Exercise

1. FIFO and Average Cost Mitchell Company’s record of transactions for the month of June
was as follows.

Purchases Sales
June 1 (balance on hand) 600 @ $3.00 June 3 500 @ $5.00
4 1,500 @ 3.04 9 1,300 @ 5.00
8 800 @ 3.20 11 600 @ 5.50
13 1,200 @ 3.25 23 1,200 @ 5.50
21 700 @ 3.30 27 900 @ 6.00
29 500 @ 3.13 4,500
5,300

Instructions
(a) Assuming that periodic inventory records are kept, compute the inventory at June 30
using (1) FIFO and (2) average cost.
(b) Assuming that perpetual inventory records are kept in both units and dollars, determine
the inventory at June 30 using (1) FIFO and (2) Moving average cost.

Solution

(a) 1. FIFO 500 @ 3.13 = $1,565

300 @ 3.30 = 990
$2,555
2. Average Cost
Total cost = $16,695* = $3.15 average cost per unit
Total units 5,300
800 @ 3.15 = $2,520
*Units Price Total Cost
600 @ $3.00 = $1,800
1,500 @ $3.04 = 4,560
800 @ $3.20 = 2,560
1,200 @ $3.25 = 3,900
700 @ $3.30 = 2,310
500 @ $3.13 = 1,565
5,300 $16,695
Solution (Continued)

(b) 1. FIFO 500 @ 3.13 = $1,565

300 @ 3.30 = 990
$2,555

2. Average Cost

Purchase Sold Balance

No. of Unit No. of Unit No. of Unit
Date units cost units cost units cost Amount
June 1 600 $3.0000 $1,800
3 500 $3.000 100 3.0000 300
4 1,500 $3.04 1,600 3.0375 4,860
8 800 3.20 2,400 3.0917 7,420
9 1,300 3.0917 1,100 3.0917 3,401
11 600 3.0917 500 3.0917 1,546
13 1,200 3.25 1,700 3.2035 5,446
21 700 3.30 2,400 3.2317 7,756
23 1,200 3.2317 1,200 3.2317 3,878
27 900 3.2317 300 3.2317 969
29 500 3.13 800 3.1675 2,534

Solution
(a) 400 @ $2.50 = $1,000
460 @ $2.60 = 1,196
860 $2,196

Inventory June 30 is $2,534

2. Matlock Corporation sells item A as part of its product line. Information as to balances on
hand, purchases, and sales of item A are given in the following table for the first six
months of 2015.
Quantities
Unit Price
Date Purchased Sold Balance of Purchase
January 11 — — 400 $2.50
January 24 1,300 — 1,700 $2.60
February 8 — 300 1,400 —
March 16 — 560 840 —
June 11 600 — 1,440 $2.75

Instructions
(a) Compute the cost of goods sold for the first six months under the periodic FIFO and
average inventory pricing method.
(b) Compute the ending inventory at June 30 under the perpetual FIFO and moving average
inventory pricing method.
3. Determine the proper unit inventory price in the following independent cases by applying
the lower of cost or net realizable value rule. Circle your choice.
1 2 3 4 5
Cost $80 $105 $120 $60 $72
Sales value 100 130 160 65 80
Cost to complete 18 19 21 4
Cost to sell 7 10 12 2

Solution
Case 1 $ 75 Case 4 $59
Case 2 $101 Case 5 $69
Case 3 $120

4. Determine the unit value that should be used for inventory costing following “lower-of-
cost-or-net realizable value”
A B C D
Cost $20 $30 $22 $25
Sales value 23 35 27 30
Cost to complete 3 5 2 4
Cost to sell 2 2 1 2

Solution
Case A $18
Case B $28
Case C $22
Case D$24

5. The December 31, 2015 inventory of Gwynn Company consisted of four products, for
which certain information is provided below.
Estimated Expected Estimated
Product Original Cost Completion Cost Selling Price Cost to sell
A $25 $6 $40 $4
B $42 $12 $58 $8
C $120 $25 $150 $15
D $18 $3 $26 $2
Instructions
Using the lower-of-cost-or-net realizable value approach applied on an individual-item basis,
compute the inventory valuation that should be reported for each product on December 31,
2015.
Solution
Lower-of-
Net Real. Cost-or-
Product Value Cost NRV
A $30 $25 $25
B $38 $42 $38
C $110 $120 $110
D $21 $18 $18
6. Pinkel Company uses the LCNRV method, on an individual-item basis, in pricing its
inventory items. The inventory at December 31, 2015, consists of products D,E,F,G,H,
and I, Relevant per-unit data for these products appear below.
Item Item Item Item Item
Item
D E F G H I

Estimated selling price €180 €165 €140 €135 €165 €135

Cost 110 120 120 120 75 54
Cost to complete 45 45 35 50 45 45
Selling costs 15 27 15 30 15 30

Instructions
Using the LCNRV rule, determine the proper unit value for statement of financial position
reporting purposes at December 31, 2015, for each of the inventory items above.

Solution
Net
Realizable.
Item Value Cost LCNRV
D €120* €110 €110
E 93 120 93
F 90 120 90
G 55 120 55
H 105 75 75
1 60 54 54
*Estimated selling price – Estimated selling costs and cost to
complete = €180 – €45 – €15 = €120.

7. Dover Company began operations in 2015 and determined its ending inventory at cost
and at a LCNRV at December 31, 2015, and December 31, 2016. This information is
presented below.
Cost Net Realizable Value
12/31/15 £520,000 £485,000
12/31/16 615,000 585,000

Instructions
(a) Prepare the journal entries required at December 31, 2015, and December 31, 2016,
assuming that the inventory is recorded at LCNRV, using a perpetual inventory
system and the cost-of-goods-sold method.
(b) Prepare the journal entries required at December 31, 2015, and December 31, 2016,
assuming that the inventory is recorded at cost, using a perpetual system and the loss
method.
(c) Which of the two methods above provides the higher net income in each year?
Solution
(a) 12/31/15 Cost of Goods Sold………………………………… 35,000
Allowance to Reduce
Inventory to NRV…………………….. 35,000

12/31/16 Allowance to Reduce

Inventory to NRV…………………………….. 5,000
Costs of Goods Sold…………………
5,000
₤35,000 – (₤615,000 – ₤585,000)

(b) 12/31/15 Loss Due to Decline of

Inventory to NRV…………………………… 35,000
Allowance to Reduce
Inventory to NRV………….. 35,000

12/31/16 Allowance to Reduce

Inventory to NRV……………………………..5,000
Recovery of Inventory Loss…………
5,000

(c) Both methods provide the same net income.

8. Akimora Dairy began operations on April 1, 2015, with purchase of 250 milking cows for
¥8,500,000. It has completed the first month of operations and has the following
information for its milking cows at the end of April 2015 (000 omitted).
Milking cows
Change in fair value due to growth and price changes* ¥(250,000)
Decrease in fair value due to harvest (15,000)
Milk harvested during April 2015 (at net realizable value) 90,000
*Due to a very high rate of calving in the past month, there is a glut of milking cows
on the market.

Instructions
(a) Prepare the journal entries for Akimora’s biological asset (milking cows) for the
month of April 2015.
(b) Prepare the journal entry for the milk harvested by Akimora during April 2015.
(c) Akimora sells the milk harvested in April on the local milk exchange and receives
¥93,000.
Solution
(a) Unrealized Holding Gain or Loss – Income.................... 265,000
Biological Assets – Milking Cows............................ 265,000

(b) Milk Inventory................................................................. 90,000

Unrealized Holding Gain or Loss – Income.............. 90,000

(c) Cash.................................................................................. 93,000

Cost of Goods Sold.......................................................... 90,000
Milk Inventory........................................................... 90,000
Sales Revenue............................................................ 93,000
9. Doran Realty Company purchased a plot of ground for $800,000 and spent $2,100,000 in
developing it for building lots. The lots were classified into Highland, Midland, and
Lowland grades, to sell at $100,000, $75,000, and $50,000 each, respectively.

Instructions
Complete the table below to allocate the cost of the lots using a relative standalone sales
value method.
No. of Selling Total % of Apportioned Cost
Grade Lots Price Revenue Total Sales Total Per Lot
Highland 20 $ $ $ $
Midland 40 $ $
Lowland 100 $ $
160 $ $

Solution
No. of Selling Total % of Apportioned Cost
Grade Lots Price Revenue Total Sales Total Per Lot
Highland 20 $100,000 $ 2,000,000 20% $ 580,000 $29,000
Midland 40 $75,000 3,000,000 30% 870,000 $21,750
Lowland 100 $50,000 5,000,000 50% 1,450,000 $14,500
160 $10,000,000 $2,900,000

10. An inventory taken the morning after a large theft discloses $60,000 of goods on hand as
of March 12. The following additional data is available from the books:

Inventory on hand, March 1 $ 84,000

Purchases received, March 1 – 11 63,000
Sales (goods delivered to customers) 120,000

Past records indicate that sales are made at 50% above cost.

Instructions
Estimate the inventory of goods on hand at the close of business on March 11 by the gross
profit method and determine the amount of the theft loss. Show appropriate titles for all
amounts in your presentation.

Solution
Beginning Inventory $ 84,000
Purchases 63,000
Goods Available 147,000
Goods Sold ($120,000 ÷ 150%) (80,000)
Estimated Ending Inventory 67,000
Physical Inventory (60,000)
Theft Loss $ 7,000
11. On January 1, a store had inventory of $48,000. January purchases were $46,000 and
January sales were $90,000. On February 1 a fire destroyed most of the inventory. The
rate of gross profit was 25% of cost. Merchandise with a selling price of $5,000 remained
undamaged after the fire. Compute the amount of the fire loss, assuming the store had no
insurance coverage. Label all figures.

Solution
Beginning Inventory $ 48,000
Purchases 46,000
Goods available 94,000
Cost of sale ($90,000 ÷ 125%) (72,000)
Estimated ending inventory 22,000
Cost of undamaged inventory ($5,000 ÷ 125%) (4,000)
Estimated fire loss $18,000

12. Utley Co. prepares monthly income statements. Inventory is counted only at year end;
thus, month-end inventories must be estimated. All sales are made on account. The rate of
mark-up on cost is 20%. The following information relates to the month of May.

Accounts receivable, May 1 $21,000

Accounts receivable, May 31 27,000
Collections of accounts during May 90,000
Inventory, May 1 45,000
Purchases during May 58,000

Instructions
Calculate the estimated cost of the inventory on May 31.

Solution
Collections of accounts $ 90,000
Add accounts receivable, May 31 27,000
Deduct accounts receivable, May 1 (21,000)
Sales during May $ 96,000

Inventory, May 1 $ 45,000

Purchases during May 58,000
Goods available 103,000
Cost of sales ($96,000 ÷ 120%) (80,000)
Estimated cost of inventory, May 31 $ 23,000
13. Presented below is information related to Kuchinsky Company.
Cost Retail
Beginning inventory € 280,000 € 390,000
Purchases 1,820,000 3,000,000
Markups 130,000
Markup cancellations 20,000
Markdowns 47,000
Markdown cancellations 7,000
Sales 3,150,000

Instructions
Compute the inventory by the conventional retail inventory method.

Solution
Cost Retail
Beginning inventory……………………………. € 280,000 € 390,000
Purchases………………………………………. 1,820,000 3,000,000
Totals……………………………………….. 2,100,000 3,390,000
Add: Net marksups
Markups………………………………………. € 130,000
Markup cancellations………………………… (20,000) 110,000
Totals……………………………………………… €2,100,000 3,500,000

Deduct: Net markdowns

Markdowns…………………………………… 47,000
Markup cancellations………………………… (7,000) 40,000
Sales price of goods available………………….. 3,460,000
Deduct: Sales…………………………………….. 3,150,000
Ending Inventory ay retail……………………….. € 310,000

Cost-to-retail ratio =
Ending inventory at cost = 60% × €310,000 = €186,000

14. Reed Mangus purchased the Hillside Vineyard at an estate auction in April 2015 for
€1,250,000. The purchase was risky because the growing season was coming to an end,
the grapes must be harvested in the next several weeks, and Reed has limited experience
in carrying off a grape harvest.

At the end of the first quarter of operations, Reed is feeling pretty good about his early
results. The first harvest was a success; 500 bushels of grapes were harvested with a value
of €50,000 (based on current local commodity prices at the time of harvest). And, given
the strong yield from area vineyards during this season, the net realizable value of Reed’s
vineyard has increased by €25,000 at the end of the quarter. After storing the grapes for a
short period of time, Reed was able to sell the entire harvest for €60,000.

Instructions
 (a) Prepare the journal entries for the Hillside biological asset (grape vines) for the first
quarter of operations (the beginning carrying and net realizable value is €1,250,000).
(b) Prepare the journal entry for the grapes harvested during the first quarter.
(c) Prepare the journal entry to record the sale of the grapes harvested in the first quarter.
(d) Determine the total effect on income for the quarter related to the Hillside biological
asset and agricultural produce.

Solution
(a) Biological assets–Grape Vineyard…………………. 25,000
Unrealized Holding Gain or Loss – Income 25,000

(b) Grape Inventory………………………………………. 50,000

Unrealized Holding Gain or Loss – Income…… 50,000

(c) Cash…………………………………………………… 60,000

Cost of Goods Sold………………………………….. 50,000
Grape Inventory………………………………….. 50,000
Sales Revenue…………………………………… 60,000

(d) Unrealized Holding Gain or Loss – Income………. €25,000

Unrealized Holding Gain or Loss – Income………. 50,000
Gross Profit on sold Grapes………………………... 10,000
Total Effect on Income………………………………. €85,000

15. On December 31, 2015 Felt Company’s inventory burned. Sales and purchases for the
year had been $1,400,000 and $980,000, respectively. The beginning inventory (Jan. 1,
2015) was $170,000; in the past Felt’s gross profit has averaged 40% of selling price.

Instructions
Compute the estimated cost of inventory burned, and give entries as of December 31, 2015 to
close merchandise accounts.

Solution
Beginning inventory $ 170,000
Add: Purchases 980,000
Cost of goods available 1,150,000
Sales $1,400,000
Less (40%  $1,400,000) 560,000 840,000
Estimated inventory lost $ 310,000
Sales Revenue.................................................................................... 1,400,000
Income Summary................................................................... 1,400,000

Cost of Goods Sold............................................................................ 840,000

Fire Loss............................................................................................. 310,000
Inventory................................................................................ 170,000
Purchases................................................................................ 980,000

16. When you undertook the preparation of the financial statements for Telfer Company at
January 31, 2016, the following data were available:
At Cost At Retail
Inventory, February 1, 2015 $70,800 $ 98,500
Markdowns 35,000
Markups 63,000
Markdown cancellations 20,000
Markup cancellations 10,000
Purchases 219,500 294,000
Sales 345,000
Purchases returns and allowances 4,300 5,500
Sales returns and allowances 10,000

Instructions
Compute the ending inventory at cost as of January 31, 2016, using the retail method which
approximates lower of cost or net realizable value. Your solution should be in good form with
amounts clearly labeled.

Solution
At Cost At Retail
Beginning inventory, 2/1/15 $ 70,800 $ 98,500
Purchases $219,500 $294,000
Less purchase returns 4,300 215,200 5,500 288,500
Totals $286,000 387,000
Add markups (net) 53,000
Totals 440,000
Deduct markdowns (net) 15,000
Sales price of goods available 425,000
Net sales (335,000)
Ending inventory, 1/31/16 at retail $ 90,000
Ending inventory at cost: Ratio of cost to retail =
$286,000 ÷ $440,000 = 65%;
$90,000 × 65% = $58,500 $ 58,500
17. Presented below is information related to Carpenter Inc.
Cost Retail
Inventory, 12/31/15 $375,000 $ 550,000
Purchases 1,369,000 2,050,000
Purchase returns 90,000 120,000
Purchase discounts 27,000 –
Gross sales (after employee discounts) – 2,110,000
Sales returns – 145,000
Markups – 180,000
Markup cancellations – 60,000
Markdowns – 65,000
Markdown cancellations 30,000
Freight-in 63,000 –
Employee discounts granted – 12,000
Loss from breakage (normal) – 8,000

Instructions
Assuming that carpenter Inc. uses the conventional retail inventory method, compute the cost
of its ending inventory at December 31, 2016.

Solution
Cost Retail
Beginning Inventory…………………….. $ 375,000
550,000
Purchases……………………………….. 1,369,000 2,050,000
Purchase returns………………………… (90,000) (120,000)
Purchase discounts……………………… (27,000) –
Freight-in………………………………….. 63,000 –
Markups…………………………………… $ 180,000 –
Markup cancellations……………………. (60,000) 120,000
Totals…………………………………. $1,690,000 2,600,000
Markdowns……………………………….. (65,000) –
Markdown cancellations………………… 30,000 (35,000)
Sales………………………………………. (2,110,000) –
Sales returns……………………………… 145,000 (1,965,000)
Inventory losses due to breakage………. (8,000)
Employee discounts……………………… (12,000)
Ending inventory at retail………………… $ 580,000

Cost-to-retail ratio =

Ending inventory at cost: $580,000 x 65% = $377,000