Q1. Gross Profit Method
Mark Price Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May:
|
Inventory, May 1
|
$ 160,000
|
|
Purchases (gross)
|
640,000
|
|
Freight-in
|
30,000
|
|
Sales revenue
|
1,000,000
|
|
Sales returns
|
70,000
|
|
Purchase discounts
|
12,000
|
Instructions:
(a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales.
(b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost.
Q2. LCNRV
Garcia Home Improvement Company installs replacement siding, windows, and louvered glass doors for single-family homes and condominium complexes. The company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2017. Jim Alcide, controller for Garcia, has gathered the following data concerning inventory.
At May 31, 2017, the balance in Garcia's Raw Materials Inventory account was $408,000, and Allowance to Reduce Inventory to NRV had a credit balance of $27,500. Alcide summarized the relevant inventory cost and market data at May 31, 2017, in the schedule below.
Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Garcia's May 31, 2017, financial statements for inventory under the LCNRV rule as applied to each item in inventory. Devereaux expressed concern over departing from the historical cost principle.
|
|
Cost
|
Sales Price
|
Net Realizable Value
|
|
Aluminum siding
|
$70,000
|
$64,000
|
$56,000
|
|
Cedar shake siding
|
86,000
|
94,000
|
84,800
|
|
Louvered glass doors
|
112,000
|
186,000
|
168,300
|
|
Thermal windows
|
140,000
|
154,800
|
140,000
|
|
Total
|
$408,000
|
$499,200
|
$449,100
|
Instructions
(a) Determine the proper balance in Allowance to Reduce Inventory to NRV at May 31, 2017.
(b) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded (using the loss method) due to the change in Allowance to Reduce Inventory to NRV.
(c) Explain the rationale for the use of the LCNRV rule as it applies to inventories.
Q3: Lower-of-Cost-or-Market
Referring to the situation in Q2 for Garcia Home Improvement Company, consider the following expanded data at May 31, 2017. Assume Garcia uses LIFO inventory costing, and that the Allowance to Reduce Inventory to NRV had a credit balance of $27,500 on May 31, 2017 before adjustment.
|
Cost
|
Replacement Cost
|
Sales Price
|
Net Realizable Value
|
Normal Profit
|
|
Aluminum siding
|
$70,000
|
$62,500
|
$64,000
|
$56,000
|
$5,100
|
|
Cedar shake siding
|
86,000
|
79,400
|
94,000
|
84,800
|
7,400
|
|
Louvered glass doors
|
112,000
|
124,000
|
186,400
|
168,300
|
18,500
|
|
Thermal windows
|
140,000
|
126,000
|
154,800
|
140,000
|
15,400
|
|
Total
|
$408,000
|
$391,900
|
$499,200
|
$449,100
|
$46,400
|
Instructions (CMA adapted)
(a) (1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31, 2017.
(2) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory to Market.
(1) Calculation of the Allowance to Reduce Inventory to Market account at May 31, 2017:
|
Inventory item
|
Cost
|
Replacement Cost
|
NRV (Ceiling)
|
NRV less normal profit (Floor)
|
LCM
|
|
Aluminum siding
|
$70,000
|
$62,500
|
$56,000
|
|
|
|
Cedar shake siding
|
86,000
|
79,400
|
84,800
|
|
|
|
Louvered glass doors
|
112,000
|
124,000
|
168,300
|
|
|
|
Thermal windows
|
140,000
|
126,000
|
140,000
|
|
|
|
Totals
|
$408,000
|
$391,900
|
$449,100
|
|
|
Calculation of Allowance balance at May 31, 2017:
(2) Calculation of loss to be recorded:
(b) Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories.
Q4. Retail Inventory Method
The records for the Clothing Department of Sharapova's Discount Store are summarized below for the month of January.
|
|
At Retail
|
At Cost
|
|
Inventory, January 1
|
|
$ 25,000
|
17,000
|
|
Purchases in January
|
|
137,000
|
82,500
|
|
Freight-in
|
|
|
7,000
|
|
Purchase returns
|
|
3,000
|
2,300
|
|
Transfers in from suburban branch
|
|
13,000
|
9,200
|
|
Inventory losses due to normal breakage, etc
|
|
400
|
|
|
Sales revenue
|
|
95,000
|
|
|
Sales returns
|
|
2,400
|
|
|
Net markups
|
$ 8,000
|
|
|
|
Net markdowns
|
4,000
|
|
|
Instructions:
(a) Compute the inventory for this department as of January 31, at retail prices.
(b) Compute the ending inventory using lower-of-average-cost-or-market.