Beginning inventory.............................................
Net purchases.......................................................
Net markups..........................................................
Totals......................................................................
Deduct:
Net markdowns.....................................................
Sales revenue........................................................
Ending inventory at retail.....................................
Cost
$ 12,000
120,000
$132,000
Retail
$ 20,000
170,000
10,000
200,000
7,000
147,000
$ 46,000
Cost-to-retail ratio: $132,000 $200,000 = 66%

Ending inventory at lower-of cost-or-market (66% X $46,000) = $30,360
BRIEF EXERCISE 9-9
Inventory turnover:
$9,275
$1,615 + $1,620
2
= 5.73 times
Average days to sell inventory:

365 5.73 = 63.7 days
9-7
*BRIEF EXERCISE 9-10
Beginning inventory...............................................
Net purchases.........................................................
Net markups............................................................
Net markdowns.......................................................
Total (excluding beginning inventory)..................
Total (including beginning inventory)...................
Deduct: Sales revenue..........................................
Ending inventory at retail......................................
Cost
$ 12,000
120,000
120,000
$132,000
Retail
$ 20,000
170,000
10,000
(7,000)
173,000
193,000
147,000
$ 46,000
Cost-to-retail ratio: $120,000 $173,000 = 69.4%

Ending inventory at cost
$20,000 X 60% ($12,000/$20,000) = $12,000
26,000 X 69.4%
= 18,044
$46,000
$30,044
*BRIEF EXERCISE 9-11

Cost
$ 12,000
120,000
Beginning inventory...............................................
Net purchases.........................................................
Net markups............................................................
Net markdowns.......................................................
Total (excluding beginning inventory)..................
120,000
Total (including beginning inventory)................... $132,000
Deduct: Sales revenue..........................................
Ending inventory at retail......................................
9-8
Retail
$ 20,000
170,000
10,000
(7,000)
173,000
193,000
147,000
$ 46,000
*BRIEF EXERCISE 9-11 (Continued)

Cost-to-retail ratio: $120,000 $173,000 = 69.4%
Ending inventory at retail deflated to base year prices
$46,000 1.15 = $40,000
Ending inventory at cost
$20,000 X 100% X 60% = $12,000
20,000 X 115% X 69.4% = 15,962
$27,962
9-9
SOLUTIONS TO EXERCISES
EXERCISE 9-1 (1520 minutes)
Per Unit
Part No.
110
111
112
113
120
121
122
Totals
Quantity
600
1,000
500
200
400
1,600
300
Cost
$ 90
60
80
170
205
16
240
Market
$100.00
52.00
76.00
180.00
208.00
0.20
235.00
Total
Cost
$ 54,000
60,000
40,000
34,000
82,000
25,600
72,000
$367,600
Total
Market
$ 60,000
52,000
38,000
36,000
83,200
320
70,500
$340,020
Lower-ofCost-orMarket
$ 54,000
52,000
38,000
34,000
82,000
320
70,500
$330,820
(a) $330,820.
(b)
$340,020.
Item
D
E
F
G
H
I
Net
Realizable
Value
(Ceiling)
$90*
80
65
65
80
60
Net
Realizable
Value
Less
Normal
Profit
(Floor)
$70**
60
45
45
60
40
Replacement
Cost
$120
72
70
30
70
30
Designated
Market
$90
72
65
45
70
40
Cost
$75
80
80
80
50
36
LCM
$75
72
65
45
50
36
*Estimated selling price Estimated selling expense = $120 $30 = $90.

**Net realizable value Normal profit margin = $90 $20 = $70.
9-10
Item
No.
Cost
per
Unit
Replacement
Cost
Net
Realizable
Value
1320
1333
1426
1437
1510
1522
1573
1626
$3.20
2.70
4.50
3.60
2.25
3.00
1.80
4.70
$3.00
2.30
3.70
3.10
2.00
2.70
1.60
5.20
$4.15*
3.00
4.60
2.95
2.45
3.40
1.75
5.50
Net Real.
Value
Less
Normal
Profit
Designated
Market
Value
Quantity
$2.90**
2.50
3.60
2.05
1.85
2.90
1.25
4.50
$3.00
2.50
3.70
2.95
2.00
2.90
1.60
5.20
1,200
900
800
1,000
700
500
3,000
1,000
Final
Inventory
Value
$ 3,600
2,250
2,960
2,950
1,400
1,450
4,800
4,700***
$24,110
*$4.50 $.35 = $4.15.

**$4.15 $1.25 = $2.90.
***Cost is used because it is lower than designated market value.
(a)
(b)
12/31/13
Cost of Goods Sold..........................................................

19,000
Inventory...................................................................
19,000
12/31/13
Cost of Goods Sold..........................................................

15,000
Inventory...................................................................
15,000
12/31/14
Loss Due to Market Decline of

Inventory.........................................................................
19,000
Allowance to Reduce Inventory
to Market................................................................
19,000
12/31/14

to Market.........................................................................
4,000*
Loss Due to Market Decline
of Inventory...........................................................4,000
9-11
EXERCISE 9-4 (Continued)

*Cost of inventory at 12/31/13
Lower of cost or market at 12/31/13
Allowance amount needed to reduce inventory
to market (a)
$346,000
(327,000)
Cost of inventory at 12/31/14

Lower of cost or market at 12/31/14
Allowance amount needed to reduce inventory
to market (b)
$410,000
(395,000)
Recovery of previously recognized loss
(c)
$ 19,000
$ 15,000
= (a) (b)
= $19,000 $15,000
= $4,000.
Both methods of recording lower-of-cost-or-market adjustments have

the same effect on net income.

(a)
Sales revenue
Cost of goods sold
Inventory, beginning
Purchases
Cost of goods available
Inventory, ending
Cost of goods sold
Gross profit
Gain (loss) due to market
fluctuations of inventory*
9-12
February
$29,000
March
$35,000
April
$40,000
15,000
20,000
35,000
15,100
19,900
9,100
15,100
24,000
39,100
17,000
22,100
12,900
17,000
26,500
43,500
13,000
30,500
9,500
(2,000)
$ 7,100
1,100
$14,000
700
$10,200

*
Jan. 31
Feb. 28
Mar. 31
Apr. 30
Inventory at cost
Inventory at the lower-of-costor-market
Allowance amount needed to
reduce inventory to market
Gain (loss) due to market
fluctuations of inventory**
$15,000
$15,100
$17,000
$13,000
14,500
12,600
15,600
12,300
$ 2,500
$ 1,400
700
$ (2,000)
$ 1,100
700
500
**$500 $2,500 = $(2,000)

$2,500 $1,400 = $1,100
$1,400 $700 = $700
(b)
Jan. 31
Loss Due to Market Decline of Inventory........................

500
to Market................................................................ 500
Feb. 28
Loss Due to Market Decline of Inventory........................

2,000
to Market................................................................ 2,000
Mar. 31
Allowance to Reduce Inventory to Market........................

1,100
Recovery of Loss Due to Market
Decline of Inventory............................................. 1,100
Apr. 30
Allowance to Reduce Inventory to Market........................

700
Recovery of Loss Due to Market
Decline of Inventory............................................. 700
9-13
EXERCISE 9-6
Net realizable value (ceiling)
Net realizable value less normal profit (floor)
Replacement cost
Designated market
Cost
Lower-of-cost-or-market
$45 $14 = $31

$31 $ 9 = $22
$35
$31 Ceiling
$40
$31
$35 figure used $31 correct value per unit = $4 per unit.
$4 X 1,000 units = $4,000.
If ending inventory is overstated, net income will be overstated.
If beginning inventory is overstated, net income will be understated.
Therefore, net income for 2013 was overstated by $4,000 and net income for
2014 was understated by $4,000.
9-14
2,400
17
17
15 2 =
15
8 7=
* 49 5 =
15
27
Number
Sold*
of Lots
4,000
15
$127,800
40,800
60,000
$ 27,000
SalesTotal
Price
25,200
1,680
32,000
36,000
$56,000 $80,000
22,400
$ 8,400 $12,000
$2,100
2,800
Sold
Cost of
Sales
Lots
Lot
Cost
Per
18,200
$ 5,800
Operating expenses
Net income
$24,000
10,800
9,600
Gross
Profit
$ 3,600
24,000
Gross profit
Cost of goods sold (see schedule) 56,000
$80,000
X
$60,000/$127,800 89,460
X
$40,800/$127,800 89,460
X
$27,000/$127,800
$89,460
Relative
Price Sales Cost
Total
Sales revenue (see schedule)
$3,000
Price Per
Sales
Lot
Lots
No. of
$89,460
28,560
42,000
$18,900
toAllocated
Lots
Cost
$2,100
1,680
2,800
No.
(Cost
Cost
of Allocated/
Lots)
Per Lot
9-15
Group 3
Total
Group 2
Group 1
Group 3
Group 2
Group 1
9-16
50
700
120
100
200
31.50
50.40
$56.70
Cost
Chair
per
80
300
Number of
Chairs Sold
$90
Price
Lot Sales
per
400
Chairs
No. of
$20,160
3,780
5,040
Cost of
Sold
Chairs
$11,340
$95,000
35,000
24,000
$36,000
Price
Sales
Total
6,000
$32,000
8,000
$18,000
Sales
$35,000/$95,000
$24,000/$95,000
$36,000/$95,000
X
$11,840
2,220
2,960
$ 6,660
Profit
Gross
59,850
59,850
$59,850
Relative
Price Sales Cost
Total
$59,850
22,050
15,120
$22,680
to Allocated
Chairs
Cost
31.50
50.40
$56.70
Chair
Cost per
9-17
9-18
(700 120) X $31.50 = $18,270
Inventory of straight chairs
Straight chairs
Armchairs
Lounge chairs
Chairs
Straight chairs
Armchairs
Lounge chairs
Chairs

Unrealized Holding Gain or LossIncome
(Purchase Commitments).............................................35,000
Commitments ($400,000 $365,000)..................
35,000

(a)
If the commitment is material in amount, there should be a footnote in

the balance sheet stating the nature and extent of the commitment.
The footnote may also disclose the market price of the materials. The
excess of market price over contracted price is a gain contingency
which per FASB Statement No. 5 cannot be recognized in the
accounts until it is realized.
(b)
The drop in the market price of the commitment should be charged to

operations in the current year if it is material in amount. The following
entry would be made:
Unrealized Holding Gain or LossIncome
(Purchase Commitments).............................................
10,800
Commitments [$36,000 X ($3.00 $2.70)]...........
10,800
The entry is made because a loss in utility has occurred during the
period in which the market decline took place. The account credited in
the above entry should be included among the current liabilities on
the balance sheet, with an appropriate footnote indicating the nature
and extent of the commitment. This liability indicates the minimum
obligation on the commitment contract at the present timethe
amount that would have to be forfeited in case of breach of contract.
(c)
Assuming the $10,800 market decline entry was made on December

31, 2014, as indicated in (b), the entry when the materials are received
in January 2015 would be:
Raw Materials....................................................................
97,200
Estimated Liability on Purchase Commitments.............
10,800
Accounts Payable....................................................
108,000
9-19
9-20

This entry records the raw materials at the actual cost, eliminates the
$10,800 liability set up at December 31, 2014, and records the contractual liability for the purchase. This permits operations to be charged
this year with the $97,200, the other $10,800 of the cost having been
charged to operations in 2014.
1.
20%
100% + 20%
= 16.67% OR 16 2/3%.
2.
25%
100% + 25%
= 20%.
3.
33 1/3%
= 25%.
100% + 33 1/3%
4.
50%
100% + 50%
= 33.33% OR 33 1/3%.

(a)
Inventory, May 1 (at cost)

Purchases (at cost)
Purchase discounts
Freight-in
Goods available (at cost)
Sales revenue (at selling price)
Sales returns (at selling price)
Net sales (at selling price)
Less: Gross profit (30% of $930,000)
$1,000,000
(70,000)
930,000
279,000
$160,000
640,000
(12,000)
30,000
818,000
9-21
Net sales (at cost)

Approximate inventory, May 31 (at cost)
9-22
651,000
$167,000

(b) Gross profit as a percent of sales must be computed:
30%
100% + 30%
= 23.08% of sales.
Inventory, May 1 (at cost)

Purchases (at cost)
Purchase discounts
Freight-in
$1,000,000
Sales returns (at selling price)
(70,000)
Net sales (at selling price)
930,000
Less: Gross profit (23.08% of $930,000)
214,644
Net sales (at cost)
Approximate inventory, May 31 (at cost)
$160,000
640,000
(12,000)
30,000
818,000
715,356
$102,644

(a)
Merchandise on hand, January 1

Purchases
Less: Purchase returns and allowances
Freight-in
Total merchandise available (at cost)
Cost of goods sold*
Ending inventory
Less: Undamaged goods
Estimated fire loss
*Gross profit =
$ 38,000
72,000
(2,400)
3,400
111,000
75,000
36,000
10,900
$ 25,100
33 1/3%
= 25% of sales.
100% + 33 1/3%
Cost of goods sold = 75% of sales of $100,000 = $75,000.
9-23

(b)
Cost of goods sold = 66 2/3% of sales of $100,000 = $66,667

Total merchandise available (at cost)
[$111,000 (as computed above) $66,667]
Less: Undamaged goods
Estimated fire loss
$44,333
10,900
$33,433
EXERCISE 9-14
Beginning inventory
Purchases
Purchase returns
Sales revenue
Sales returns
Net sales
Less: Gross profit (40% X $626,000)
Estimated ending inventory (unadjusted for
damage)
Less: Goods on handundamaged (at cost)
$21,000 X (1 40%)
Less: Goods on handdamaged (at net
realizable value)
Fire loss on inventory
9-24
$170,000
390,000
560,000
(30,000)
530,000
$650,000
(24,000)
626,000
(250,400)
375,600
154,400
(12,600)
(5,300)
$136,500

Beginning inventory (at cost)
Purchases (at cost)
Less sales returns
Net sales
Less: Gross profit* (2/7 of $112,000)
Net sales (at cost)
Estimated inventory (at cost)
Less: Goods on hand ($30,500 $6,000)
$116,000
4,000
112,000
32,000
Claim against insurance company
$ 38,000
85,000
123,000
80,000
43,000
24,500
$ 18,500
40%
= 2/7 of selling price
100% + 40%
*Computation of gross profit:
Note: Depending on details of the consignment agreement and Duncans

insurance policy, the consigned goods might be considered owned for
insurance purposes.
Inventory 1/1/14 (cost)

Purchases to 8/18/14 (cost)
Cost of goods available
Deduct cost of goods sold*
Inventory 8/18/14
Lumber
Millwork
Hardware
$ 250,000
1,500,000
1,750,000
1,664,000
$ 86,000
$ 90,000
375,000
465,000
410,000
$ 55,000
$ 45,000
160,000
205,000
150,000
$ 55,000
*(See computations on next page)
9-25

Computation for cost of goods sold:*
Lumber:
$2,080,000
= $1,664,000
1.25
Millwork:
$533,000
1.30
= $410,000
Hardware:
$210,000
1.40
= $150,000
*Alternative computation for cost of goods sold:

Markup on selling price:
Cost of goods sold:
Lumber:
25%
= 20% or 1/5
100% + 25%
$2,080,000 X 80% = $1,664,000
Millwork:
30%
= 3/13
100% + 30%
$533,000 X 10/13 = $410,000
Hardware:
40%
= 2/7
100% + 40%
$210,000 X 5/7 = $150,000
9-26

Ending inventory:
(a)
Gross profit is 45% of sales

Total goods available for sale (at cost)
Sales (at selling price)
Less: Gross profit (45% of sales)
Sales (at cost)
Ending inventory (at cost)
(b)
1,375,000
$ 725,000
Gross profit is 60% of cost

60%
100% + 60%
= 37.5% markup on selling price

Less: Gross profit (37.5% of sales)
Sales (at cost)
(c)
$2,500,000
1,125,000
$2,100,000
$2,500,000
937,500
$2,100,000
1,562,500
$ 537,500
Gross profit is 35% of sales

Sales (at cost)
$2,500,000
875,000
$2,100,000
1,625,000
$ 475,000
9-27

(d)
Gross profit is 25% of cost

25%
100% + 25%
= 20% markup on selling price

Sales (at cost)
$2,500,000
500,000
$2,100,000
2,000,000
$ 100,000

(a)
Beginning inventory
Purchases
Net markups
Totals
Net markdowns
Sales price of goods available
Deduct: Sales revenue
Ending inventory at retail
(b)
9-28
1.
2.
3.
4.
Cost
$ 58,000
122,000
_______
$180,000
Retail
$100,000
200,000
10,345
310,345
(26,135)
284,210
186,000
$ 98,210
$180,000 $300,000 = 60%

$180,000 $273,865 = 65.73%
$180,000 $310,345 = 58%
$180,000 $284,210 = 63.33%

(c)
1.
2.
3.
Method 3.
Method 3.
Method 3.
(d)
58% X $98,210 = $56,962
(e)
$180,000 $56,962 = $123,038
(f)
$186,000 $123,038 = $62,962

Beginning inventory
Purchases
Totals
Add: Net markups
Markups
Markup cancellations
Totals
Cost
$ 200,000
1,375,000
1,575,000
_________
$1,575,000
Deduct: Net markdowns

Markdowns
Markdowns cancellations
Deduct: Sales revenue
Cost-to-retail ratio =
$1,575,000
$2,500,000
Retail
$ 280,000
2,140,000
2,420,000
$95,000
(15,000)
35,000
(5,000)
80,000
2,500,000
30,000
2,470,000
2,200,000
$ 270,000
= 63%
Ending inventory at cost = 63% X $270,000 = $170,100
9-29

Cost
$30,000
48,000
(2,000)
2,400
78,400
Beginning inventory
Purchases
Purchase returns
Freight on purchases
Totals
Add: Net markups
Markups
Markup cancellations
Net markups
Totals
Retail
$ 46,500
88,000
(3,000)
_______
131,500
$10,000
(1,500)
_______
$78,400

Markdowns
Markdowns cancellations
Net markdowns
Deduct: Net sales ($99,000 $2,000)
Ending inventory, at retail
$78,400
$140,000
9,300
(2,800)
8,500
140,000
6,500
133,500
97,000
$ 36,500
= 56%

(a)
Inventory turnover:
2012
$10,436
= 5.7 times
$1,870 + $1,803
2
(b)
9-30
Average days to sell inventory:

2012
365 5.7 = 64 days
2011
$9,390
$1,803 + $1,598
2
= 5.5 times
2011
365 5.5 = 66 days
*EXERCISE 9-22 (2535 minutes)

(a)
Conventional Retail Method
Cost
$ 38,100
130,900
169,000
________
$169,000
Inventory, January 1, 2013

Purchases (net)
Add: Net markups
Totals
Deduct: Sales (net)
$169,000
$260,000
Retail
$ 60,000
178,000
238,000
22,000
260,000
13,000
247,000
167,000
$ 80,000
= 65%

(b)
LIFO Retail Method

Net purchases
Net markups
Net markdowns
Total (excluding beginning inventory)
Total (including beginning inventory)
Deduct sales (net)
$130,900
$187,000
Cost
$ 38,100
130,900
130,900
$169,000
Retail
$ 60,000
178,000
22,000
(13,000)
187,000
247,000
167,000
$ 80,000
= 70%
9-31
*EXERCISE 9-22 (Continued)

Computation of ending inventory at LIFO cost, 2014:
Ending Inventory
at Retail Prices
Layers at
Retail Prices
$80,000
2013 $60,000
2014 20,000
*$38,100
$60,000
Cost to Retail
(Percentage)
Ending Inventory
at LIFO Cost
63.5%*
70.0%
$38,100
14,000
$52,100
X
X
(prior years cost to retail)

(a)
Cost
$14,000
58,800
7,500

Net purchases
Freight-in
Net markups
Totals
Sales revenue
Net markdowns
Estimated theft
Cost-to-retail ratio:
$80,300
$110,000
$80,300
Retail
$ 20,000
81,000
9,000
110,000
(80,000)
(1,600)
(2,000)
$ 26,400
= 73%
Ending inventory at lower-of-average-cost-or-market = $26,400 X 73%

= $19,272
9-32

(b)
Cost
$58,800
7,500
Purchases
Freight-in
Net markups
Net markdowns
Totals
Cost-to-retail ratio:
$66,300
$66,300
$88,400
Retail
$81,000
9,000
(1,600)
$88,400
= 75%
The increment at retail is $26,400 $20,000 = $6,400.

The increment is costed at 75% X $6,400 = $4,800.
Ending inventory at LIFO retail:
Beginning inventory, 2014
Increment
Ending inventory, 2014
Cost
$14,000
4,800
$18,800
Retail
$20,000
6,400
$26,400

(a)
Cost-to-retail ratiobeginning inventory:
$216,000
= 72%
$300,000
*($294,300 1.09) X 72% = $194,400

*Since the above computation reveals that the inventory quantity has
declined below the beginning level, it is necessary to convert the
ending inventory to beginning-of-the-year prices (by dividing by 1.09)
and then multiply it by the beginning cost-to-retail ratio (72%).
9-33

(b)
Ending inventory at retail prices deflated $365,150 1.09

Beginning inventory at beginning-of-year prices
Inventory increase in terms of beginning-of-year dollars
$335,000
300,000
$ 35,000
Beginning inventory (at cost)

Additional layer, $35,000 X 1.09 X 76%*
$216,000
28,994
$244,994
*($364,800 $480,000)
Ending inventory at retail (deflated) $100,100 1.10
Beginning inventory at retail
Increment at retail
Ending inventory on LIFO basis
First layer
Second layer ($16,500 X 1.10 X 60%)
9-34
$91,000
74,500
$16,500
Cost
$36,000
10,890
$46,890

(a)
Beginning inventory
Net purchases
Net markups
Totals
Net markdowns
Sales revenue
Cost
$ 30,100
108,500
________
$138,600
Cost-retail ratio = 66% ($138,600/$210,000)

Ending inventory at cost ($78,100 X 66%)
(b)
Cost
$ 30,100
108,500
Beginning inventory
Net purchases
Net markups
Net markdowns
Total (excluding beginning inventory)
108,500
Total (including beginning inventory)
$138,600
Sales revenue
Ending inventory at retail (current)
Ending inventory at retail (base year)
($78,100 1.10)
Cost-to-retail ratio for new layer:
$108,500/$155,000 = 70%
Layers:
Base layer
$50,000 X 1.00 X 60.2%* =
New layer
($71,000 $50,000) X 1.10 X 70% =
*($30,100/$50,000)
(c)
Cost of goods available for sale

Ending inventory at cost, from (b)
Cost of goods sold
Retail
$ 50,000
150,000
10,000
210,000
(5,000)
(126,900)
$ 78,100
$ 51,546
Retail
$ 50,000
150,000
10,000
(5,000)
155,000
205,000
(126,900)
78,100
$ 71,000
$ 30,100
16,170
$ 46,270
$138,600
46,270
$ 92,330
9-35

2013
Restate to base-year retail ($118,720 1.06)
$112,000
Layers: 1. $100,000 X 1.00 X 54%* =

2. $ 12,000 X 1.06 X 57% =
Ending inventory
$ 54,000
7,250
$ 61,250
*$54,000 $100,000
2014
2015
2016
$125,000
Layers: 1. $100,000 X 1.00 X 54% =

2. $ 12,000 X 1.06 X 57% =
3. $ 13,000 X 1.11 X 60% =
Ending inventory
$ 54,000
7,250
8,658
$ 69,908
$109,000
Layers: 1. $100,000 X 1.00 X 54% =

2. $ 9,000 X 1.06 X 57% =
Ending inventory
$ 54,000
5,438
$ 59,438
$130,000
Layers: 1. $100,000 X 1.00 X 54% =

2. $ 9,000 X 1.06 X 57% =
3. $ 21,000 X 1.25 X 58% =
Ending inventory
$ 54,000
5,438
15,225
$ 74,663

Inventory (beginning)
Adjustment to Record Inventory at Cost*
($212,600 $205,000)
7,600
7,600
*Note: This account is an income statement account showing the effect of

changing from a lower-of-cost-or-market approach to a straight cost basis.
9-36
9-37

Solutions To CH 8 A Exercises

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Solutions To CH 8 A Exercises

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CHAPTER 9

Inventories: Additional Valuation Issues

4. Gross profit method.

11, 12, 13,

5. Retail inventory method.

18, 19, 20,

*7. LIFO retail.

*This material is discussed in an Appendix to the chapter.

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Describe and apply the lowerof-cost-or-market rule.

Explain when companies value

Explain when companies use

Discuss accounting issues

Determine ending inventory by

10, 11, 12,

11, 12, 13,

Determine ending inventory by

Explain how to report and

Determine ending inventory by

22, 23, 24,

*This material is discussed in an Appendix to the chapter.

ASSIGNMENT CHARACTERISTICS TABLE

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Retail inventory method.

SOLUTIONS TO BRIEF EXERCISES

$193.00 ($212 $19)

BRIEF EXERCISE 9-2

BRIEF EXERCISE 9-3

BRIEF EXERCISE 9-4

BRIEF EXERCISE 9-5

BRIEF EXERCISE 9-6

BRIEF EXERCISE 9-7

BRIEF EXERCISE 9-8

Cost-to-retail ratio: $132,000 $200,000 = 66%

Average days to sell inventory:

*BRIEF EXERCISE 9-10

Cost-to-retail ratio: $120,000 $173,000 = 69.4%

*BRIEF EXERCISE 9-11

*BRIEF EXERCISE 9-11 (Continued)

EXERCISE 9-2 (1015 minutes)

*Estimated selling price Estimated selling expense = $120 $30 = $90.

EXERCISE 9-3 (1520 minutes)

*$4.50 $.35 = $4.15.

Cost of Goods Sold..........................................................

Cost of Goods Sold..........................................................

Loss Due to Market Decline of

Allowance to Reduce Inventory

EXERCISE 9-4 (Continued)

Cost of inventory at 12/31/14

Recovery of previously recognized loss

Both methods of recording lower-of-cost-or-market adjustments have

EXERCISE 9-5 (2025 minutes)

EXERCISE 9-5 (Continued)

**$500 $2,500 = $(2,000)

Loss Due to Market Decline of Inventory........................

Loss Due to Market Decline of Inventory........................

Allowance to Reduce Inventory to Market........................

Allowance to Reduce Inventory to Market........................

$45 $14 = $31

Cost of goods sold (see schedule) 56,000

Sales revenue (see schedule)

EXERCISE 9-7 (1520 minutes)

EXERCISE 9-8 (1217 minutes)