9
Inventories: CHAPTER Additional Valuation Issues
ANSWERS TO QUESTIONS
1. Where there is evidence that the utility of goods to be disposed of in the ordinary course of
business will be less than cost, the difference should be recognized as a loss in the current period,
and the inventory should be stated at market value in the financial statements.
2. The upper (ceiling) and lower (floor) limits for the value of the inventory are intended to prevent the
inventory from being reported at an amount in excess of the net realizable value or at an amount
less than the net realizable value less a normal profit margin. The maximum limitation, not to
exceed the net realizable value (ceiling) covers obsolete, damaged, or shopworn material and
prevents overstatement of inventories and understatement of the loss in the current period. The
minimum limitation deters understatement of inventory and overstatement of the loss in the current
period.
3. The usual basis for carrying forward the inventory to the next period is cost. Departure from cost is
required when the utility of the goods included in the inventory is less than their cost. This loss in
utility should be recognized as a loss of the current period, the period in which it occurred.
Furthermore, the subsequent period should be charged for goods at an amount that measures
their expected contribution to that period. In other words, the subsequent period should be
charged for inventory at prices no higher than those which would have been paid if the inventory
had been obtained at the beginning of that period. (Historically, the lower-of-cost-or-market rule
arose from the accounting convention of providing for all losses and anticipating no profits.)
In accordance with the foregoing reasoning, the rule of cost or market, whichever is lower may
be applied to each item in the inventory, to the total of the components of each major category, or
to the total of the inventory, whichever most clearly reflects operations. The rule is usually applied
to each item, but if individual inventory items enter into the same category or categories of finished
product, alternative procedures are suitable.
The arguments against the use of the lower-of-cost-or-market method of valuing inventories
include the following:
(a) The method requires the reporting of estimated losses (all or a portion of the excess of actual
cost over replacement cost) as definite income charges even though the losses have not been
sustained to date and may never be sustained. Under a consistent criterion of realization a
drop in replacement cost below original cost is no more a sustained loss than a rise above
cost is a realized gain.
(b) A price shrinkage is brought into the income statement before the loss has been sustained
through sale. Furthermore, if the charge for the inventory write-downs is not made to a special
loss account, the cost figure for goods actually sold is inflated by the amount of the estimated
shrinkage in price of the unsold goods. The title Cost of Goods Sold therefore becomes a
misnomer.
(c) The method is inconsistent in application in a given year because it recognizes the propriety
of implied price reductions but gives no recognition in the accounts or financial statements to
the effect of the price increases.
(d) The method is also inconsistent in application in one year as opposed to another because the
inventory of a company may be valued at cost in one year and at market in the next year.
(e) The lower-of-cost-or-market method values the inventory in the balance sheet conservatively.
Its effect on the income statement, however, may be the opposite. Although the income
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9-1
statement for the year in which the unsustained loss is taken is stated conservatively, the net
income on the income statement of the subsequent period may be distorted if the expected
reductions in sales prices do not materialize.
9-2
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
Questions Chapter 9 (Continued)
(f) In the application of the lower-of-cost-or-market rule a prospective normal profit is used in
determining inventory values in certain cases. Since normal profit is an estimated figure
based upon past experiences (and might not be attained in the future), it is not objective in
nature and presents an opportunity for manipulation of the results of operations.
4. The lower-of-cost-or-market rule may be applied directly to each item or to the total of the
inventory (or in some cases, to the total of the components of each major category). The method
should be the one that most clearly reflects income. The most common practice is to price the
inventory on an item-by-item basis. Companies favor the individual item approach because tax
requirements require that an individual item basis be used unless it involves practical difficulties. In
addition, the individual item approach gives the most conservative valuation for balance sheet
purposes.
5. (1)
(2)
(3)
(4)
(5)
$14.50.
$16.10.
$13.75.
$9.70.
$15.90.
6. One approach is to record the inventory at cost and then reduce it to market, thereby reflecting a
loss in the current period (often referred to as the loss method). The loss would then be shown as
a separate item in the income statement and the cost of goods sold for the year would not be
distorted by its inclusion. An objection to this method of valuation is that an inconsistency is
created between the income statement and balance sheet. In attempting to meet this inconsistency
some have advocated the use of a special account to receive the credit for such an inventory
write-down, such as Allowance to Reduce Inventory to Market which is a contra account against
inventory on the balance sheet. It should be noted that the disposition of this account presents
problems to accountants.
Another approach is merely to substitute market for cost when pricing the new inventory (often
referred to as the cost-of-goods-sold method). Such a procedure increases cost of goods sold by
the amount of the loss and fails to reflect this loss separately. For this reason, many theoretical
objections can be raised against this procedure.
7. An exception to the normal recognition rule occurs where (1) there is a controlled market with a
quoted price applicable to specific commodities and (2) no significant costs of disposal are
involved. Certain agricultural products and precious metals which are immediately marketable at
quoted prices are often valued at net realizable value (market price).
8. Relative sales value is an appropriate basis for pricing inventory when a group of varying units is
purchased at a single lump-sum price (basket purchase). The purchase price must be allocated in
some manner or on some basis among the various units. When the units vary in size, character,
and attractiveness, the basis for allocation must reflect both quantitative and qualitative aspects. A
suitable basis then is the relative sales value of the units that comprise the inventory.
9. The drop in the market price of the commitment should be charged to operations in the current year
if it is material in amount. The following entry would be made [($6.20 $5.90) X 150,000] = $45,000:
Unrealized Holding Gain or LossIncome (Purchase Commitments)........
Estimated Liability on Purchase Commitments................................
45,000
45,000
The entry is made because a loss in utility has occurred during the period in which the market
decline took place. The account credited in the above entry should be included among the current
liabilities on the balance sheet with an appropriate note indicating the nature and extent of the
commitment. This liability indicates the minimum obligation on the commitment contract at the
present timethe amount that would have to be forfeited in case of breach of contract.
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-3
Questions Chapter 9 (Continued)
10. The major uses of the gross profit method are: (1) it provides an approximation of the ending
inventory which the auditor might use for testing validity of physical inventory count; (2) it means
that a physical count need not be taken every month or quarter; and (3) it helps in determining
damages caused by casualty when inventory cannot be counted.
11. Gross profit as a percentage of sales indicates that the margin is based on selling price rather than
cost; for this reason the gross profit as a percentage of selling price will always be lower than if
based on cost. Conversions are as follows:
25% on cost =
33 1/3% on cost =
33 1/3% on selling price =
60% on selling price =
20% on selling price
25% on selling price
50% on cost
150% on cost
12. A markup of 25% on cost equals a 20% markup on selling price; therefore, gross profit equals
$1,000,000 ($5 million X 20%) and net income equals $250,000 [$1,000,000 (15% X $5 million)].
The following formula was used to compute the 20% markup on selling price:
Gross profit on selling price =
Percentage markup on cost
.25
=
= 20%
100% + Percentage markup on cost
1 + .25
13. Inventory, January 1, 2012......................................................................
Purchases to February 10, 2012.............................................................
Freight-in to February 10, 2012...............................................................
Merchandise available.....................................................................
Sales to February 10, 2012.....................................................................
Less gross profit at 40%..................................................................
Sales at cost................................................................................
Inventory (approximately) at February 10, 2012.................
$ 400,000
$1,140,000
60,000
1,200,000
1,600,000
1,950,000
780,000
1,170,000
$ 430,000
14. The validity of the retail inventory method is dependent upon (1) the composition of the inventory
remaining approximately the same at the end of the period as it was during the period, and
(2) there being approximately the same rate of markup at the end of the year as was used
throughout the period.
The retail method, though ordinarily applied on a departmental basis, may be appropriate for the
business as a unit if the above conditions are met.
15. The conventional retail method is a statistical procedure based on averages whereby inventory
figures at retail are reduced to an inventory valuation figure by multiplying the retail figures by a
percentage which is the complement of the markup percent.
To determine the markup percent, original markups and additional net markups are related to the
original cost. The complement of the markup percent so determined is then applied to the inventory
at retail after the latter has been reduced by net markdowns, thus in effect achieving a lower-ofcost-or-market valuation.
An example of reduction to market follows:
Assume purchase of 100 items at $1 each, marked to sell at $1.50 each, at which price 80 were
sold. The remaining 20 are marked down to $1.15 each.
The inventory at $15.33 is $4.67 below original cost and is valued at an amount which will produce
the normal 33 1/3% gross profit if sold at the present retail price of $23.00.
9-4
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
Questions Chapter 9 (Continued)
Computation of Inventory
Purchases
Sales
Markdowns (20 X $.35)
Inventory at retail
Inventory at lower-of-cost-or-market $23 X 66 2/3% = $15.33
16. (a)
Cost
$100
Retail
$150
(120)
(7)
$ 23
Ratio
66 2/3%
Ending inventory:
Cost
Beginning inventory............................................................
Purchases...........................................................................
Freight-in.............................................................................
Totals..........................................................................
Add net markups.................................................................
$ 149,000
1,400,000
70,000
1,619,000
_________
$1,619,000
Deduct net markdowns.......................................................
Deduct sales.......................................................................
Ending inventory, at retail...................................................
Ratio of cost to selling price
$1,619,000
$2,535,500
Retail
$
283,500
2,160,000
2,443,500
92,000
2,535,500
48,000
2,487,500
2,175,000
$ 312,500
= 64%.
Ending inventory estimated at cost = 64% X $312,500 = $200,000.
(b)
The retail method, above, showed an ending inventory at retail of $312,500; therefore, merchandise not accounted for amounts to $17,500 ($312,500 $295,000) at retail and $11,200
($17,500 X .64) at cost.
17. Information relative to the composition of the inventory (i.e., raw material, work-in-process, and
finished goods); the inventory financing where significant or unusual (transactions with related
parties, product financing arrangements, firm purchase commitments, involuntary liquidations of
LIFO inventories, pledging inventories as collateral); and the inventory costing methods employed
(lower-of-cost-or-market, FIFO, LIFO, average cost) should be disclosed. If Deere Company uses
LIFO, it should also report the LIFO reserve.
18. Inventory turnover measures how quickly inventory is sold. Generally, the higher the inventory
turnover, the better the enterprise is performing. The more times the inventory turns over, the
smaller the net margin can be to earn an appropriate total profit and return on assets. For
example, a company can price its goods lower if it has a high inventory turnover. A company with
a low profit margin, such as 2%, can earn as much as a company with a high net profit margin,
such as 40%, if its inventory turnover is often enough. To illustrate, a grocery store with a 2% profit
margin can earn as much as a jewelry store with a 40% profit margin and an inventory turnover of
1 if its turnover is more than 20 times.
19. Two major modifications are necessary. First, the beginning inventory should be excluded from the
numerator and denominator of the cost-to-retail percentage and second, markdowns should be
included in the denominator of the cost-to-retail percentage.
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9-5
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 9-1
(a)
Ceiling
Floor
(b)
$106.00
(c)
$193.00 ($212 $19)
$161.00 ($212 $19 $32)
$51.00
BRIEF EXERCISE 9-2
Item
Jokers
Penguins
Riddlers
Scarecrows
Cost
$2,000
5,000
4,400
3,200
Designated
Market
$2,050
4,950
4,550
3,070
LCM
$2,000
4,950
4,400
3,070
BRIEF EXERCISE 9-3
(a)
(b)
9-6
Cost-of-goods-sold method
Cost of Goods Sold.................................................
Inventory..........................................................
21,000
Loss method
Loss Due to Market Decline of Inventory..............
Allowance to Reduce Inventory to Market...
21,000
21,000
21,000
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 9-4
Group
Number
of CDs
Sales
Price
per CD
1
2
3
100
800
100
$5
$10
$15
*$500/$10,000 = 5/100
Total
Sales
Price
$
500
8,000
1,500
$10,000
Relative
Sales
Price
Cost
Allocated
to CDs
Total
Cost
5/100* X $8,000 =
80/100 X $8,000 =
15/100 X $8,000 =
Cost
per CD
$ 400
6,400
1,200
$8,000
$ 4**
$8
$12
**$400/100 = $4
BRIEF EXERCISE 9-5
Unrealized Holding LossIncome (Purchase
Commitments)..........................................................
50,000
Estimated Liability on Purchase
Commitments..................................................
50,000
BRIEF EXERCISE 9-6
Purchases (Inventory).................................................
950,000
Estimated Liability on Purchase Commitments.......
Cash.....................................................................
50,000
1,000,000
BRIEF EXERCISE 9-7
Beginning inventory....................................................
Purchases.....................................................................
Cost of goods available..............................................
Sales revenue..............................................................
Less gross profit (35% X 700,000).............................
Estimated cost of goods sold....................................
Estimated ending inventory destroyed in fire..........
$150,000
500,000
650,000
$700,000
245,000
455,000
$195,000
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-7
BRIEF EXERCISE 9-8
Beginning inventory..............................................
Net purchases........................................................
Net markups...........................................................
Totals......................................................................
Deduct:
Net markdowns......................................................
Sales revenue.........................................................
Ending inventory at retail.....................................
Cost
$ 12,000
120,000
$132,000
Retail
$ 20,000
170,000
10,000
200,000
7,000
147,000
$ 46,000
Cost-to-retail ratio: $132,000 $200,000 = 66%
Ending inventory at lower-of cost-or-market (66% X $46,000) = $30,360
BRIEF EXERCISE 9-9
Inventory turnover:
$304,657
$33,160 + $34,511
2
= 9.00 times
Average days to sell inventory:
365 9.00 = 40.6 days
9-8
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
*BRIEF EXERCISE 9-10
Beginning inventory...............................................
Net purchases.........................................................
Net markups............................................................
Net markdowns.......................................................
Total (excluding beginning inventory)..................
Total (including beginning inventory)..................
Deduct: Sales revenue..........................................
Ending inventory at retail.......................................
Cost
$ 12,000
120,000
120,000
$132,000
Retail
$ 20,000
170,000
10,000
(7,000)
173,000
193,000
147,000
$ 46,000
Cost-to-retail ratio: $120,000 $173,000 = 69.4%
Ending inventory at cost
$20,000 X 60% ($12,000/$20,000) = $12,000
26,000 X 69.4%
= 18,044
$46,000
$30,044
*BRIEF EXERCISE 9-11
Beginning inventory..............................................
Net purchases........................................................
Net markups...........................................................
Net markdowns......................................................
Total (excluding beginning inventory)................
Total (including beginning inventory).................
Deduct: Sales revenue.........................................
Ending inventory at retail.....................................
Cost
$ 12,000
120,000
120,000
$132,000
Retail
$ 20,000
170,000
10,000
(7,000)
173,000
193,000
147,000
$ 46,000
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-9
*BRIEF EXERCISE 9-11 (Continued)
Cost-to-retail ratio: $120,000 $173,000 = 69.4%
Ending inventory at retail deflated to base year prices
$46,000 1.15 = $40,000
Ending inventory at cost
$20,000 X 100% X 60% = $12,000
20,000 X 115% X 69.4% = 15,962
$27,962
9-10
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
SOLUTIONS TO EXERCISES
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)
Market
$100.00
52.00
76.00
180.00
208.00
0.50
235.00
Total
Market
$ 60,000
52,000
38,000
36,000
83,200
800
70,500
$340,500
$334,300.
(b)
Cost
$ 95
60
80
170
205
16
240
Total
Cost
$ 57,000
60,000
40,000
34,000
82,000
25,600
72,000
$370,600
Lower-ofCost-orMarket
$ 57,000
52,000
38,000
34,000
82,000
800
70,500
$334,300
$340,500.
EXERCISE 9-2 (1015 minutes)
Item
D
E
F
G
H
I
Net
Realizable
Value
(Ceiling)
$90*
80
60
55
80
60
Net
Realizable
Value
Less
Normal
Profit
(Floor)
$70**
60
40
35
60
40
Replacement
Cost
$120
72
70
30
70
30
Designated
Market
$90
72
60
35
70
40
Cost
$75
80
80
80
50
36
LCM
$75
72
60
35
50
36
*Estimated selling price Estimated selling expense = $120 $30 = $90.
**Net realizable value Normal profit margin = $90 $20 = $70.
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-11
EXERCISE 9-3 (1520 minutes)
Item
No.
Cost
per
Unit
1320
1333
1426
1437
1510
1522
1573
1626
Net Real.
Value
Net
Less
Designated
Replacement Realizable Normal
Market
Cost
Value
Profit
Value
$3.20
2.70
4.50
3.60
2.25
3.00
1.80
4.70
$3.00
2.30
3.70
3.10
2.00
2.70
1.60
5.20
$4.15*
2.90
4.60
2.75
2.45
3.50
1.75
5.50
$2.90**
2.40
3.60
1.85
1.85
3.00
1.25
4.50
$3.00
2.40
3.70
2.75
2.00
3.00
1.60
5.20
LCM
Quantity
$3.00
2.40
3.70
2.75
2.00
3.00
1.60
4.70
1,200
900
800
1,000
700
500
3,000
1,000
Final
Inventory
Value
$ 3,600
2,160
2,960
2,750
1,400
1,500
4,800
4,700***
$23,870
*$4.50 $.35 = $4.15.
**$4.15 $1.25 = $2.90.
***Cost is used because it is lower than designated market value.
EXERCISE 9-4 (1015 minutes)
(a)
12/31/12
12/31/13
(b)
12/31/12
12/31/13
9-12
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............................................
Loss Due to Market Decline of
Inventory...................................
24,000
20,000
24,000
24,000
4,000*
4,000
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
EXERCISE 9-4 (Continued)
*Cost of inventory at 12/31/12....................................
Lower-of-cost-or-market at 12/31/12.......................
Allowance amount needed to reduce inventory
to market (a)............................................................
$346,000
(322,000)
Cost of inventory at 12/31/13...................................
Lower-of-cost-or-market at 12/31/13.......................
Allowance amount needed to reduce inventory
to market (b)............................................................
$410,000
(390,000)
Recovery of previously recognized loss
(c)
$ 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 9-5 (2025 minutes)
(a)
Sales
Cost of goods sold
Inventory, beginning
Purchases
Cost of goods available
Inventory, ending
Cost of goods sold
Gross profit
Gain (loss) due to market
fluctuations of inventory*
February
$29,000
March
$35,000
April
$40,000
15,000
17,000
32,000
15,100
16,900
12,100
15,100
24,000
39,100
17,000
22,100
12,900
17,000
26,500
43,500
14,000
29,500
10,500
(2,000)
$10,100
1,100
$14,000
700
$11,200
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-13
EXERCISE 9-5 (Continued)
*
Jan. 31
Feb. 28
Mar. 31
Apr. 30
Inventory at cost
Inventory at the lower-of-costor-market
Allowance amount needed to
reduce inventory to market
Gain (loss) due to market
fluctuations of inventory**
$15,000
$15,100
$17,000
$14,000
14,500
12,600
15,600
13,300
$ 2,500
$ 1,400
$
700
$ (2,000)
$ 1,100
$
700
Loss Due to Market Decline of Inventory....
Allowance to Reduce Inventory
to Market............................................
500
Loss Due to Market Decline of Inventory....
Allowance to Reduce Inventory
to Market............................................
2,000
Allowance to Reduce Inventory to Market....
Recovery of Loss Due to Market
Decline of Inventory..........................
1,100
Allowance to Reduce Inventory to Market....
Recovery of Loss Due to Market
Decline of Inventory..........................
700
$
500
**$500 $2,500 = $(2,000)
$2,500 $1,400 = $1,100
$1,400 $700 = $700
(b)
Jan. 31
Feb. 28
Mar. 31
Apr. 30
9-14
500
2,000
1,100
700
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
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 2012 was overstated by $2,000 and net income
for 2013 was understated by $2,000.
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-15
9-16
$3,000
2,000
19
17 19 2 =
15 7 = 8
* 95=4
17
29
8
21,760
23,120
2,720
1,360
$53,040
$ 8,160
$2,040
34,000
$78,000
32,000
$12,000
Solst of
Cod
LotSales
s
18,200
$ 6,760
Operating expenses
Net income
Loost
Ct
Per
24,960
Gross profit
$24,960
10,880
10,240
$ 3,840
Gross
Profit
53,040
Cost of goods sold (see schedule)
Number of
Lots Sold*
4
$60,000/$125,000 X
$38,000/$125,000 X
Sales (see schedule)
$125,000
38,000
60,000
$27,000/$125,000 X
Relative Sales
Price
$78,000
4,000
15
$ 27,000
Sales
Sales Price
Price Per Lot
Total
9
No. of
Lots
85,000
85,000
$85,000
Total
Cost
$85,000
25,840
40,800
$18,360
Allocated
to LCos t
ot s
1,360
2,720
$2,040
Cost Per Lot
No. of Lots)
(Cost Allocated/
EXERCISE 9-7 (1520 minutes)
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
Group 3
Total
Group 2
Group 1
Group 3
Group 2
Group 1
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-17
9-18
120
100
200
Number of
Chairs
Sold
$54
30
48
Cost
Chair
per
$19,200
3,600
4,800
Cost of
Sold
Chairs
$10,800
6,000
$32,000
8,000
$18,000
Sales
$12,800
2,400
3,200
$ 7,200
Profit
Gross
60,000
$40,000/$100,000 X
40,000
50
800
$100,000
60,000
24,000
80
300
$60,000
$36,000/$100,000 X
$24,000/$100,000 X
Price
Cost
Relative Sales Total
$36,000
Total
Price
Sales
$90
Sales
Chain
Price per
400
Chairs
No. of
$60,000
24,000
14,400
$21,600
Cost
to Chairs
Allocated
$54
30
48
Chair
Cost per
EXERCISE 9-8 (1217 minutes)
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-19
(800 120) X $30 = $20,400
Inventory of straight chairs
Straight chairs
Armchairs
Lounge chairs
Chairs
Straight chairs
Armchairs
Lounge chairs
Chairs
EXERCISE 9-9 (510 minutes)
Unrealized Holding Gain or LossIncome
(Purchase Commitments)..............................................
Estimated Liability on Purchase
Commitments.........................................................
25,000
25,000
EXERCISE 9-10 (1520 minutes)
(a)
If the commitment is material in amount, there should be a footnote in
the balance sheet stating the nature and extent of the commitment.
The footnote may also disclose the market price of the materials. The
excess of market price over contracted price is a gain contingency
which cannot be recognized in the accounts until it is realized.
(b)
The drop in the market price of the commitment should be charged to
operations in the current year if it is material in amount. The following
entry would be made:
Unrealized Holding Gain or LossIncome
(Purchase Commitments).....................................
Estimated Liability on Purchase
Commitments................................................
12,000
12,000
The entry is made because a loss in utility has occurred during the
period in which the market decline took place. The account credited in
the above entry should be included among the current liabilities on
the balance sheet, with an appropriate footnote indicating the nature
and extent of the commitment. This liability indicates the minimum
obligation on the commitment contract at the present timethe
amount that would have to be forfeited in case of breach of contract.
(c)
Assuming the $12,000 market decline entry was made on December
31, 2013, as indicated in (b), the entry when the materials are received
in January 2014 would be:
Inventory....................................................................
Estimated Liability on Purchase Commitments....
Accounts Payable............................................
9-20
108,000
12,000
120,000
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
EXERCISE 9-10 (Continued)
This entry debits the raw materials at the actual cost ($108,000),
eliminates the $12,000 liability set up at December 31, 2013, and records
the contractual liability for the purchase. This permits operations to
be charged this year with the $108,000, the other $12,000 of the cost
having been charged to operations in 2013.
EXERCISE 9-11 (813 minutes)
(1)
20%
100% + 20%
= 16.67% OR 16 2/3%.
(2)
25%
100% + 25%
= 20%.
(3)
(4)
33 1/3%
= 25%.
100% + 33 1/3%
50%
100% + 50%
= 33.33% OR 33 1/3%.
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 selling (at 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
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-21
EXERCISE 9-12 (Continued)
(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 9-13 (1520 minutes)
(a)
Merchandise on hand, January 1....................
Purchases..........................................................
Less: Purchase returns and allowances.......
Freight-in...........................................................
Total merchandise available (at cost)...
Cost of goods sold*..........................................
Ending inventory..............................................
Less: Undamaged goods................................
Estimated fire loss............................................
*Gross profit =
$ 38,000
92,000
(2,400)
3,400
131,000
90,000
41,000
10,900
$ 30,100
33 1/3%
= 25% of sales.
100% + 33 1/3%
Cost of goods sold = 75% of sales of $120,000 = $90,000.
9-22
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
EXERCISE 9-13 (Continued)
(b)
Cost of goods sold = 66 2/3% of sales of $120,000 = $80,000
Total merchandise available (at cost)..................
[$131,000 [as computed in (a)] $80,000]
Less: Undamaged goods....................................
Estimated fire loss................................................
$51,000
10,900
$40,100
EXERCISE 9-14
Beginning inventory.......................................................
Purchases........................................................................
Purchase returns............................................................
Goods available (at cost)...............................................
Sales.................................................................................
Sales returns...................................................................
Net sales..........................................................................
Less: Gross profit (30% X $626,000)...........................
Estimated ending inventory (unadjusted for
damage)........................................................................
Less: Goods on handundamaged (at cost)
$21,000 X (1 30%).............................................
Less: Goods on handdamaged (at net
realizable value)..................................................
Fire loss on inventory....................................................
$170,000
450,000
620,000
(30,000)
590,000
$650,000
(24,000)
626,000
(187,800)
438,200
151,800
(14,700)
(5,300)
$131,800
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-23
EXERCISE 9-15 (1015 minutes)
Beginning inventory (at cost)...................................
Purchases (at cost)....................................................
Goods available (at cost).................................
Sales (at selling price)...............................................
Less sales returns......................................................
Net sales......................................................................
Less: Gross profit* (20% of $112,000).....................
Net sales (at cost).............................................
Estimated inventory (at cost)....................................
Less: Goods on hand ($30,500 $6,000).................
Claim against insurance company...........................
$ 38,000
90,000
128,000
$116,000
4,000
112,000
22,400
89,600
38,400
24,500
$ 13,900
25%
= 20% of selling price
100% + 25%
*Computation of gross profit:
Note: Depending on details of the consignment agreement and Garnetts
insurance policy, the consigned goods might be covered by Garnetts
insurance policy.
EXERCISE 9-16 (1520 minutes)
Inventory 1/1/13 (cost)
Purchases to 8/18/13 (cost)
Cost of goods available
Deduct cost of goods sold*
Inventory 8/18/13
Lumber
$ 250,000
1,500,000
1,750,000
1,640,000
$ 110,000
Millwork
$ 90,000
375,000
465,000
410,000
$ 55,000
Hardware
$ 45,000
160,000
205,000
175,000
$ 30,000
*(See computations on next page)
9-24
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
EXERCISE 9-16 (Continued)
*Computation for cost of goods sold:
Lumber:
$2,050,000 = $1,640,000
1.25
Millwork:
$533,000
1.30
= $410,000
Hardware:
$245,000
1.40
= $175,000
*Alternative computation for cost of goods sold:
Markup on selling price:
Cost of goods sold:
Lumber:
25%
= 20% or 1/5
100% + 25%
$2,050,000 X 80% = $1,640,000
Millwork:
30%
= 3/13
100% + 30%
$533,000 X 10/13 = $410,000
Hardware:
40%
= 2/7
100% + 40%
$245,000 X 5/7 = $175,000
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9-25
EXERCISE 9-17 (2025 minutes)
Ending inventory:
(a)
Gross profit is 40% of sales
Total goods available for sale (at cost)........
Sales (at selling price)...................................
Less: Gross profit (40% of sales)................
Sales (at cost)......................................
Ending inventory (at cost)..................
(b)
1,380,000
$ 720,000
= 37.5% markup on selling price
Total goods available for sale (at cost)........
Sales (at selling price)...................................
Less: Gross profit (37.5% of sales).............
Sales (at cost)......................................
Ending inventory (at cost)..................
$2,100,000
$2,300,000
862,500
1,437,500
$ 662,500
Gross profit is 35% of sales
Total goods available for sale (at cost)........
Sales (at selling price)...................................
Less: Gross profit (35% of sales)................
Sales (at cost)......................................
Ending inventory (at cost)..................
9-26
$2,300,000
920,000
Gross profit is 60% of cost
60%
100% + 60%
(c)
$2,100,000
$2,100,000
$2,300,000
805,000
1,495,000
$ 605,000
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
EXERCISE 9-17 (Continued)
(d)
Gross profit is 25% of cost
25%
100% + 25%
= 20% markup on selling price
Total goods available for sale (at cost)........
Sales (at selling price)...................................
Less: Gross profit (20% of sales).................
Sales (at cost).................................................
Ending inventory (at cost).............................
$2,100,000
$2,300,000
460,000
1,840,000
$ 260,000
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.
Cost
$ 58,000
122,000
$180,000
Retail
$100,000
200,000
20,000
320,000
(30,000)
290,000
186,000
$104,000
$180,000 $300,000 = 60%
$180,000 $270,000 = 66.67%
$180,000 $320,000 = 56.25%
$180,000 $290,000 = 62.07%
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-27
EXERCISE 9-18 (Continued)
(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
EXERCISE 9-19 (1217 minutes)
Beginning inventory..........................
Purchases...........................................
Totals.........................................
Add: Net markups
Markups....................................
Markup cancellations..............
Totals...................................................
Cost
$ 200,000
1,425,000
1,625,000
_________
$1,625,000
Deduct: Net markdowns
Markdowns................................
Markdown cancellations..........
Sales price of goods available..........
Deduct: Sales....................................
Ending inventory at retail..................
Cost-to-retail ratio =
$1,625,000
$2,500,000
Retail
$ 280,000
2,140,000
2,420,000
$95,000
(15,000)
35,000
(5,000)
80,000
2,500,000
30,000
2,470,000
2,250,000
$ 220,000
= 65%
Ending inventory at cost = 65% X $220,000 = $143,000
9-28
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
EXERCISE 9-20 (2025 minutes)
Beginning inventory...............................
Purchases................................................
Purchase returns....................................
Freight on purchases.............................
Totals..............................................
Add: Net markups
Markups.........................................
Markup cancellations...................
Net markups............................................
Totals..............................................
Cost
$30,000
55,000
(2,000)
2,400
85,400
$10,000
(1,500)
_______
$85,400
Deduct: Net markdowns
Markdowns.....................................
Markdown cancellations...............
Net markdowns.......................................
Sales price of goods available..............
Deduct: Net sales ($95,000 $2,000)....
Ending inventory, at retail.....................
Cost-to-retail ratio =
$85,400
$140,000
Retail
$ 46,500
88,000
(3,000)
_______
131,500
8,500
140,000
9,300
(2,800)
6,500
133,500
93,000
$ 40,500
= 61%
Ending inventory at cost = 61% X $40,500 = $24,705
EXERCISE 9-21 (1015 minutes)
(a)
(b)
Inventory turnover:
2010
$8,923
= 6.63 times
$1,344 + $1,347
2
Average days to sell inventory:
2010
365 6.63 = 55.1 days
2009
$9,458
$1,347 + $1,367
2
= 6.97 times
2009
365 6.97 = 52.4 days
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9-29
*EXERCISE 9-22 (2535 minutes)
(a)
Conventional Retail Method
Inventory, January 1, 2013...................
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
$ 41,100
150,000
191,100
$191,100
Retail
$ 60,000
191,000
251,000
22,000
273,000
13,000
260,000
167,000
$ 93,000
= 70%
Ending inventory at cost = 70% X $93,000 = $65,100
(b)
LIFO Retail Method
Inventory, January 1, 2013.......................
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 =
9-30
$150,000
$200,000
Cost
$ 41,100
150,000
150,000
$191,100
Retail
$ 60,000
191,000
22,000
(13,000)
200,000
260,000
167,000
$ 93,000
= 75%
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
*EXERCISE 9-22 (Continued)
Computation of ending inventory at LIFO cost, 2013:
Ending Inventory
at Retail Prices
Layers at
Retail Prices
$93,000
2012 $60,000
2013 33,000
Cost-to-Retail
Percentage
Ending Inventory
at LIFO Cost
68.5%*
75.0%
$41,100
24,750
$65,850
X
X
*$41,100
(prior years cost to retail)
$60,000
*EXERCISE 9-23 (1520 minutes)
(a)
Inventory, January 1, 2013...................
Net Purchases.......................................
Freight-in................................................
Net markups..........................................
Totals............................................
Sales.......................................................
Net markdowns.....................................
Estimated theft......................................
Ending inventory at retail.....................
Cost-to-retail ratio:
$77,000
$110,000
Cost
$14,000
55,500
7,500
$77,000
Retail
$ 20,000
81,000
9,000
110,000
(75,000)
(2,500)
(2,000)
$ 30,500
= 70%
Ending inventory at lower-of-average-cost-or-market =
$30,500 X 70% = $21,350
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-31
*EXERCISE 9-23 (Continued)
(b)
Purchases..............................................
Freight-in...............................................
Net markups..........................................
Net markdowns.....................................
Totals............................................
Cost-to-retail ratio:
$63,000
$87,500
Cost
$55,500
7,500
______
$63,000
Retail
$81,000
9,000
(2,500)
$87,500
= 72%
The increment at retail is $30,500 $20,000 = $10,500.
The increment is costed at 72% X $10,500 = $7,560.
Ending inventory at LIFO retail:
Beginning inventory, 2013...................
Increment...............................................
Ending inventory, 2013........................
Cost
$14,000
7,560
$21,560
Retail
$20,000
10,500
$30,500
*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-to-retail ratio (74%).
9-32
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
*EXERCISE 9-24 (Continued)
(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%*...............................
$330,000
(300,000)
$ 30,000
$222,000
24,852
$246,852
*($364,800 $480,000)
*EXERCISE 9-25 (510 minutes)
Ending inventory at retail (deflated) $95,150 1.10.....................
Beginning inventory at retail..........................................................
Increment at retail...........................................................................
$86,500
(74,500)
$12,000
Ending inventory on LIFO basis
First layer.................................................................................
Second layer ($12,000 X 1.10 X 55%)...................................
Cost
$36,000
7,260
$43,260
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-33
*EXERCISE 9-26 (2025 minutes)
(a)
Beginning inventory.........................................
Net purchases....................................................
Net markups.......................................................
Totals.........................................................
Net markdowns..................................................
Sales...................................................................
Ending inventory at retail.................................
Cost
$ 34,300
108,500
$142,800
Cost-retail ratio = 68% ($142,800/$210,000)
Ending inventory at cost ($77,000 X 68%)......
(b)
Beginning inventory.........................................
Net purchases....................................................
Net markups.......................................................
Net markdowns..................................................
Total (excluding beginning inventory)............
Total (including beginning inventory).............
Sales...................................................................
Ending inventory at retail (current).................
Ending inventory at retail (base year)
($77,000 1.10)...............................................
Cost-retail ratio for new layer:
$108,500/$155,000 = 70%
Layers:
Base layer
$50,000 X 1.00 X 68.6%* =.....................
New layer
($70,000 $50,000) X 1.10 X 70% =.....
Retail
$ 50,000
150,000
10,000
210,000
(5,000)
(128,000)
$ 77,000
$ 52,360
Cost
$ 34,300
108,500
108,500
$142,800
Retail
$ 50,000
150,000
10,000
(5,000)
155,000
205,000
(128,000)
77,000
$ 70,000
$ 34,300
15,400
$ 49,700
*($34,300/$50,000)
(c)
9-34
Cost of goods available for sale......................
Ending inventory at cost, from (b)..................
Cost of goods sold............................................
$142,800
(49,700)
$ 93,100
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
*EXERCISE 9-27 (2025 minutes)
2011
Restate to base-year retail ($121,900 1.06)
$115,000
Layers: 1. $100,000 X 1.00 X 54%* =
2. $ 15,000 X 1.06 X 57% =
Ending inventory
$ 54,000
9,063
$ 63,063
*$54,000 $100,000
2012
$ 54,000
9,063
6,660
$ 69,723
Restate to base-year retail ($126,500 1.15)
$110,000
Layers: 1. $100,000 X 1.00 X 54% =
2. $ 10,000 X 1.06 X 57% =
Ending inventory
$ 54,000
6,042
$ 60,042
Restate to base-year retail ($162,500 1.25)
$130,000
Layers: 1. $100,000 X 1.00 X 54% =
2. $ 10,000 X 1.06 X 57% =
3. $ 20,000 X 1.25 X 58% =
Ending inventory
2014
$125,000
Layers: 1. $100,000 X 1.00 X 54% =
2. $ 15,000 X 1.06 X 57% =
3. $ 10,000 X 1.11 X 60% =
Ending inventory
2013
Restate to base-year retail ($138,750 1.11)
$ 54,000
6,042
14,500
$ 74,542
*EXERCISE 9-28 (510 minutes)
Inventory (beginning)...............................................
Adjustment to Record Inventory at Cost*
($210,600 $205,000)...................................
5,600
5,600
*Note: This account is an income statement account showing the effect of
changing from a lower-of-cost-or-market approach to a straight cost basis.
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-35
IFRS CONCEPTS AND APPLICATION
IFRS9-1
Key similarities are (1) the guidelines on who owns the goodsgoods in
transit, consigned goods, special sales agreements, and the costs to
include in inventory are essentially accounted for the same under IFRS and
U.S. GAAP; (2) use of specific identification cost flow assumption, where
appropriate; (3) unlike property, plant and equipment, IFRS does not permit
the option of valuing inventories at fair value. As indicated above, IFRS
requires inventory to be written down, but inventory cannot be written up
above its original cost; (4) certain agricultural products and minerals and
mineral products can be reported at net realizable value using IFRS.
Key differences are related to (1) the LIFO cost flow assumptionGAAP
permits the use of LIFO for inventory valuation. IFRS prohibits its use. FIFO
and average-cost are the only two acceptable cost flow assumptions
permitted under IFRS; (2) lower-of-cost-or-market test for inventory
valuationIFRS defines market as net realizable value. GAAP on the other
hand defines market as replacement cost subject to the constraints of net
realizable value (the ceiling) and net realizable value less a normal markup
(the floor). That is, IFRS does not use a ceiling or a floor to determine
market; (3) inventory write-downsunder GAAP, if inventory is written
down under the lower-of-cost-or-market valuation, the new basis is now
considered its cost. As a result, the inventory may not be written back up
to its original cost in a subsequent period. Under IFRS, the write-down may
be reversed in a subsequent period up to the amount of the previous writedown. Both the write-down and any subsequent reversal should be
reported on the income statement; (4) the requirements for accounting and
reporting for inventories are more principles-based under IFRS. That is,
GAAP provides more detailed guidelines in inventory accounting.
9-36
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
IFRS9-2
As shown in the analysis below, under IFRS, LaTours inventory turnover
ratio is computed as follows:
Cost of Goods Sold
Average Inventory
=
$578
$154
= 3.75
Difficulties in comparison to a company using GAAP could arise if the U.S.
company uses the LIFO cost flow assumption, which is prohibited un der
IFRS. Generally in times of rising prices, LIFO results in a lower inventory
balance reported on the balance sheet (assumes more recently purchased
items are sold first). Thus, the GAAP company will report higher inventory
turnover ratios. The LIFO reserve can be used to adjust the reported LIFO
numbers to FIFO and to permit an apples to apples comparison.
IFRS9-3
Reed must not be aware of the important convergence issue arising from
the use of the LIFO cost flow assumption; IFRS specifically prohibits its
use. Conversely, the LIFO cost flow assumption is widely used in the
United States because of its favorable tax advantages. In addition, many
argue that LIFO from a financial reporting point of view provides a better
matching of current costs against revenue and therefore a more realistic
income is computed.
The problem is compounded in the United States because LIFO cannot be
used for tax purposes unless it is used for financial reporting purposes. As
a result, unless the tax law is changed, it is unlikely that GAAP will
eliminate the use of the LIFO cost flow assumption because of its
substantial tax advantages for many companies.
Also, GAAP has more detailed rules related to accounting and reporting of
inventories than IFRS. We expect that these more detailed rules will be
used internationally because they provide practical guidance for some
inventory accounting and reporting issues.
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-37
IFRS9-4
(a)
Biological assets are measured on initial recognition and at the end of
each reporting period at fair value less costs to sell (NRV). Companies
record a gain or loss due to changes in the NRV of biological assets
in income when it arises.
(b)
Agricultural produce (which are harvested from biological assets) are
measured at fair value less costs to sell (NRV) at the point of harvest.
Once harvested, the NRV of the agricultural produce becomes its cost
and this asset is accounted for similar to other inventories held for
sale in the normal course of business.
IFRS9-5
(1)
(2)
(3)
(4)
(5)
$12.80 ($14.80 $1.50 $.50).
$16.10.
$13.00 ($15.20 $1.65 $.55).
$ 9.20 ($10.40 $ .80 $.40).
$15.90.
IFRS9-6
Item
D
E
F
G
H
I
Net
Realizable
Value
$80*
62
60
35
70
40
Cost
$75
80
80
80
50
36
LCNRV
$75
62
60
35
50
36
*Estimated selling price Estimated selling costs and cost to complete
= $120 $30 $10 = $80.
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Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
IFRS9-7
(a)
12/31/12
Cost of Goods Sold..............................
Allowance to Reduce Inventory
24,000
24,000
to NRV.......................................
12/31/13
(b)
12/31/12
12/31/13
Allowance to Reduce Inventory to
NRV...................................................
Cost of Goods Sold....................
Loss Due to Decline of
Inventory to NRV...............................
Allowance to Reduce Inventory
to NRV.......................................
Allowance to Reduce Inventory
to NRV................................................
Recovery of Loss Due to
Decline of Inventory................
4,000*
4,000
24,000
24,000
4,000*
4,000
*Cost of inventory at 12/31/12...............................
Lower-of-cost-or-NRV at 12/31/12.......................
Allowance amount needed to reduce
Inventory to NRV (a)..........................................
$346,000
(322,000)
Cost of inventory at 12/31/13...............................
Lower-of-cost-or-NRV at 12/31/13.......................
Allowance amount needed to reduce
Inventory to NRV (b)..........................................
$410,000
(390,000)
Recovery of previously recognized loss
(c)
$ 24,000
$ 20,000
= (a) (b)
= $24,000 $20,000
= $4,000.
Both methods of recording lower-of-cost-or-NRV adjustments have
the same effect on net income.
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-39
IFRS9-8
Biological Assets Shearing Sheep......................
Unrealized Holding Gain or
Loss Income.............................................
4,125*
4,125
*$4,700 $575 = $4,125.
IFRS9-9
(a)
(b)
Wool Inventory.........................................................
Unrealized Holding Gain or
Loss Income..............................................
9,000
Cash...........................................................................
Cost of Goods Sold..................................................
Wool Inventory...............................................
Sales...............................................................
10,500
9,000
9,000
9,000
10,500
IFRS9-10
(a)
The IFRS requirements related to accounting and reporting for
inventories is found in IAS 2 (Inventories), IAS 18 (Revenue) and IAS
41 (Agriculture).
Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the
production process or in the rendering of services.
(IAS 2, paragraph 6)
This Standard applies to all inventories, except:
(a) work in progress arising under construction contracts, including
directly related service contracts (see IAS 11 Construction
Contracts);
(b) financial instruments (see IAS 32 Financial Instruments:
Presentation and IAS 39 Financial Instruments: Recognition and
Measurement); and
(c) biological assets related to agricultural activity and agricultural
produce at the point of harvest (see IAS 41 Agriculture).
(IAS 2, paragraph 2)
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Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
IFRS9-10 (Continued)
(c)
Net realisable value refers to the net amount that an entity expects to
realise from the sale of inventory in the ordinary course of business.
Fair value reflects the amount for which the same inventory could be
exchanged between knowledgeable and willing buyers and sellers in
the marketplace. The former is an entity-specific value; the latter is
not. Net realisable value for inventories may not equal fair value less
costs to sell. (IAS 2, paragraph 7).
(d)
This Standard does not apply to the measurement of inventories held by:
(a) producers of agricultural and forest products, agricultural produce
after harvest, and minerals and mineral products, to the extent
that they are measured at net realisable value in accordance
with well established practices in those industries. When such
inventories are measured at net realisable value, changes in that
value are recognised in profit or loss in the period of the change.
(b) commodity broker-traders who measure their inventories at fair
value less costs to sell. When such inventories are measured at
fair value less costs to sell, changes in fair value less costs to
sell are recognised in profit or loss in the period of the change.
(IAS 2, paragraph 3).
IFRS9-11
(a)
Inventories are valued at the lower-of-cost-or-net realisable value
using the retail method, which is computed on the basis of selling
price less the appropriate trading margin. All inventories are finished
goods.
(b)
Inventories are reported on the statement of financial position simply
as Inventories. The footnotes indicate that all inventories are fin ished
goods.
(c)
No information is provided in the annual report regarding what costs
are included in inventories or cost of sales.
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
9-41
IFRS9-11 (Continued)
Cost of Sales
5,918.1
=
Average Inventory
613.2 + 536.0
2
= 10.30 or approximately 35 days to turn its inventory, which is
slightly lower than in 2009 (11.10 or 33 days). Overall, turnover
remains high.
(d) Inventory turnover =
Its gross profit percentages for 2010 and 2009 are as follows:
Net sales.............................
Cost of sales......................
Gross profit........................
Gross profit percentage....
2010
9,536.6
5,918.1
3,618.5
37.94%
2009
9,062.1
5,690.2
3,371.9
37.21%
M&S had a small improvement in its gross profit and a slight increase in
gross profit percentage. Sales in 2010 showed a 5.2% increase, due to
(1) inclusion of 53 weeks in 2010 compared to 52 weeks in 2009, and
(2) increased UK locations and strong international performance. It
appears that M&S has been able to maintain its gross profit percentage
on these increased sales.
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Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)