Merchandise inventory - Multiple choice questions.
1. When inventory declines in value below original (historical) cost, and this decline is considered other than temporary, what is the maximum amount that the inventory can be valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal profit margin
2. Marr Corporation has two products in its ending inventory, each accounted for at the lower of cost or market. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follows:
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Product #1
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Product #2
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Historical cost
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$40.00
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$ 70.00
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Replacement cost
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45.00
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54.00
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Estimated cost to dispose
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10.00
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26.00
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Estimated selling price
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80.00
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130.00
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In pricing its ending inventory using the lower-of-cost-or-market, what unit values should Marr use for products #1 and #2, respectively?
a. $40.00 and $65.00.
b. 46.00 and $65.00.
c. $46.00 and $60.00.
d. $45.00 and $54.00.
3. AJ Corporation, a manufacturer of ethnic foods, contracted in 2007 to purchase 500 pounds of a spice mixture at $5.00 per pound, delivery to be made in spring of 2008. By 12/31/07, the price per pound of the spice mixture had risen to $5.60 per pound. In 2007, AJ should recognize
a. a loss of $2,500.
b. a loss of $300.
c. no gain or loss.
d. a gain of $300.
4. The original cost of an inventory item is above the replacement cost and the net realizable value. The replacement cost is below the net realizable value less the normal profit margin. As a result, under the lower-of-cost-or-market method, the inventory item should be reported at the
a. net realizable value.
b. net realizable value less the normal profit margin.
c. replacement cost.
d. original cost.
5. Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in inventory, but did not record the transaction. The effect of this on its financial statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities were understated.
d. net income, current assets, and retained earnings were understated.
6. Harder Corporation uses the perpetual inventory method. On March 1, it purchased $30,000 of inventory, terms 2/10, n/30. On March 3, Harder returned goods that cost $3,000. On March 9, Harder paid the supplier. On March 9, Harder should credit
a. purchase discounts for $600.
b. inventory for $600.
c. purchase discounts for $540.
d. inventory for $540.