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

(a)

$334,300.

(b)

$340,500

Cost
$ 95
60
80
170
205
16
240

Market
$100.00
52.00
76.00
180.00
208.00
0.50
235.00

Total
Cost
$ 57,000
60,000
40,000
34,000
82,000
25,600
72,000
$370,600

Total
Market
$ 60,000
52,000
38,000
36,000
83,200
800
70,500
$340,500

Lower-ofCost-orMarket
$ 57,000
52,000
38,000
34,000
82,000
800
70,500
$334,300

EXERCISE 9-4 (1015 minutes)

(a)

12/31/10

12/31/11

(b)

12/31/10

12/31/11

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

Inventory ......................................

24,000

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

Inventory ......................................

20,000

Loss Due to Market Decline of

Inventory ............................................
Allowance to Reduce Inventory
to Market ...................................
Allowance to Reduce Inventory
to Market ............................................
Recovery of Loss Due to
Market Decline of Inventory .....

20,000

24,000
24,000

4,000*
4,000

*Cost of inventory at 12/31/10 ....................................

Lower-of-cost-or-market at 12/31/10 .......................
Allowance amount needed to reduce inventory
to market (a) ...........................................................

$346,000
(322,000)

Cost of inventory at 12/31/11 ...................................

Lower-of-cost-or-market at 12/31/11 .......................
Allowance amount needed to reduce inventory
to market (b) ...........................................................

$410,000
(390,000)

Recovery of previously recognized loss

(c)

24,000

$ 24,000

$ 20,000

= (a) (b)
= $24,000 $20,000
= $4,000.

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

the same effect on net income.

EXERCISE 9-6
Net realizable value (ceiling)
Net realizable value less normal profit (floor)
Replacement cost
Designated market
Cost
Lower-of-cost-or-market

$50 $14 = $36

$36 $ 9 = $27
$38
$36 Ceiling
$40
$36

$38 figure used $36 correct value per unit = $2 per unit.
$2 X 1,000 units = $2,000.
If ending inventory is overstated, net income will be overstated.
If beginning inventory is overstated, net income will be understated.
Therefore, net income for 2010 was overstated by $2,000 and net income for 2011 was understated by $2,000.

EXERCISE 9-12 (1015 minutes)

(a)

Inventory, May 1 (at cost)...................................

Purchases (at cost) ............................................
Purchase discounts ...........................................
Freight-in .............................................................
Goods available (at cost) ..........................
Sales (at selling price) ........................................
Sales returns (at selling price)...........................
Net sales (at selling price) .................................
Less: Gross profit (25% of $930,000) ...............
Sales (at cost) ............................................
Approximate inventory,
May 31 (at cost) ....................................

$160,000
640,000
(12,000)
30,000
818,000
$1,000,000
(70,000)
930,000
232,500
697,500
$120,500

(b) Gross profit as a percent of sales must be computed:

25%
= 20% of sales.
100% + 25%
Inventory, May 1 (at cost).................................
Purchases (at cost) ..........................................
Purchase discounts .........................................
Freight-in ...........................................................
Goods available (at cost) ........................
Sales (at selling price) ......................................
Sales returns (at selling price).........................
Net sales (at selling price) ...............................
Less: Gross profit (20% of $930,000) .............
Sales (at cost) ..........................................
Approximate inventory,
May 31 (at cost) ..................................

$160,000
640,000
(12,000)
30,000
818,000
$1,000,000
(70,000)
930,000
186,000
744,000
$ 74,000

EXERCISE 9-18 (2025 minutes)

(a)
Beginning inventory .......................................
Purchases .......................................................
Net markups ....................................................
Totals ......................................................
Net markdowns ...............................................
Sales price of goods available .......................
Deduct: Sales .................................................
Ending inventory at retail ...............................

(b)

1.
2.
3.
4.

$180,000 $300,000 = 60%

$180,000 $270,000 = 66.67%
$180,000 $320,000 = 56.25%
$180,000 $290,000 = 62.07%

(c)

1.
2.
3.

Method 3.
Method 3.
Method 3.

(d)

56.25% X $104,000 = $58,500

(e)

$180,000 $58,500 = $121,500

(f)

$186,000 $121,500 = $64,500

Cost

Retail

$ 58,000
122,000

$100,000
200,000
20,000
320,000

$180,000

(30,000)
290,000
186,000
$104,000

*EXERCISE 9-22 (2535 minutes)

(a)

Conventional Retail Method

Inventory, January 1, 2011 ...................
Purchases (net).....................................
Add: Net markups ................................
Totals ...........................................
Deduct: Net markdowns ......................
Sales price of goods available.............
Deduct: Sales (net) ..............................
Ending inventory at retail .....................

Cost-to-retail ratio =

$191,100
$273,000

Cost

Retail

$ 41,100
150,000
191,100

$ 60,000
191,000
251,000
22,000
273,000
13,000
260,000
167,000
$ 93,000

$191,100

= 70%

Ending inventory at cost = 70% X $93,000 = $65,100

(b)

LIFO Retail Method

Inventory, January 1, 2011 ........................
Net purchases ............................................
Net markups ...............................................
Net markdowns ..........................................
Total (excluding beginning inventory) .....
Total (including beginning inventory) ......
Deduct sales (net) ......................................
Ending inventory at retail ..........................

Cost-to-retail ratio =

$150,000
$200,000

Cost

Retail

$ 41,100
150,000

$ 60,000
191,000
22,000
(13,000)
200,000
260,000
167,000
$ 93,000

150,000
$191,100

= 75%

Computation of ending inventory at LIFO cost, 2011:

Ending Inventory
at Retail Prices

Layers at
Retail Prices

$93,000

2010 $60,000
2011 33,000

*$41,100
$60,000

X
X

(prior years cost to retail)

Cost-to-Retail
Percentage

Ending Inventory
at LIFO Cost

68.5%*
75.0%

$41,100
24,750
$65,850

*EXERCISE 9-24 (1015 minutes)

(a)

Cost-to-retail ratiobeginning inventory:

$222,000
= 74%
$300,000

*($294,300 1.09) X 74% = $199,800

*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-toretail ratio (74%).
(b)

Ending inventory at retail prices

deflated $359,700 1.09 .....................................................
Beginning inventory at beginning-of-year prices ................
Inventory increase in terms of
beginning-of-year dollars ...................................................
Beginning inventory (at cost) ...............................................
Additional layer, $30,000 X 1.09 X 76%* ...............................

*($364,800 $480,000)

$330,000
(300,000)
$ 30,000
$222,000
24,852
$246,852