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Exam 9: Inventories: Additional Issues

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Question 61

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On July 10, 2018, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2019. The company's fiscal year-end is December 31. The contract was exercised on February 1, 2019, and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2018, was $180,000. -The company uses a perpetual inventory system. At what amount will Johnson record the inventory purchased on February 1, 2019?

A) $210,000.
B) $200,000.
C) $180,000.
D) $190,000.

E) C) and D)
F) B) and C)

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Question 62

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Under the retail inventory method:

A) A company measures inventory on its balance sheet by converting retail prices to cost.
B) A company measures inventory on its balance sheet at current selling prices.
C) A company measures inventory on its balance sheet on a LIFO basis.
D) None of these answer choices are correct.

E) B) and C)
F) A) and D)

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Question 63

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Data related to the inventories of Alpine Ski Equipment and Supplies is presented below: - In applying the lower of cost or net realizable value rule, the inventory of skis would be valued at:

Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was overstated by $32,000, and its ending inventory on December 31 was understated by $62,000. These errors were not discovered until the next year. As a result, Prunedale's cost of goods sold for this year was:

Sullivan Corporation has determined its year-end inventory on a FIFO basis to be $500,000. Information pertaining to that inventory is as follows: $\begin{array} { l r } \text { Selling price } & \$ 520,000 \\\text { Costs to sell } & 30,000 \\\text { Replacement cost } & 440,000\end{array}$ -What should be the reported value of Sullivan's inventory?

On July 10, 2018, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2019. The company's fiscal year-end is December 31. The contract was exercised on February 1, 2019, and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2018, was $180,000. -The company uses a perpetual inventory system. How much loss on purchase commitment will Johnson recognize in 2018?

Clarabell Inc. uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shown below: -The conventional cost-to-retail percentage (rounded) is:

Clarabell Inc. uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shown below: - To the nearest thousand, estimated ending inventory using the conventional retail method is:

Harvey's Junk Jewelry started business January 1, 2018, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2018: -To the nearest thousand, the estimated ending inventory at cost is (round cost-to-retail ratio to whole percentage) :

Hawkeye Auto Parts uses the average cost retail method to estimate inventories. Data for the first six months of 2018 include: beginning inventory at cost and retail were $55,000 and $100,000, net purchases at cost and retail were $785,000 and $1,300,000, and sales during the first six months totaled $800,000. The estimated inventory at June 30, 2018, would be:

Harvey's Junk Jewelry started business January 1, 2018, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2018: - The numerator for the current period's cost-to-retail percentage is:

On January 1, 2018, the Coldstone Corporation adopted the dollar-value LIFO retail inventory method. Beginning inventory at cost and at retail were $180,000 and $282,000, respectively. Net purchases during the year at cost and at retail were $604,500 and $920,000, respectively. Markups during the year were $10,000. There were no markdowns. Net sales for 2018 were $900,000. The retail price index at the end of 2018 was 1.04. What is the inventory balance that Coldstone would report in its 12/31/2018 balance sheet?

Sullivan Corporation has determined its year-end inventory on a FIFO basis to be $500,000. Information pertaining to that inventory is as follows: $\begin{array} { l r } \text { Selling price } & \$ 520,000 \\\text { Costs to sell } & 30,000 \\\text { Replacement cost } & 440,000\end{array}$ -What should be the reported value of Sullivan's inventory if the company prepares its financial statements according to International Financial Reporting Standards (IFRS) ?

Briefly outline the steps in the gross profit method of estimating ending inventory and indicate when the method might be used.

Symington and Cribbs (S&C) is a sporting goods distributor. S&C uses the FIFO inventory method to determine the cost of its ending inventory. Ending inventory quantities are determined by a physical count. For the fiscal year-end December 31, 2018, ending inventory was originally determined to be $67 million. However, in early January of 2019, the company's controller, Amy Grant, discovered that an error was made in the inventory count. The correct amount of ending inventory should be $87 million. The auditors did not discover the error and the financial statements are scheduled to be issued on February 26, 2019. S&C is a public company. Amy's first reaction was to communicate her finding to the auditors and to revise the financial statements before they are issued. However, she knows that this was a very good year for the company with profits far exceeding analysts' expectations. If the error is not corrected this year, it will self-correct next year as long as 2019 ending inventory is correctly stated. This will help future 2019 profits. On the other hand, her fellow workers' profit sharing plans are based on annual pretax earnings and if she revises the statements, everyone's profit sharing bonus will be higher this year. Required: 1. Is Amy correct by stating that the error will self-correct next year as long as 2019 ending inventory is correctly stated? If the error is not corrected in the current year, what will be the effect on 2018 and 2019 income before tax? 2. Discuss the ethical dilemma Amy faces.

Data related to the inventories of Costco Medical Supply are presented below: $\begin{array} { l c c c r } & \text { Surgical } & \text { Surgical } & \text { Rehab } & \text { Rehab } \\& \text { Equiprnent } & \text { Supplies } & \text { Equipment } & \text { Supplies } \\\text { Selling price } & \$ 260 & \$ 100 & \$ 340 & \$ 165 \\\text { Cost } & 170 & 90 & 250 & 162 \\\text { Costs to sell } & 30 & 15 & 25 & 10\end{array}$ -In applying the lower of cost or net realizable value rule, the inventory of surgical equipment would be valued at:

DK Super Stores Inc. uses the average cost retail method to estimate its ending inventory. Information at June 30, 2018, is as follows: Required: Compute the cost-to-retail percentage used by DK.

Novelli's Nursery has developed the following data in order to calculate the lower of cost or net realizable value for its products. The individual products are listed within the categories of trees. The costs to sell are 10% of selling price. -Required: Determine the reported inventory value assuming the lower of cost or net realizable value rule is applied to categories of trees.

Briefly explain how a material adjustment to inventory due to application of the lower of cost or market (LCM) rule should be reported in the financial statements.

Memphis Wholesale Market applies the lower of cost or net realizable valuation to individual products and has collected the following data: $\begin{array}{lccc}&\text { Product A }&\text { Product B }&\text { Product C }\\\text { Selling price } & \$ 100 & \$ 125 & \$ 80 \\\text { Cost } & 70 & 75 & 80 \\\text { Costs to sell } & 15 & 20 & 8\end{array}$ -Determine the inventory book value for Products A, B, and C.