ACCT 301 Solutions to Chapter 9 Homework - ACCT 301...

ACCT 301 Solutions to Chapter 9 Homework
Question 9-1
Question 9-3
Question 9-4
Question 9-7
The retail inventory method first determines the amount of ending inventory at retail by
subtracting sales for the period from goods available for sale at retail . Ending inventory at retail
is then converted to cost by multiplying it by the cost-to-retail percentage.
Question 9-13
Freight-in is added to purchases in the cost column. Net markups are added in the retail
column before the calculation of the cost-to-retail percentage. Normal spoilage is deducted in
the retail column after the calculation of the cost-to-retail percentage. If sales are recorded net of
employee discounts, the discounts are added to net sales before sales are deducted in the retail
column.
1
GAAP generally require the use of historical cost to value assets, but a departure from cost
is necessary when the utility of an asset is no longer as great as its cost. The utility or benefits
from inventory result from the ultimate sale of the goods. This utility could be reduced below
cost due to deterioration, obsolescence, or changes in price levels. To avoid reporting inventory
at an amount greater than the benefits it can provide, the lower-of-cost-or-market approach to
valuing inventory was developed. This approach results in the recognition of losses when the
value of inventory declines below its cost, rather than in the period in which the goods are
ultimately sold.
The LCM determination can be made based on individual inventory items, on logical
categories of inventory, or on the entire inventory.
The preferred method is to record the loss from the write-down of inventory as a separate
item in the income statement rather than including the write-down in cost of goods sold. A
less desirable alternative is to include the loss in cost of goods sold.

When a company changes to the LIFO inventory method from any other method, it usually
is impossible to calculate the income effect on prior years. To do so would require assumptions
as to when specific LIFO inventory layers were created in years prior to the change. As a result,
a company changing to LIFO usually does not report the change retrospectively. Instead, the
LIFO method simply is used from that point on. The base year inventory for all future LIFO
determinations is the beginning inventory in the year the LIFO method is adopted.
Exercise 9-4
(1) (2) (3) (4) (5)
Product RC
Ceiling
NRV (*)
Floor
NRV-NP
(**)
Designated
Market Value
[Middle value
Cost
Per Unit
Inventory
Value
[Lower of (4)
and (5)]
A $35 $52 $34 $35 $40 $35
B 70 86 56 70 80 70
C 55 70 46 55 40 40
D 70 112 73 73 100 73
E 28 26 17 26 20 20
* Selling price less disposal costs. Disposal costs = 10% of selling price + 5%
of cost.
** NRV less normal profit margin