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Herman Company has 3 products in its ending inventory. Specific per unit data for each of the products are as follows: Product 1 Product 2 Product 3 Cost $ 20 $ 90 $ 50 Replacement cost 18 85 40 Selling price 40 120 70 Disposal costs 6 40 10 Normal profit margin 5 30 12 Required: what unit values should Herman use for each of its products when applying the LCM rule to ending inventory?
Answer:
(1) (2) Ceiling (3) Floor (4) Designated Market Value [Middle value of (1), (2) & (3)] $29 80 48 (5) Per Unit Inventory Value [Lower of (4) and (5)] $20 80 48
Product 1 2 3
RC $18 85 40
NRV (*) $ 34 80 60
Cost $20 90 50
* Selling price less disposal costs. ** NRV less normal profit margin
Required:
Determine the balance sheet inventory carrying at the December 31, 2011, assuming the LCM rule is applied to individual products. 2. Assuming the Tatum recognizes an inventory write-down as a separate income statement item, determine the amount of the loss. Requirement 1 1.
(1)
(2) Ceiling
(3) Floor NRV-NP (NP= 25% of cost) $70,000 87,500 35,000 42,500
(4)
(5)
Designated Market Value [Middle value of (1), (2) & (3)] $100,000 87,500 40,000 42,500 Totals
Inventory Value [Lower of (4) and (5)] Cost $120,000 90,000 60,000 30,000 $300,000 $100,000 87,500 40,000 30,000 $257,500
The inventory value is $257,500. Requirement 2 Loss from write-down of inventory: $300,000 - 257,500 = $42,500
Product A B C D E
RC $35 70 55 70 28
Designated Market Value [Middle value of (1), (2) & (3)] $35 70 55 73 26
* Selling price less disposal costs. Disposal costs = 10% of selling price + 5% of cost. ** NRV less normal profit margin
(1)
(2)
(3)
(4)
(5)
Ceiling
Floor Designated Market Value [Middle value of (1), (2) & (3)] $12,000 8,800 2,160 800 6,630 $30,390 Inventory Value [Lower of (4) and (5)] Cost $10,000 12,000 1,800 1,400 8,400 $33,600 $10,000 8,800 1,800 800 6,630 $28,030
Inventory carrying value would be $28,030. Requirement 2 Inventory carrying value would be $30,390, the lower of aggregate inventory cost ($33,600) and aggregate inventory market ($30,390). The amount of the loss from inventory write-down is $3,210 ($33,600 - 30,390).
Answer:
Requirement 1 Lower-of-cost-or-market (a) (b) By Individual By Products Product Type
Designated Market Value Product Tools: Hammers Saws Screwdrivers Total tools Paint products: 1-gallon cans $3,000 $2,500 $ 500 2,000 600 $3,100 $ 550 1,800 780 $3,130 Cost
2,500
Requirement 2 (a) Individual products $6,500 - 5,800 = $700 (b) Product type $6,500 - 6,050 = $450 (c) Total inventory $6,500 - 6,080 = $420
Answer:
Beginning inventory (from records) Plus: Net purchases (from records) 370,000 Cost of goods available for sale 510,000 Less: Cost of goods sold: Net sales Less: Estimated gross profit of 25% Estimated cost of goods sold (412,500) Estimated cost of inventory destroyed $ 97,500 $140,000
$550,000 (137,500)
Answer:
Beginning inventory (from records) Plus: Net purchases (from records) 140,000 Cost of goods available for sale 240,000 Less: Cost of goods sold: Net sales Less: Estimated gross profit of 35% Estimated cost of goods sold (143,000) Estimated ending inventory 97,000 Less: Value of usable damaged goods (12,000) Estimated loss from fire $100,000
$220,000 (77,000)
$ 85,000
Merchandise inventory, January 1, 2011 Purchased to date Freight-in Sales to date The gross profit ratio has averaged 20% of sales for the past 4 years. Required: use the gross profit method to estimate the cost of the inventory destroyed in the fire.
Answer:
Merchandise inventory, January 1, 2011 Purchases Freight-in Cost of goods available for sale Less: Cost of goods sold: Sales Less: Estimated gross profit of 20% Estimated loss from fire $1,900,000 5,800,000 400,000 8,100,000 $8,200,000 (1,640,000)
(6,560,000) $1,540,000
Answer:
Requirement 1
Beginning inventory (from records) $ 58,500 Plus: Net purchases ($110,000 4,000) Freight-in (from records) 3,000 Cost of goods available for sale 167,500 Less: Cost of goods sold: Net sales ($180,000 5,000) $175,000 Less: Estimated gross profit of 40% Estimated cost of goods sold (105,000) Estimated cost of inventory before theft 62,500 Less: Stolen inventory Estimated ending inventory $ 54,500
106,000
(70,000)
(8,000)
Requirement 2
Beginning inventory (from records) $ 58,500 Plus: Net purchases ($110,000 4,000) Freight-in (from records) 3,000 Cost of goods available for sale 167,500 Less: Cost of goods sold:
106,000
Net sales ($180,000 5,000) $175,000 Less: Estimated gross profit of 50%* Estimated cost of goods sold (87,500) Estimated cost of inventory before theft 80,000 Less: Stolen inventory Estimated ending inventory $ 72,000
(87,500)
(8,000)
*Gross profit as a % of cost (1 + Gross profit as a % of cost) = Gross profit as a % of sales. 100% 200% = 50%
Inventory, January 1,2011 Net purchases through Nov, 17 Net sales through Nov, 17 Historical gross profit ratio
Required: 1. Calculate the estimated cost of each of the toppings lost in the fire. 2. What factors could cause the estimates to be over-or understated?
Answer:
Requirement 1 Fruit Toppings Estimate of cost of goods sold: Cost percentage x Net sales Marshmallow Toppings Chocolate Topping
Beginning inventory Plus: Net purchases Cost of goods available for sale Less: Estimate of cost of goods sold Estimate of cost of inventory lost
Requirement 2 1. 2. The two main factors that could cause the estimates of the inventory lost to be over or understated are: The historical cost percentages used may not be representative of the current relationship between cost and selling price. Theft or spoilage losses may not be appropriately considered in the cost percentage.
Required: Answer:
Estimate the average cost of ending inventory and cost of goods sold for October. Do not approximate LCM.
Cost
Retail
Beginning inventory Plus: Net purchases Net markups Less: Net markdowns Goods available for sale $54,120 Cost-to-retail percentage: $82,000 Less: Net sales Estimated ending inventory at retail Estimated ending inventory at cost (66% x $50,000) Estimated cost of goods sold = 66%
Required: Determine the December 31, 2011, inventory that approximates average cost, lower of cost or market. Answer:
Cost Beginning inventory Plus: Purchases Freight-in Net markups $798,000 Cost-to-retail percentage: Less: Net markdowns Goods available for sale Less: Net sales Estimated ending inventory at retail Estimated ending inventory at cost (70% x $336,000) = 70% $1,140,000 _______ 798,000 (4,000) 1,136,000 (800,000) $ 336,000 $235,200 $190,000 600,000 8,000 Retail $ 280,000 840,000 20,000 1,140,000
Answer:
Beginning inventory Plus: Net purchases Net markups Less: Net markdowns Goods available for sale (excluding beg. Inventory) Goods available for sale (including beg. Inventory) $607,760 Cost-to-retail percentage: = 71% $856,000 (800,000) $ 336,000 Cost $280,000 56,000 x 71% = $336,000 $160,000 39,760 $199,760 Cost $160,000 607,760 _______ 607,760 767,760 Retail $ 280,000 840,000 20,000 (4,000) 856,000 1,136,000
Less: Net sales Estimated ending inventory at retail Estimated ending inventory at cost: Retail Beginning inventory Current periods layer Total Estimated cost of goods sold
(199,760) $568,000
Required: determine the amounts that Beldon should capitalize as the cost of land and the new building.
Answer:
Capitalized cost of land: Purchase price Demolition of old building Less: Sale of materials Legal fees for title investigation $60,000 $4,000 (2,000) 2,000 2,000
Total cost of land Capitalized cost of building: Construction costs Architect's fees Interest on construction loan Total cost of building
$64,000
Required:
1. Prepare the journal entry to record the acquisition of the tractor. Round computations to the nearest dollar. 2. How much interest expense will the company include in its 2011 and 2012 income statements for this note? 3. What is the amount of the liability the company will report in its 2011 and 2012 balance sheets for this note?
Requirement 1 Tractor ($5,000 cash + 18,783 present value of note).............................................................. Discount on note payable (difference) ..................................................................................... ........................................................................................................................................... Cash ................................................................................................................................................. 5,000 .......................................................................................................Note payable (face amount) ............................................................................................................................................... 25,000
23,783 6,217
2011: Interest expense ($18,783 x 10%) = $1,878 2012: Interest expense [($18,783 + 1,878) x 10%] = 2,066
Requirement 3
2011: $25,000 ($6,217 1,878) = $20,661 2012: $25,000 ($6,217 1,878 2,066) = 22,727
Answer:
Equipment - new ($200,000 + 60,000) Accumulated depreciation (account balance) Cash 260,000 220,000 60,000
400,000 20,000
Answer:
Equipment - new ($170,000 + 60,000) Loss ($180,000 - 170,000) Accumulated depreciation (account balance) Cash Equipment - old (account balance) 230,000 10,000 220,000 60,000 400,000
Answer:
Requirement 1 Fair value of land + Cash given = Fair value of equipment $150,000 + 10,000 = $160,000 Requirement 2 Equipment ($150,000 + 10,000)................................................................................................ 160,000 ........................................................................................................................................... Cash ............................................................................................................................................... 10,000 ......................................................................................................................Land (book value) ............................................................................................................................................. 120,000 ................................................................................................................................. Gain ($150,000 - 120,000) ............................................................................................................................................... 30,000
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Answer:
Requirement 1 Fair value of land - Cash received = Fair value of equipment $150,000 - 10,000 = $140,000 Requirement 2 Equipment ($150,000 - 10,000)................................................................................................. 140,000 Cash........................................................................................................................................... 10,000 ......................................................................................................................Land (book value) ............................................................................................................................................. 120,000 ................................................................................................................................. Gain ($150,000 - 120,000) ............................................................................................................................................... 30,000
Answer:
Requirement 1 Fair value of old land + Cash given = Fair value of new land $72,000 + 14,000 = $86,000 Requirement 2 Landnew ($72,000 + 14,000) Cash Land - old (book value) Gain ($72,000 30,000) Requirement 3 Landnew ($30,000 + 14,000) Cash Land - old (book value) 44,000 14,000 30,000 86,000 14,000 30,000 42,000
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