ch09 PDF

CHAPTER 9
INVENTORIES: ADDITIONAL VALUATION ISSUES

CHAPTER LEARNING OBJECTIVES
1. Describe and apply the lower-of-cost-or- net realizable value rule.
2. Explain when companies value inventories at net realizable value.
3. Explain when companies use the relative standalone sales value method to value
inventories.
4. Discuss accounting issues related to purchase commitments.
5. Determine ending inventory by applying the gross profit method.
6. Determine ending inventory by applying the retail inventory method.
7. Explain how to report and analyze inventory.
9-2
Test Bank for Intermediate Accounting: IFRS Edition, 2e
TRUE-FALSEConceptual
1.
A company should abandon the historical cost principle when the future utility of the
inventory item falls below its original cost.
2.
The lower-of-cost-or-net realizable method is used for inventory despite being less
conservative than valuing inventory at net realizable value.
3.
Application of the lower-of-cost-or-net realizable value rule results in inconsistency

because a company may value inventory at cost in one year and at net realizable value in
the next year.
4.
International Financial Reporting Standards (IFRS) require that a company record an

inventory write-down as part of cost of goods sold.
5.
Under International Financial Reporting Standards (IFRS), when companies value

inventory using the lower-of-cost-or-net realizable value (LCNRV), in most situations,
companies price inventory on a totalinventory basis.
6.
Biological assets, such as milking cows, are reported as non-current assets at fair value
less costs to sale (net realizable value).
7.
The unrealized gains and losses related to recording biological assets at their correct
valuation are reported as part of other comprehensive income on the statement of
comprehensive income.
8.
Under International Financial Reporting Standards (IFRS), net realizable value is the
general rule for valuing commodities held by broker-traders.
9.
Under International Financial Reporting Standards (IFRS), separate reporting of reversals

of inventory write-downs in the period of sale are required.
10.
Under International Financial Reporting Standards (IFRS), agricultural activity can result in
the production of both agricultural produce and biological assets.
11.
An inventory of wheat held by a broker-trader is valued at net realizable value.
12.
Agricultural produce is harvested from biological assets and is measured at fair value less
costs to sell at the point of harvest.
13.
In a basket purchase, the cost of the individual assets acquired is determined on the basis
of their relative standalone sales value.
14.
A basket purchase occurs when a company agrees to buy inventory weeks or months in
advance.
15.
Most purchase commitments must be recorded as a liability.
16.
If the contract price on a noncancelable purchase commitment exceeds the market price,
the buyer should recognize a liability and corresponding loss in the period in which the
market decline takes place.
Inventories: Additional Valuation Issues
9-3
17.
When a buyer enters into a formal, noncancelable purchase contract, an asset and a
liability are recorded at the inception of the contract.
18.
In late 2015, Daisy Company entered into a noncancelable purchase contract for which
the contract price is now greater than the market price, and Daisy expects that losses will
occur when the purchase is executed in early 2016. Under IFRS, Daisy should recognize
a liability and corresponding loss in 2015.
19.
Under International Financial Reporting Standards (IFRS), a company who recorded a

loss on a purchase commitment in 2015 cannot record a recovery of that loss in 2016 if
prices improve.
20.
The gross profit method can be used to approximate the dollar amount of inventory on
hand.
21.
In most situations, the gross profit percentage is stated as a percentage of cost.
22.
A disadvantage of the gross profit method is that it uses past percentages in determining
the markup.
23.
When the conventional retail method includes both net markups and net markdowns in the
cost-to-retail ratio, it approximates a lower-of-cost-or-net realizable value valuation.
24.
In the retail inventory method, the term markup means a markup on the original cost of an
inventory item.
25.
In the retail inventory method, abnormal shortages are deducted from both the cost and
retail amounts and reported as a loss.
26.
The inventory turnover is computed by dividing the cost of goods sold by the ending
inventory on hand.
27.
The average days to sell inventory represents the average number of days sales for
which a company has inventory on hand.
28.
Under IFRS, LIFO is permitted for financial reporting purposes if the companys host
country permits it for tax purposes.
29.
Under U.S. GAAP, if inventory is written down under lower-of-cost-or-market, it may not be
written back up to its original cost in a subsequent period.
30.
IFRS requires inventory to be written down below its original cost in some situations, but
inventory cannot be written up above its original cost.
True False AnswersConceptual

Item
1.
2.
3.
4.
5.
Ans.
T
F
T
F
F
Item
6.
7.
8.
9.
10.
Ans.
T
F
T
T
T
Item
11.
12.
13.
14.
15.
Ans.
T
T
T
F
F
Item
16.
17.
18.
19.
20.
Ans.
T
F
T
F
T
Item
21.
22.
23.
24.
25.
Ans.
F
T
F
F
T
Item
26.
27.
28.
29.
30.
Ans.
F
T
F
T
T
9-4
MULTIPLE CHOICEConceptual
31.
LCNRV of inventory
a. is always either the net realizable value or its cost.
b. should always be equal to net realizable value.
c. may sometimes be less than net realizable value.
d. should always be equal to net realizable value less costs to complete.
32.
Lower-of-cost-or-net realizable value

a. gives the lowest valuation if applied to the total inventory.
b. gives the lowest valuation if applied to major groups of inventory.
c. gives the lowest valuation if applied to individual items of inventory.
d. must be applied to major groups for taxes.
33.
When the cost-of-goods-sold method is used to record inventory at net realizable value
a. there is a direct reduction in the selling price of the product that results in a loss being
recorded on the income statement prior to the sale.
b. a loss is recorded directly in the inventory account by crediting inventory and debiting
loss on inventory decline.
c. only the portion of the loss attributable to inventory sold during the period is recorded
in the financial statements.
d. the net realizable value figure for ending inventory is substituted for cost and the loss
is buried in cost of goods sold.
34.
Lower-of-cost-or-net realizable value as it applies to inventory is best described as the

a. reporting of a loss when there is a decrease in the future utility below the original cost.
b. method of determining cost of goods sold.
c. assumption to determine inventory flow.
d. change in inventory value to net realizable value.
35.
Why are inventories stated at lower-of-cost-or-net realizable value?

a. To report a loss when there is a decrease in the future utility.
b. To be conservative.
c. To report a loss when there is a decrease in the future utility below the original cost.
d. To permit future profits to be recognized.
36.
Which of the following is not an acceptable method of applying the lower-of-cost-or-net

realizable value method to inventory?
a. Inventory location.
b. Groups of inventory items.
c. Individual item.
d. Total of the inventory.
37.
Which method(s) may be used to record a loss due to a price decline in the value of
inventory?
a. Loss method.
b. Sales method.
c. Cost-of-goods-sold method.
d. Both the loss method and the cost-of-goods-sold method.
9-5
38.
When inventory declines in value below original (historical) cost what is the maximum
amount that the inventory can be valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Sales price reduced by estimated costs to sell
39.
Net realizable value is

a. fair value plus estimated costs to complete and make a sale.
b. selling price.
c. selling price plus estimated costs to complete and make a sale.
d. selling price less estimated costs to complete and make a sale.
40.
Shake Companys inventory experienced a decline in value necessitating a write-down to

lower of cost or net realizable value (LCNRV) of $230,000. This amount is material to
Shakes income statement and the company follows IFRS. Where should Shake
Company report this decline in value according to IFRS?
I.
As a loss on the income statement.
II.
As a separate component of other comprehensive income on the statement
of comprehensive income.
III.
As part of cost of goods sold on the income statement.
a. Shake must use I.
b. Shake must use I, II or III.
c. Shake must use I, or III.
d. Shake must use III.
41.
Which of the following statements is incorrect regarding the lower-of-cost-or-net

realizable value (LCNRV)?
a. Net realizable value (NRV) is the selling price less estimated costs to complete and
estimated costs to make a sale.
b. In most situations, companies price inventory on a total-inventory basis.
c. One of two methods may be used to record the income effect of valuing inventory at
net realizable value.
d. Companies use an allowance account, the Allowance to Reduce Inventory to Net
Realizable Value.
42.
Under International Financial Reporting Standards (IFRS), which of the following is true
regarding inventory write-downs and/or recovery of a write-down?
a. Recovery of inventory write-downs is prohibited under IFRS.
b. IFRS requires separate reporting of reversals of inventory write-downs.
c. IFRS requires companies to record write-downs in a separate loss account.
d. All of the choices are correct.
43.
Under International Financial Reporting Standards (IFRS), net realizable value is the
general rule for valuing which of the following types of inventory?
a. Commodities held by broker-traders.
b. Computer components held for sale to manufacturers.
c. Inventories priced on an item by-item basis, but not those priced on a total-inventory
basis.
d. All of the choices are held at NRV under IFRS.
9-6
44.
Under International Financial Reporting Standards (IFRS), agricultural activity results in

which of the following types of assets?
I.
Agricultural produce
II.
Biological assets
a. I only.
b. II only.
c. I and II.
d. Neither I nor II.
45.
Agricultural produce is
a. Harvested from biological assets.
b. Valued at the time of harvest at its cost to produce.
c. Valued at each reporting period at its fair value less costs to sell.
d. All of the choices are correct regarding agricultural produce.
46.
Commodity broker-traders
a. Produce or raise commodities such as corn, wheat, or precious metals.
b. Hold their inventory primarily to sell the commodities in the near term and generate a
profit from price fluctuations.
c. Value their inventories at the lower-of-cost-or-net realizable value (LCNRV).
d. All of the choices are correct regarding broker-traders.
47.
Situations in which net realizable value is used to value inventory include

a. agricultural inventory.
b. minerals and mineral products.
c. commodities held by broker-traders.
d. All of these are correct.
48.
If a material amount of inventory has been ordered through a formal purchase contract at
the statement of financial position date for future delivery at firm prices,
a. this fact must be disclosed.
b. disclosure is required only if prices have declined since the date of the order.
c. disclosure is required only if prices have since risen substantially.
d. an appropriation of retained earnings is necessary.
49.
The credit balance that arises when a net loss on a purchase commitment is recognized
should be
a. presented as a current liability.
b. subtracted from ending inventory.
c. presented as an appropriation of retained earnings.
d. presented in the income statement.
50.
In 2015, Orear Manufacturing signed a contract with a supplier to purchase raw materials
in 2016 for $700,000. Before the December 31, 2015 statement of financial position date,
the market price for these materials dropped to $510,000. The journal entry to record this
situation at December 31, 2015 will result in a credit that should be reported
a. as a valuation account to Inventory on the statement of financial position.
b. as a current liability.
c. as an appropriation of retained earnings.
d. on the income statement.
9-7
51.
At the end of the fiscal year, Apha Airlines has an outstanding non-cancellable purchase
commitment for the purchase of 1 million gallons of jet fuel at a price of $4.10 per gallon
for delivery during the coming summer. The company prices its inventory at the LCNRV.
If the market price for jet fuel at the end of the year is $4.50, how would this situation be
reflected in the annual financial statements?
a. Record unrealized gains of $400,000 and disclose the existence of the purchase commitment.
b. No impact.
c. Record unrealized losses of $400,000 and disclose the existence of the purchase commitment.
d. Disclose the existence of the purchase commitment.
52.
At the end of the fiscal year, Apha Airlines has an outstanding purchase commitment for
the purchase of 1 million gallons of jet fuel at a price of $4.60 per gallon for delivery during
the coming summer. The company prices its inventory at the LCNRV. If the market price
for jet fuel at the end of the year is $4.25, how would this situation be reflected in the
annual financial statements?
a. Record unrealized gains of $350,000 and disclose the existence of the purchase commitment.
b. No impact.
c. Record unrealized losses of $350,000 and disclose the existence of the purchase commitment.
d. Disclose the existence of the purchase commitment.
53.
How is the gross profit method used as it relates to inventory valuation?

a. Verify the accuracy of the perpetual inventory records.
b. Verity the accuracy of the physical inventory.
c. To estimate cost of goods sold.
d. To provide an inventory value of LIFO inventories.
54.
Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus the purchases equal total goods to be accounted for.
b. Goods not sold must be on hand.
c. If the sales, reduced to the cost basis, are deducted from the sum of the opening
inventory plus purchases, the result is the amount of inventory on hand.
d. The total amount of purchases and the total amount of sales remain relatively
unchanged from the comparable previous period.
55.
The gross profit method of inventory valuation is invalid when

a. a portion of the inventory is destroyed.
b. there is a substantial increase in inventory during the year.
c. there is no beginning inventory because it is the first year of operation.
d. None of these are correct.
56.
Which statement is not true about the gross profit method of inventory valuation?
a. It may be used to estimate inventories for interim statements.
b. It may be used to estimate inventories for annual statements.
c. It may be used by auditors.
d. It may be used when fire or other catastrophe destroys the inventory.
57.
A major advantage of the retail inventory method is that it

a. provides reliable results in cases where the distribution of items in the inventory is
different from that of items sold during the period.
b. hides costs from competitors and customers.
c. gives a more accurate statement of inventory costs than other methods.
d. provides a method for inventory control and facilitates determination of the periodic
inventory for certain types of companies.
9-8
58.
An inventory method which is designed to approximate inventory valuation at the lower of

cost or net realizable value is
a. last-in, first-out.
b. first-in, first-out.
c. conventional retail method.
d. specific identification.
59.
The retail inventory method is based on the assumption that the

a. final inventory and the total of goods available for sale contain the same proportion of
high-cost and low-cost ratio goods.
b. ratio of gross margin to sales is approximately the same each period.
c. ratio of cost to retail changes at a constant rate.
d. proportions of markups and markdowns to selling price are the same.
60.
Which statement is true about the retail inventory method?

a. It may not be used to estimate inventories for interim statements.
b. It may not be used to estimate inventories for annual statements.
c. It may not be used by auditors.
d. None of these are correct.
61.
When the conventional retail inventory method is used, markdowns are commonly ignored
in the computation of the cost to retail ratio because
a. there may be no markdowns in a given year.
b. this tends to give a better approximation of the lower of cost or net realizable value.
c. markups are also ignored.
d. this tends to result in the showing of a normal profit margin in a period when no
markdown goods have been sold.
62.
To produce an inventory valuation which approximates the lower-of-cost-or-net realizable

value using the conventional retail inventory method, the computation of the ratio of cost
to retail should
a. include markups but not markdowns.
b. include markups and markdowns.
c. ignore both markups and markdowns.
d. include markdowns but not markups.
63.
Which of the following is not required when using the retail inventory method?
a. All inventory items must be categorized according to the retail markup percentage
which reflects the items selling price.
b. A record of the total cost and retail value of goods purchased.
c. A record of the total cost and retail value of the goods available for sale.
d. Total sales for the period.
64.
Which of the following is not a reason the retail inventory method is used widely?
a. As a control measure in determining inventory shortages
b. For insurance information
c. To permit the computation of net income without a physical count of inventory
d. To defer income tax liability
9-9
65.
What condition is not necessary in order to use the retail method to provide inventory
results?
a. Retailer keeps a record of the total costs of products sold for the period.
b. Retailer keeps a record of the total costs and retail value of goods purchased.
c. Retailer keeps a record of the total costs and retail value of goods available for sale.
d. Retailer keeps a record of sales for the period.
66.
What method yields results that are essentially the same as those of the conventional
retail method?
a. FIFO.
b. Lower-of-average-cost-or-net realizable value.
c. Average cost.
d. LIFO.
67.
What is the effect of net markups on the cost-retail ratio when using the conventional retail
method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markdowns.
d. Decreases the cost-retail ratio.
68.
What is the effect of freight-in on the cost-retail ratio when using the conventional retail
method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markups.
d. Decreases the cost-retail ratio.
69.
Which of the following is not a common disclosure for inventories?

a. Inventory composition.
b. Inventory location.
c. Inventory financing arrangements.
d. Inventory costing methods employed.
70.
Which of the following statements is false regarding an assumption of inventory cost flow?
a. The cost flow assumption need not correspond to the actual physical flow of goods.
b. The assumption selected may be changed each accounting period.
c. The FIFO assumption uses the earliest acquired prices to cost the items sold during a
period.
d. The LIFO assumption uses the earliest acquired prices to cost the items on hand at
the end of an accounting period.
71.
The average days to sell inventory is computed by dividing

a. 365 days by the inventory turnover.
b. the inventory turnover ratio by 365 days.
c. net sales by the inventory turnover.
d. 365 days by cost of goods sold.
72.
The inventory turnover is computed by dividing the cost of goods sold by

a. beginning inventory.
b. ending inventory.
c. average inventory.
d. number of days in the year.
9 - 10
73.
Replenish, Inc. develops and produces sports drinks for sale throughout the United States
and Europe. The International Accounting Standards Board (IASB) prohibits Replenish,
Inc. from using which of the following cost flow assumptions for its inventory?
a. LIFO (last-in, first-out).
b. Specific identification.
c. Weighted-average.
d. The IASB allows any of these cost flow assumptions as long as the company uses it
consistently.
74.
Which of the following statements is correct regarding International Financing Reporting

Standards (IFRS) and U.S. GAAP with regard to inventory?
a. LIFO (last-in, first-out) is permitted under IFRS but not under U.S. GAAP.
b. When applying lower-of-cost-or-market, U.S. GAPP defines market as net realizable
value.
c. IFRS permits valuing inventories at fair value, similar to the accounting for property,
plant, and equipment.
d. Under U.S. GAPP, if inventory is written down under lower-of-cost-or-market, it may
not be written back up to its original cost in a subsequent period.
Multiple Choice AnswersConceptual

Item
31.
32.
33.
34.
35.
36.
37.
Ans.
a
c
d
a
c
a
d
Item
38.
39.
40.
41.
42.
43.
44.
Ans.
b
d
c
b
b
a
c
Item
45.
46.
47.
48.
49.
50.
51.
Ans.
a
b
d
a
a
b
d
Item
52.
53.
54.
55.
56.
57.
58.
Ans.
c
a
d
d
b
d
c
Item
59.
60.
61.
62.
63.
64.
65.
Ans.
a
d
b
a
a
d
a
Item
66.
67.
68.
69.
70.
71.
72.
Ans.
b
d
a
b
b
a
c
Item
73.
74.
Ans.
a
d
Solutions to those Multiple Choice questions for which the answer is none of these choices are
correct.
55.
The gross profit percentage applicable to the goods in ending inventory is different from
the percentage applicable to the goods sold during the period.
60.
Many answers are possible.
9 - 11
MULTIPLE CHOICEComputational
75.
Oslo Corporation has two products in its ending inventory, each accounted for at the lower
of cost or net realizable value. Specific data with respect to each product follows:
Selling price
Historical cost
Cost to sell
Cost to complete
Product #1
$60
40
10
15
Product #2
$130
70
26
40
In pricing its ending inventory using the lower-of-cost-or-net realizable value, what unit
values should Oslo use for products #1 and #2, respectively?
a. $35 and $64.
b. $50 and $104.
c. $40 and $70.
d. $45 and $90.
76.
Muckenthaler Company sells product 2005WSC for $25 per unit. The cost of one unit of
2005WSC is $18. The estimated cost to complete a unit is $4, and the estimated cost to
sell is $6. At what amount per unit should product 2005WSC be reported, applying lowerof-cost-or-net realizable value?
a. $20.
b. $15.
c. $18.
d. $19.
77.
Lexington Company sells product 1976NLC for $45 per unit. The cost of one unit of
1976NLC is $36. The estimated cost to complete a unit is $8, and the estimated cost to
sell is $5. At what amount per unit should product 1976NLC be reported, applying lowerof-cost-or-net realizable value?
a. $36.
b. $32.
c. $37.
d. $40.
78.
Given the acquisition cost of product Z is $32, the cost to complete product Z is $9.00, the
cost to sell product Z is $5, and the selling price for product Z is $50.00, what is the proper
per unit inventory price for product Z?
a. $32.
b. $45.
c. $36.
d. $41.
79.
Given the acquisition cost of product ALPHA is $85, the cost to complete product ALPHA
is $8, the cost to sell product ALPHA is $6, and the selling price for product ALPHA is $97,
what is the proper per unit inventory price for product ALPHA?
a. $85.
b. $83
c. $79.
d. $89.
9 - 12
80.
Given the acquisition cost of product Dominoe is $86, the cost to complete for product
Dominoe is $10, the cost to sell product Dominoe is $8, and the selling price for product
Dominoe is $101, what is the proper per unit inventory price for product Dominoe?
a. $91.
b. $93.
c. $83.
d. $86.
81.
Given the historical cost of product Z is $150, the selling price of product Z is $190, costs
to sell product Z are $21, and the cost to complete product Z is $30, what is the net
realizable value that should be used in the lower-of-cost-or-net realizable value
comparison?
a. $160.
b. $169.
c. $139.
d. $150.
82.
Given the historical cost of product Z is $150, the selling price of product Z is $190, costs
to sell product Z are $11, and the cost to complete product Z is $20, what is the amount
that should be used to value the inventory under the lower-of-cost-or-net realizable value
method?
a. $130.
b. $150.
c. $159.
d. $139.
83.
Given the historical cost of product Dominoe is $65, the selling price of product Dominoe
is $90, costs to sell product Dominoe are $16, and the cost to complete the product is
$14, what is the amount that should be used to value the inventory under the lower-ofcost-or-net realizable value method?
a. $65.
b. $76.
c. $60.
d. $74.
84.
Robust Inc. has the following information related to an item in its ending inventory. Product
66 has a cost of $6,500, a selling price of $7,100, a cost to complete of $600, and a cost
to sell of $400. What is the lower-of-cost-or-net realizable value for product 66?
a. $5,900.
b. $6,100.
c. $6,500.
d. $6,700.
85.
Robust Inc. has the following information related to an item in its ending inventory. Packit
(Product # 874) has a cost of $498, a selling price of $536, a cost to complete of $62, and
a cost to sell of $28. What is the lower-of-cost-or-net realizable inventory value for Packit?
a. $446.
b. $498.
c. $536.
d. $474.
9 - 13
86.
Robust Inc. has the following information related to an item in its ending inventory. Acer
Top has a cost of $502, a selling price of $568, a cost to complete of $53, and a cost to
sell of $38. What is the lower-of-cost-or-net realizable inventory value for Acer Top?
a. $515.
b. $502.
c. $477.
d. $530.
87.
Rios, Inc. uses International Financial Reporting Standards (IFRS). In 2014, Rios, Inc.
experienced a decline in the value of its inventory resulting in a write-down of its inventory
from $240,000 to $200,000. The company used the loss method in 2014 to record the
necessary adjustment and uses an allowance account to reduce inventory to NRV. In
2015, market conditions have improved dramatically and Rios, Inc.s inventory increases
to an NRV of $216,000. Which of the following will Rios, Inc. record in 2015?
a. A debit to Recovery of Inventory Loss for $16,000.
b. A credit to Recovery of Inventory Loss for $24,000.
c. A debit to Allowance to Reduce Inventory to NRV of $16,000.
d. A credit to Allowance to Reduce Inventory to NRV of $24,000.
88.
Dub Dairy produces milk to sell to local and national ice cream producers. Dub Dairy
began operations on January 1, 2015 by purchasing 840 milk cows for $1,176,000. The
company controller had the following information available at year end relating to the
cows:
Milking cows
Carrying value, January1, 2015
$1,176,000
Change in fair value due to growth and price changes
365,000
Decrease in fair value due to harvest
(42,000)
Milk harvested during 2015
$54,000
At December 31, 2015, what is the value of the milking cows on Dub Dairys statement of
financial position?
a. $1,176,000
b. $1,541,000
c. $1,134,000
d. $1,499,000
89.
cows:
Milking cows
$1,176,000
365,000
(42,000)
Milk harvested during 2015 but not yet sold
$54,000
On Dub Dairys income statement for the year ending December 31, 2015, what amount
of unrealized gain on biological assets will be reported?
a. $ -0b. $365,000
c. $323,000
d. $54,600
9 - 14
90.

cows:
Milking cows
$1,176,000
365,000
(42,000)
$54,000
On Dub Dairys income statement for the year ending December 31, 2015, what amount
of unrealized gain on harvested milk will be reported?
a. No gain is reported until the milk is sold.
b. $12,000
c. $54,000
d. $311,000
91.
Braum Dairy produces milk to sell to local and national ice cream producers. Braum Dairy
began operations on January 1, 2015 by purchasing 650 milk cows for $780,000. The
cows:
Milking cows
$780,000
242,000
(28,000)
$36,200
On Braum Dairys income statement for the year ending December 31, 2015, what
amount of unrealized gain on biological assets will be reported?
a. $ -0b. $242,000
c. $214,000
d. $36,200
92.
Braum Dairy produces milk to sell to local and national ice cream producers. Braum Dairy
began operations on January 1, 2015 by purchasing 650 milk cows for $780,000. The
cows:
Milking cows
$780,000
242,000
(28,000)
$36,200
On Braum Dairys income statement for the year ending December 31, 2015, what
amount of unrealized gain on harvest milk will be reported?
a. No gain is reported until the milk is sold.
b. $8,200
c. $36,200
d. $205,800.
9 - 15
93.
Lucys Llamas purchased 1,000 llamas on January 1, 2015. These llamas will be sheared
semiannually and their wool sold to specialty clothing manufacturers. The llamas were
purchased for $148,000. During 2015 the change in fair value due to growth and price
changes is $9,400, the wool harvested but not yet sold is valued at net realizable value of
$18,000, and the change in fair value due to harvest is ($1,150). What is the value of the
llamas on Lucys Llamas statement of financial position on June 30, 2015?
a. $156,250
b. $148,000
c. $146,850
d. $128,850
94.
Lucys Llamas purchased 1,000 llamas on January 1, 2015. These llamas will be sheared
semiannually and their wool sold to specialty clothing manufacturers. The llamas were
purchased for $148,000. During 2015 the change in fair value due to growth and price
changes is $9,400, the wool harvested but not yet sold is valued at net realizable value of
$18,000, and the change in fair value due to harvest is ($1,150). On Lucys Llamas
income statement for the year ending December 31, 2015, what amount of unrealized
gain on biological assets will be reported?
a. $26,250
b. $27,400
c. $9,400
d. $8,250
95.
Lennys Llamas purchased 1,500 llamas on January 1, 2015. These llamas will be
sheared semiannually and their wool sold to specialty clothing manufacturers. The llamas
were purchased for $222,000. During 2015 the change in fair value due to growth and
price changes is $14,100, the wool harvested but not yet sold is valued at net realizable
value of $27,000, and the change in fair value due to harvest is ($1,750). What is the
value of the llamas on Lennys Llamas statement of financial position on June 30, 2015?
a. $234,350
b. $222,000
c. $220,250
d. $193,250
96.
Lennys Llamas purchased 1,000 llamas on January 1, 2015. These llamas will be
sheared semiannually and their wool sold to specialty clothing manufacturers. The llamas
were purchased for $222,000. During 2015 the change in fair value due to growth and
price changes is $14,100, the wool harvested but not yet sold is valued at net realizable
value of $27,000, and the change in fair value due to harvest is ($1,750). On Lennys
Llamas income statement for the year ending December 31, 2015, what amount of
unrealized gain on biological assets will be reported?
a. $39,350
b. $41,100
c. $14,100
d. $12,350
9 - 16
97.
Turner Corporation acquired two inventory items at a lump-sum cost of $50,000. The
acquisition included 3,000 units of product LF, and 7,000 units of product 1B. LF normally
sells for $15 per unit, and 1B for $5 per unit. If Turner sells 1,000 units of LF, what amount
of gross profit should it recognize?
a. $1,875
b. $5,625.
c. $10,000.
d. $11,875.
98.
Robertson Corporation acquired two inventory items at a lump-sum cost of $40,000. The
acquisition included 3,000 units of product CF, and 7,000 units of product 3B. CF normally
sells for $12 per unit, and 3B for $4 per unit. If Robertson sells 1,000 units of CF, what
amount of gross profit should it recognize?
a. $1,500.
b. $4,500.
c. $8,000.
d. $9,500.
99.
At a lump-sum cost of $48,000, Pratt Company recently purchased the following items for
resale:
Item
M
N
O
No. of Items Purchased

4,000
2,000
6,000
Resale Price Per Unit

$2.50
8.00
4.00
The appropriate cost per unit of inventory is:

M
N
O
a.
$2.50
$8.00
$4.00
b.
$2.07
$13.24
$2.21
c.
$2.40
$7.68
$3.84
d.
$4.00
$4.00
$4.00
100.
Confectioners, a chain of candy stores, purchases its candy in bulk from its suppliers. For
a recent shipment, the company paid $3,000 and received 8,500 pieces of candy that are
allocated among three groups. Group 1 consists of 2,500 pieces that are expected to sell
for $0.25 each. Group 2 consists of 5,500 pieces that are expected to sell for 0.60 each.
Group 3 consists of 500 pieces that are expected to sell for $1.20 each. Using the relative
standalone sales value method, what is the cost per item in group 1?
a. $0.250.
b. $0.166.
c. $0.200.
d. $.0375.
9 - 17
101.
a. $0.375.
b. $0.600.
c. $0.350.
d. $.0398.
102.
a. $0.796.
b. $0.375.
c. $1.200.
d. $0.900.
103.
During the current fiscal year, Jeremiah Corp. signed a long-term noncancellable
purchase commitment with its primary supplier. Jeremiah agreed to purchase $2.5 million
of raw materials during the next fiscal year under this contract. At the end of the current
fiscal year, the raw material to be purchased under this contract had a market value of
$2.3 million. What is the journal entry at the end of the current fiscal year?
a. Debit Unrealized Holding Loss for $200,000 and credit Purchase Commitment Liability
for $200,000.
b. Debit Purchase Commitment Liability for $200,000 and credit Unrealized Holding Gain
for $200,000.
c. Debit Unrealized Holding Loss for $2,300,000 and credit Purchase Commitment
Liability for $2,300,000.
d. No journal entry is required.
104.
During the prior fiscal year, Jeremiah Corp. signed a long-term noncancellable purchase
commitment with its primary supplier to purchase $2.5 million of raw materials. Jeremiah
paid the $2.5 million to acquire the raw materials when the raw materials were only worth
$2.2 million (which was also the value of the materials at the prior fiscal year end).
Assume that the purchase commitment was properly recorded. What is the journal entry
to record the purchase?
a. Debit Inventory for $2,200,000, and credit Cash for $2,200,000.
b. Debit Inventory for $2,200,000, debit Unrealized Holding Loss for $300,000, and credit
Cash for $2,500,000.
c. Debit Inventory for $2,200,000, debit Purchase Commitment Liability for $300,000 and
credit Cash for $2,500,000.
d. Debit Inventory for $2,500,000, and credit Cash for $2,500,000.
9 - 18
105.

During 2015, Larue Co., a manufacturer of chocolate candies, contracted to purchase
100,000 pounds of cocoa beans at $4.00 per pound, delivery to be made in the spring of
2016. Because a record harvest is predicted for 2016, the price per pound for cocoa
beans had fallen to $3.10 by December 31, 2015.
Of the following journal entries, the one which would properly reflect in 2015 the effect of
the commitment of Larue Co. to purchase the 100,000 pounds of cocoa is
a. Cocoa Inventory............................................................. 400,000
Accounts Payable...............................................
400,000
b. Cocoa Inventory............................................................. 310,000
Loss on Purchase Commitments...................................
90,000
Accounts Payable...............................................
400,000
c. Unrealized Holding Loss................................................
90,000
Purchase Commitments Liability........................
90,000
d. No entry would be necessary in 2015
106.
RS Corporation, a manufacturer of ethnic foods, contracted in 2015 to purchase 500

pounds of a spice mixture at $5.00 per pound, delivery to be made in spring of 2016. By
12/31/15, the price per pound of the spice mixture had risen to $5.60 per pound. In 2015,
AJ should recognize
a. a loss of $2,500.
b. a loss of $300.
c. no gain or loss.
d. a gain of $300.
107.
LF Corporation, a manufacturer of Mexican foods, contracted in 2015 to purchase 1,000

pounds of a spice mixture at $5.00 per pound, delivery to be made in spring of 2016. By
12/31/15, the price per pound of the spice mixture had dropped to $4.60 per pound. In
2015, LF should recognize
a a loss of $5,000.
b. a loss of $400.
c. no gain or loss.
d. a gain of $400.
108.
The following information is available for October for Barton Company.

Beginning inventory
Net purchases
Net sales
Percentage markup on cost
$ 50,000
150,000
300,000
66.67%
A fire destroyed Bartons October 31 inventory, leaving undamaged inventory with a cost
of $3,000. Using the gross profit method, the estimated ending inventory destroyed by fire
is
a. $17,000.
b. $77,000.
c. $80,000.
d. $100,000.

109.
9 - 19
The following information is available for October for Norton Company.

Beginning inventory
Net purchases
Net sales
Percentage markup on cost
$100,000
300,000
600,000
66.67%
A fire destroyed Nortons October 31 inventory, leaving undamaged inventory with a cost
of $6,000. Using the gross profit method, the estimated ending inventory destroyed by fire
is
a. $34,000.
b. $154,000.
c. $160,000.
d. $200,000.
Use the following information for questions 110 and 111.
Miles Company, a wholesaler, budgeted the following sales for the indicated months:
Sales on account
Cash sales
Total sales
June
$1,800,000
180,000
$1,980,000
July
$1,840,000
200,000
$2,040,000
August
$1,900,000
260,000
$2,160,000
All merchandise is marked up to sell at its invoice cost plus 20%. Merchandise inventories at the
beginning of each month are at 30% of that months projected cost of goods sold.
110.
The cost of goods sold for the month of June is anticipated to be

a. $1,440,000.
b. $1,500,000.
c. $1,520,000.
d. $1,650,000.
111.
Merchandise purchases for July are anticipated to be

a. $1,632,000.
b. $2,076,000.
c. $1,700,000.
d. $1,730,000.
112.
Reyes Company had a gross profit of $360,000, total purchases of $420,000, and an
ending inventory of $240,000 in its first year of operations as a retailer. Reyess sales in
its first year must have been
a. $540,000.
b. $660,000.
c. $180,000.
d. $600,000.
113.
A markup of 40% on cost is equivalent to what markup on selling price?

a. 29%
b. 40%
c. 60%
d. 71%
9 - 20
114.

Kesler, Inc. estimates the cost of its physical inventory at March 31 for use in an interim
financial statement. The rate of markup on cost is 25%. The following account balances
are available:
Inventory, March 1
Purchases
Purchase returns
Sales during March
$220,000
172,000
8,000
300,000
The estimate of the cost of inventory at March 31 would be

a. $84,000.
b. $144,000.
c. $159,000.
d. $112,000.
115.
On January 1, 2015, the merchandise inventory of Glaus, Inc. was $800,000. During 2015
Glaus purchased $1,600,000 of merchandise and recorded sales of $2,000,000. The
gross profit rate on these sales was 25%. What is the merchandise inventory of Glaus at
December 31, 2015?
a. $400,000.
b. $500,000.
c. $900,000.
d. $1,500,000.
116.
For 2015, cost of goods available for sale for Tate Corporation was $900,000. The gross
profit rate was 20%. Sales for the year were $800,000. What was the amount of the
ending inventory?
a. $0.
b. $260,000.
c. $180,000.
d. $160,000.
117.
On April 15 of the current year, a fire destroyed the entire uninsured inventory of a retail
store. The following data are available:
Sales, January 1 through April 15
Inventory, January 1
Purchases, January 1 through April 15
Markup on cost
$300,000
50,000
250,000
25%
The amount of the inventory loss is estimated to be

a. $60,000.
b. $30,000.
c. $75,000.
d. $50,000.
118.
The sales price for a product provides a gross profit of 25% of sales price. What is the
gross profit as a percentage of cost?
a. 25%.
b. 20%.
c. 33%.
d. Not enough information is provided to determine.
9 - 21
119.
Gamma Ray Corp. has annual sales totaling $650,000 and an average gross profit of 20%
of cost. What is the dollar amount of the gross profit?
a. $130,000.
b. $97,500.
c. $108,333.
d. $162,500.
120.
On August 31, a hurricane destroyed a retail location of Vinnys Clothier including the
entire inventory on hand at the location. The inventory on hand as of June 30 totaled
$320,000. From June 30 until the time of the hurricane, the company made purchases of
$85,000 and had sales of $250,000. Assuming the rate of gross profit to selling price is
40%, what is the approximate value of the inventory that was destroyed?
a. $320,000.
b. $181,500.
c. $205,000.
d. $255,000.
121.
On October 31, a fire destroyed PH Inc.s entire retail inventory. The inventory on hand as
of January 1 totaled $680,000. From January 1 through the time of the fire, the company
made purchases of $165,000 and had sales of $360,000. Assuming the rate of gross profit
to selling price is 40%, what is the approximate value of the inventory that was destroyed?
a. $680,000.
b. $673,000.
c. $485,000.
d. $629,000.
122.
On March 15, a fire destroyed Interlock Companys entire retail inventory. The inventory
on hand as of January 1 totaled $1,650,000. From January 1 through the time of the fire,
the company made purchases of $683,000, incurred freight-in of $78,000, and had sales
of $1,210,000. Assuming the rate of gross profit to selling price is 30%, what is the
approximate value of the inventory that was destroyed?
a. $2,048,000.
b. $1,486,000.
c. $1,564,000.
d. $2,411,000.
123.
Dicer uses the conventional retail method to determine its ending inventory at cost.
Assume the beginning inventory at cost (retail) were $130,000 ($198,000), purchases
during the current year at cost (retail) were $685,000 ($1,100,000), freight-in on these
purchases totaled $43,000, sales during the current year totaled $1,050,000, and net
markups (markdowns) were $24,000 ($36,000). What is the ending inventory value at
cost?
a. $153,164.
b. $156,165.
c. $157,412.
d. $236,000.
9 - 22
124.
Boxer Inc. uses the conventional retail method to determine its ending inventory at cost.
Assume the beginning inventory at cost (retail) were $65,500 ($99,000), purchases during
the current year at cost (retail) were $568,000 ($865,600), freight-in on these purchases
totaled $26,500, sales during the current year totaled $811,000, and net markups were
$69,000. What is the ending inventory value at cost?
a. $222,600.
b. $174,366.
c. $142,241.
d. $152,308.
125.
Barker Pet supply uses the conventional retail method to determine its ending inventory at
cost. Assume the beginning inventory at cost (retail) were $265,600 ($326,900),
purchases during the current year at cost (retail) were $1,068,600 ($1,386,100), freight-in
on these purchases totaled $63,900, sales during the current year totaled $1,302,000, and
net markups (markdowns) were $2,000 ($96,300). What is the ending inventory value at
cost?
a. $316,700.
b. $258,111.
c. $411,000.
d. $246,667.
126.
Crane Sales Company uses the retail inventory method to value its merchandise
inventory. The following information is available for the current year:
Beginning inventory
Purchases
Freight-in
Net markups
Net markdowns
Employee discounts
Sales
Cost
$ 30,000
145,000
2,500
Retail
$ 50,000
200,000
8,500
10,000
1,000
205,000
If the ending inventory is to be valued at the lower-of-cost-or-net realizable value, what is

the cost to retail ratio?
a. $177,500 $250,000
b. $177,500 $258,500
c. $175,000 $260,000
d. $177,500 $248,500
Use the following information for questions 127 through 129.
The following data concerning the retail inventory method are taken from the financial records of
Welch Company.
Cost
Retail
Beginning inventory
$ 49,000
$ 70,000
Purchases
224,000
320,000
Freight-in
6,000
Net markups
20,000
Net markdowns
14,000
Sales
336,000
9 - 23
127.
The ending inventory at retail should be

a. $74,000.
b. $60,000.
c. $64,000.
d. $42,000.
128.
If the ending inventory is to be valued at approximately the lower-of-cost-or-net realizable

value, the calculation of the cost to retail ratio should be based on goods available for sale
at (1) cost and (2) retail, respectively of
a. $279,000 and $410,000.
b. $279,000 and $396,000.
c. $279,000 and $390,000.
d. $273,000 and $390,000.
129.
If the foregoing figures are verified and a count of the ending inventory reveals that
merchandise actually on hand amounts to $54,000 at retail, the business has
a. realized a windfall gain.
b. sustained a loss.
c. no gain or loss as there is close coincidence of the inventories.
d. None of these choices are correct.
130.
Drake Corporation had the following amounts, all at retail:

Beginning inventory
Purchase returns
Abnormal shortage
Sales
Employee discounts
$ 3,600
6,000
4,000
72,000
1,600
Purchases
Net markups
Net markdowns
Sales returns
Normal shortage
$120,000
18,000
2,800
1,800
2,600
What is Drakes ending inventory at retail?

a. $54,400.
b. $56,000.
c. $57,600.
d. $58,400
131.
Goren Corporation had the following amounts, all at retail:

Beginning inventory
Purchase returns
Abnormal shortage
Sales
Employee discounts
$ 3,600
6,000
4,000
72,000
1,600
What is Gorens ending inventory at retail?

a. $34,400.
b. $36,000.
c. $37,600.
d. $38,400
Purchases
Net markups
Net markdowns
Sales returns
Normal shortage
$100,000
18,000
2,800
1,800
2,600
9 - 24
Use the following information for questions 132 through 134.

Plank Co. uses the retail inventory method. The following information is available for the current
year.
Cost
Retail
Beginning inventory
$ 78,000
$122,000
Purchases
295,000
415,000
Freight-in
5,000
Employee discounts
2,000
Net markups
15,000
Net markdowns
20,000
Sales
390,000
132.
If the ending inventory is to be valued at approximately lower-of-average-cost-or-net

realizable value, the calculation of the cost ratio should be based on cost and retail of
a. $300,000 and $430,000.
b. $300,000 and $428,000.
c. $373,000 and $550,000.
d. $378,000 and $552,000.
133.
The ending inventory at retail should be

a. $160,000.
b. $150,000.
c. $144,000.
d. $140,000.
134.
The approximate cost of the ending inventory by the conventional retail method is
a. $95,900.
b. $94,920.
c. $98,000.
d. $102,480.
135.
Fry Corporations computation of cost of goods sold is:

Beginning inventory
Add: Cost of goods purchased
Cost of goods available for sale
Ending inventory
Cost of goods sold
The average days to sell inventory for Fry are
a. 58.4 days.
b. 67.6 days.
c. 73.0 days.
d. 87.6 days.
$ 60,000
405,000
465,000
90,000
$375,000
9 - 25

136.
East Corporations computation of cost of goods sold is:

Beginning inventory
Add: Cost of goods purchased
Cost of goods available for sale
Ending inventory
Cost of goods sold
$ 60,000
405,000
465,000
80,000
$385,000
The average days to sell inventory for East are

a. 56.9 days.
b. 63.1 days.
c. 66.4 days.
d. 75.8 days.
137.
The 2015 financial statements of Sito Company reported a beginning inventory of

$80,000, an ending inventory of $120,000, and cost of goods sold of $600,000 for the
year. Sitos inventory turnover for 2015 is
a. 7.5 times.
b. 6.0 times.
c. 5.0 times.
d. 4.3 times.
138.
Boxer Inc. reported inventory at the beginning of the current year of $360,000 and at the
end of the current year of $411,000. If net sales for the current year are $2,214,600 and
the corresponding cost of sales totaled $1,879,400, what is the inventory turnover for the
current year?
a. 5.74.
b. 4.57.
c. 5.39.
d. 4.88.
Multiple Choice AnswersComputational

Item
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
Ans.
a
b
b
a
b
c
c
b
c
b
Item
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
Ans.
Item
Ans.
Item
Ans.
a
c
c
d
c
c
c
c
a
d
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
a
d
b
b
c
b
d
a
a
c
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
c
c
b
a
a
d
d
a
a
b
Item
115.
116.
117.
118.
119.
120.
121.
122.
123.
124.
Ans.
c
b
a
c
c
d
d
c
a
c
Item
125.
126.
127.
128.
129.
130.
131.
132.
133.
134.
Ans.
Item
Ans.
b
b
b
a
b
a
a
d
d
a
135.
136.
137.
138.
c
c
b
d
9 - 26
MULTIPLE CHOICECPA Adapted

139.
Ryan Distribution Co. has determined its December 31, 2015 inventory on a FIFO basis at
$250,000. Information pertaining to that inventory follows:
Selling price
Cost to sell
Cost to complete
$255,000
10,000
30,000
Ryan records losses that result from applying the lower-of-cost-or-net realizable value rule.
At December 31, 2015, the loss that Ryan should recognize is
a. $0.
b. $5,000.
c. $25,000.
d. $35,000.
140.
Keen Companys accounting records indicated the following information:

Inventory, 1/1/15
Purchases during 2015
Sales during 2015
$ 600,000
3,000,000
3,800,000
A physical inventory taken on December 31, 2015, resulted in an ending inventory of

$700,000. Keens gross profit on sales has remained constant at 25% in recent years.
Keen suspects some inventory may have been taken by a new employee. At December
31, 2015, what is the estimated cost of missing inventory?
a. $50,000.
b. $150,000.
c. $200,000.
d. $250,000.
141.
Henke Co. uses the retail inventory method to estimate its inventory for interim statement
purposes. Data relating to the computation of the inventory at July 31, 2015, are as
follows:
Cost
Retail
Inventory, 2/1/15
$ 200,000
$ 250,000
Purchases
1,000,000
1,575,000
Markups, net
175,000
Sales
1,750,000
Estimated normal shoplifting losses
20,000
Markdowns, net
110,000
Under the lower-of-cost-or-net realizable value method, Henkes estimated inventory at
July 31, 2015 is
a. $72,000.
b. $84,000.
c. $96,000.
d. $120,000.

142.
9 - 27
At December 31, 2015, the following information was available from Kohl Co.s accounting
records:
Cost
Retail
Inventory, 1/1/15
$147,000
$ 203,000
Purchases
833,000
1,155,000
Additional markups
42,000
Available for sale
$980,000
$1,400,000
Sales for the year totaled $1,050,000. Markdowns amounted to $10,000. Under the lowerof-cost-or-net realizable value method, Kohls inventory at December 31, 2015 was
a. $294,000.
b. $245,000.
c. $252,000.
d. $238,000.
Multiple Choice AnswersCPA Adapted

Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
139.
140.
141.
142.
DERIVATIONS Computational
No.
Answer Derivation
75.
Product 1: $60 $10 $15 = $35.

Product 2: $130 $26 $40 = $64.
76.
NRV = $25 $4 $6 = $15.
77.
NRV = $45 $8 $5 = $32.
78.
$50 $9 $5 = $36; cost of $32 is LCNRV.
79.
$97 $8 $6 = $83.
80.
$101 $10 $8 = $83.
81.
$190 $30 $21 = $139.
82.
NRV = $190 $11 $20 = $159,

$150 Cost, LCNRV = $150.
83.
NRV = $90 $16 $14 = $60,

$65 Cost, LCNRV = $60.
84.
$7,100 $600 $400 = $6,100.
85.
$536 $62 $28 = $446.
86.
$568 $53 $38 = $477.
9 - 28
DERIVATIONS Computational (cont.)

No.
Answer Derivation
87.
$216,000 $200,000 = $16,000.
88.
$1,176,000 + $365,000 $42,000= $1,499,000.
89.
$365,000 $42,000 = $323,000.
90.
$54,000.
91.
$242,000 $28,000 = $214,000.
92.
$36,200.
93.
$148,000 + $9,400 $1,150 = $156,250.
94.
$9,400 $1,150 = $8,250.
95.
$222,000 + $14,100 $1,750= $234,350.
96.
$14,100 - $1,750 = $12,350.
97.
LF 3,000 $15 = ($45,000 $80,000) $50,000 = $28,125

1B 7,000 $5 = $35,000; $35,000 + $45,000 = $80,000
(1,000 $15) ($28,125 1,000/3,000) = $5,625.
98.
CF 3,000 $12 = ($36,000 $64,000) $40,000 = $22,500

3B 7,000 $4 = $28,000; $28,000 + $36,000 = $64,000
(1,000 $12) ($22,500 1,000/3,000) = $4,500.
99.
Item # of Items Price

M
4,000 $2.50 = 10,000
N
2,000 $8.00 = 16,000
O
6,000 $4.00 = 24,000
50,000
10 50 $48,000 = $9,600 4,000 = $2.40

16 50 $48,000 = $15,360 2,000 = $7.68
24 50 $48,000 = $23,040 6,000 = $3.84
100.
(2,500 $0.25) + (5,500 $0.60) + (500 $1.20) = $4,525;

[(2,500 $0.25) $4,525] $3,000 = $414 2,500 = $0.166.
101.
(2,500 $0.25) + (5,500 $0.60) + (500 $1.20) = $4,525;

[(5,500 $0.60) $4,525] $3,000 = $2,188 5,500 = $0.398.
102.
(2,500 $0.25) + (5,500 $0.60) + (500 $1.20) = $4,525;

[(500 $1.20) $4,525] $3,000 = $398 500 = $0.796.
103.
$2.5 million $2.3 million = $200,000.
104.
$2.5 million $2.2 million = $300,000.
105.
($4.00 $3.10) 100,000 = $90,000.
9 - 29

No.
Answer Derivation
106.
No gain or loss since 12/31 price ($5.60) > contract price ($5,00).
107.
($5.00 $4.60) 1,000 = $400.
108.
($50,000 + $150,000) ($300,000 5/3) $3,000 = $17,000.
109.
($100,000 + $300,000) ($600,000 5/3) $6,000 = $34,000.
110.
(1 + .2)C = 1,980,000; C = $1,650,000.
111.
COGS:
112.
$360,000 + ($420,000 $240,000) = $540,000.
113.
.40
.2857 29%
1 .40
114.
COGS = $300,000 1.25 = $240,000

($220,000 + $172,000 $8,000) $240,000 = $144,000.
115.
COGS = $2,000,000 .75 = $1,500,000

$800,000 + $1,600,000 $1,500,000 = $900,000.
116.
$900,000 ($800,000 .80) = $260,000.
117.
$300,000
$50,000 + $250,000 = $60,000.
1.25
118.
25% (100% 25%) = 33%.
119.
$650,000 ($650,000 1.20) = $108,333.
120.
($320,000 + $85,000) [$250,000 (1 .40)] = $255,000.
121.
($680,000 + $165,000) [$360,000 (1 .40)] = $629,000.
122.
$1,650,000 + $683,000 + $78,000 [$1,210,000 (1 .30)] = $1,564,000.
123.
$198,000 + $1,100,000 + $24,000 $1,050,000 $36,000 = $236,000;

($130,000 + $685,000 + $43,000) ($198,000 + $1,100,000 + $24,000) = .649;
$236,000 .649 = $153,164.
124.
$99,000 + $865,600 + $69,000 $811,000 = $222,600;

($65,500 + $568,000 + $26,500) ($99,000 + $865,600 + $69,000) = 63.9%;
$222,600 .639 = $142,241.
July = $2,040,000 1.2 = $1,700,000

Aug. = $2,160,000 1.2 = $1,800,000
Julys purchase = ($1,700,000 .7) + ($1,800,000 .3) = $1,730,000.
9 - 30

No.
Answer Derivation
125.
$326,900 + $1,386,100 + $2,000 $1,302,000 $96,300 = $316,700;

($265,600 + $1,068,600 + $63,900) ($326,900 + $1,386,100 + $2,000) =
81.5%;
$316,700 .815 = $258,111.
126.
Cost: $30,000 + $145,000 + $2,500 = $177,500.

Retail: $50,000 + $200,000 + $8,500 = $258,500.
127.
$70,000 + $320,000 + $20,000 $14,000 $336,000 = $60,000.
128.
Cost: $49,000 + $224,000 + $6,000 = $279,000.

Retail: $70,000 + $320,000 + $20,000 = $410,000.
129.
Conceptual.
130.
$3,600 + $114,000 + $18,000 $4,000 $70,200 $1,600 $2,800 $2,600

= $54,400.
131.
$3,600 + $94,000 + $18,000 $4,000 $70,200 $1,600 $2,800 $2,600

= $34,400.
132.
Cost: $78,000 + $295,000 + $5,000 = $378,000.

Retail: $122,000 + $415,000 + $15,000 = $552,000.
133.
$122,000 + $415,000 $2,000 + $15,000 $20,000 $390,000 = $140,000.
134.
$140,000 .685 = $95,900.
135.
$375,000 [($60,000 + $90,000) 2] = 5; 365 5 = 73.0.
136.
$385,000 [($60,000 + $80,000) 2] = 5.5; 365 5.5 = 66.4.
137.
$600,000 [($80,000 + $120,000) 2] = 6 times
138.
$1,879,400 [($360,000 + $411,000) 2] = 4.88.
DERIVATIONS CPA Adapted

No.
Answer
Derivation
139.
$250,000 $255,000 $10,000 $30,000 = $35,000.
140.
$3,800,000 .75 = $2,850,000 (COGS)

$600,000 + $3,000,000 $2,850,000 $700,000 = $50,000.
141.
($200,000 + $1,000,000) ($250,000 + $1,575,000 + $175,000) = 0.6

($250,000 + $1,575,000 + $175,000 $20,000 $110,000
$1,750,000) 0.6 = $72,000.
9 - 31
DERIVATIONS CPA Adapted (cont.)

No.
Answer
142.
Derivation
$980,000 $1,400,000 = 0.7
($1,400,000 $10,000 $1,050,000) 0.7 = $238,000.
EXERCISES
Ex. 9-143Lower-of-cost-or-net realizable value.
Determine the proper unit inventory price in the following independent cases by applying the
lower of cost or net realizable value rule. Circle your choice.
1
2
3
4
5
Cost
$80
$105
$120
$60
$72
Sales value
100
130
160
65
80
Cost to complete
18
19
21
4
6
Cost to sell
7
10
12
2
5
Solution 9-143
Case 1
Case 2
Case 3
$ 75
$101
$120
Case 4
Case 5
$59
$69

Determine the unit value that should be used for inventory costing following lower-of-cost-or-net
realizable value
A
B
C
D
Cost
$20
$30
$22
$25
Sales value
23
35
27
30
Cost to complete
3
5
2
4
Cost to sell
2
2
1
2
Solution 9-144
Case A
Case B
Case C
Case D
$18
$28
$22
$24
9 - 32

The December 31, 2015 inventory of Gwynn Company consisted of four products, for which
certain information is provided below.
Product
A
B
C
D
Original Cost
$25
$42
$120
$18
Estimated
Completion Cost
$6
$12
$25
$3
Expected
Selling Price
$40
$58
$150
$26
Estimated
Cost to sell
$4
$8
$15
$2
Instructions
Using the lower-of-cost-or-net realizable value approach applied on an individual-item basis,
compute the inventory valuation that should be reported for each product on December 31, 2015.
Solution 9-145
Net Real.
Value
$30
Cost
$25
Lower-ofCost-orNRV
$25
$38
$42
$38
$110
$120
$110
$21
$18
$18
Product
A
Ex. 9-146LCNRV
Pinkel Company uses the LCNRV method, on an individual-item basis, in pricing its inventory
items. The inventory at December 31, 2015, consists of products D,E,F,G,H, and I, Relevant perunit data for these products appear below.
Item
Item
Item
Item
Item
Item
D
E
F
G
H
I
Estimated selling price
180
165
140
135
165
135
Cost
110
120
120
120
75
54
Cost to complete
45
45
35
50
45
45
Selling costs
15
27
15
30
15
30
Instructions
Using the LCNRV rule, determine the proper unit value for statement of financial position
reporting purposes at December 31, 2015, for each of the inventory items above.
9 - 33
Solution 9-146
Item
D
Net
Realizable.
Value
120*
Cost
110
LCNRV
110
93
120
93
90
120
90
55
120
55
105
75
75
1
60
54
54
*Estimated selling price Estimated selling costs and cost to
complete = 180 45 15 = 120.
Ex. 9-147LCNRVJournal Entries

Dover Company began operations in 2015 and determined its ending inventory at cost and at a
LCNRV at December 31, 2015, and December 31, 2016. This information is presented below.
Cost
Net Realizable Value
12/31/15
520,000
485,000
12/31/16
615,000
585,000
Instructions
(a) Prepare the journal entries required at December 31, 2015, and December 31, 2016,
assuming that the inventory is recorded at LCNRV, using a perpetual inventory system
and the cost-of-goods-sold method.
(b) Prepare the journal entries required at December 31, 2015, and December 31, 2016,
assuming that the inventory is recorded at cost, using a perpetual system and the loss
method.
(c) Which of the two methods above provides the higher net income in each year?
Solution 9-147
(a) 12/31/15 Cost of Goods Sold
Allowance to Reduce
Inventory to NRV..
12/31/16
(b) 12/31/15
Allowance to Reduce
Inventory to NRV..
Costs of Goods Sold
35,000 (615,000 585,000)
Loss Due to Decline of
Inventory to NRV
Allowance to Reduce
Inventory to NRV..
35,000
35,000
5,000
5,000
35,000
35,000
9 - 34
Solution 9-147 cont.

12/31/16
Allowance to Reduce
Inventory to NRV..5,000
Recovery of Inventory Loss
5,000
(c) Both methods provide the same net income.
Ex. 9-148 Valuation at Net Realizable Value.

Akimora Dairy began operations on April 1, 2015, with purchase of 250 milking cows for
8,500,000. It has completed the first month of operations and has the following information for its
milking cows at the end of April 2015 (000 omitted).
Milking cows
Change in fair value due to growth and price changes*
(250,000)
(15,000)
Milk harvested during April 2015 (at net realizable value)
90,000
*Due to a very high rate of calving in the past month, there is a glut of milking cows on the
market.
Instructions
(a) Prepare the journal entries for Akimoras biological asset (milking cows) for the month of
April 2015.
(b) Prepare the journal entry for the milk harvested by Akimora during April 2015.
(c) Akimora sells the milk harvested in April on the local milk exchange and receives 93,000.
Solution 9-148
(a) Unrealized Holding Gain or Loss Income....................
Biological Assets Milking Cows.............................
265,000
265,000
(b) Milk Inventory.................................................................

Unrealized Holding Gain or Loss Income..............
90,000
(c) Cash..............................................................................
Cost of Goods Sold........................................................
Milk Inventory...........................................................
Sales Revenue.........................................................
93,000
90,000
90,000
90,000
93,000
Ex. 9-149 Relative standalone sales value method.

Doran Realty Company purchased a plot of ground for $800,000 and spent $2,100,000 in
developing it for building lots. The lots were classified into Highland, Midland, and Lowland
grades, to sell at $100,000, $75,000, and $50,000 each, respectively.
9 - 35
Instructions
Complete the table below to allocate the cost of the lots using a relative standalone sales value
method.
No. of
Grade
Lots
Highland 20
Midland
40
Lowland 100
160
Selling
Price
$
$
$
Total
Revenue
$
% of
Total Sales
Apportioned Cost
Total
Per Lot
$
$
$
$
$
% of
Total Sales
20%
30%
50%
Apportioned Cost
Total
Per Lot
$ 580,000
$29,000
870,000
$21,750
1,450,000
$14,500
$2,900,000
Solution 9-149
Grade
Highland
Midland
Lowland
No. of
Lots
20
40
100
160
Selling
Price
$100,000
$75,000
$50,000
Total
Revenue
$ 2,000,000
3,000,000
5,000,000
$10,000,000
Ex. 9-150Gross profit method.

An inventory taken the morning after a large theft discloses $60,000 of goods on hand as of
March 12. The following additional data is available from the books:
Inventory on hand, March 1
Purchases received, March 1 11
Sales (goods delivered to customers)
$ 84,000
63,000
120,000
Past records indicate that sales are made at 50% above cost.
Instructions
Estimate the inventory of goods on hand at the close of business on March 11 by the gross profit
method and determine the amount of the theft loss. Show appropriate titles for all amounts in
your presentation.
Solution 9-150
Beginning Inventory
Purchases
Goods Available
Goods Sold ($120,000 150%)
Estimated Ending Inventory
Physical Inventory
Theft Loss
$ 84,000
63,000
147,000
(80,000)
67,000
(60,000)
$ 7,000
9 - 36

On January 1, a store had inventory of $48,000. January purchases were $46,000 and January
sales were $90,000. On February 1 a fire destroyed most of the inventory. The rate of gross profit
was 25% of cost. Merchandise with a selling price of $5,000 remained undamaged after the fire.
Compute the amount of the fire loss, assuming the store had no insurance coverage. Label all
figures.
Solution 9-151
Beginning Inventory
Purchases
Goods available
Cost of sale ($90,000 125%)
Estimated ending inventory
Cost of undamaged inventory ($5,000 125%)
Estimated fire loss
$ 48,000
46,000
94,000
(72,000)
22,000
(4,000)
$18,000

Utley Co. prepares monthly income statements. Inventory is counted only at year end; thus,
month-end inventories must be estimated. All sales are made on account. The rate of mark-up on
cost is 20%. The following information relates to the month of May.
Accounts receivable, May 1
Accounts receivable, May 31
Collections of accounts during May
Inventory, May 1
Purchases during May
$21,000
27,000
90,000
45,000
58,000
Instructions
Calculate the estimated cost of the inventory on May 31.
Solution 9-152
Collections of accounts
Add accounts receivable, May 31
Deduct accounts receivable, May 1
Sales during May
$ 90,000
27,000
(21,000)
$ 96,000
Inventory, May 1
Purchases during May
Goods available
Cost of sales ($96,000 120%)
Estimated cost of inventory, May 31
$ 45,000
58,000
103,000
(80,000)
$ 23,000
9 - 37
Ex. 9-153Retail Inventory Method.

Presented below is information related to Kuchinsky Company.
Cost
Beginning inventory
280,000
Purchases
1,820,000
Markups
Markup cancellations
Markdowns
Markdown cancellations
Sales
Retail
390,000
3,000,000
130,000
20,000
47,000
7,000
3,150,000
Instructions
Compute the inventory by the conventional retail inventory method.
Solution 9-153
Beginning inventory.
Purchases.
Totals..
Add: Net marksups
Markups.
Totals
Cost
280,000
1,820,000
2,100,000
130,000
(20,000)
2,100,000
Deduct: Net markdowns

Markdowns
Sales price of goods available..
Deduct: Sales..
Ending Inventory ay retail..
Cost-to-retail ratio =
Retail
390,000
3,000,000
3,390,000
47,000
(7,000)
110,000
3,500,000
40,000
3,460,000
3,150,000
310,000
2,100,000
60%
3,500,000
Ending inventory at cost = 60% 310,000 = 186,000
PROBLEMS
Pr. 9-154Valuation at net realizable value.
Reed Mangus purchased the Hillside Vineyard at an estate auction in April 2015 for 1,250,000.
The purchase was risky because the growing season was coming to an end, the grapes must be
harvested in the next several weeks, and Reed has limited experience in carrying off a grape
harvest.
At the end of the first quarter of operations, Reed is feeling pretty good about his early
results. The first harvest was a success; 500 bushels of grapes were harvested with a value of
50,000 (based on current local commodity prices at the time of harvest). And, given the strong
yield from area vineyards during this season, the net realizable value of Reeds vineyard has
9 - 38
increased by 25,000 at the end of the quarter. After storing the grapes for a short period of time,
Reed was able to sell the entire harvest for 60,000.
Instructions
(a) Prepare the journal entries for the Hillside biological asset (grape vines) for the first
quarter of operations (the beginning carrying and net realizable value is 1,250,000).
(b) Prepare the journal entry for the grapes harvested during the first quarter.
(c) Prepare the journal entry to record the sale of the grapes harvested in the first quarter.
(d) Determine the total effect on income for the quarter related to the Hillside biological asset
and agricultural produce.
Solution 9-154
(a) Biological assetsGrape Vineyard. 25,000
Unrealized Holding Gain or Loss Income
25,000
(b) Grape Inventory. 50,000

Unrealized Holding Gain or Loss Income
50,000
(c) Cash 60,000

Cost of Goods Sold.. 50,000
Grape Inventory..
Sales Revenue
50,000
60,000
(d) Unrealized Holding Gain or Loss Income.

Unrealized Holding Gain or Loss Income.
Gross Profit on sold Grapes...
Total Effect on Income.
25,000
50,000
10,000
85,000
Pr. 9-155Gross profit method.

On December 31, 2015 Felt Companys inventory burned. Sales and purchases for the year had
been $1,400,000 and $980,000, respectively. The beginning inventory (Jan. 1, 2015) was
$170,000; in the past Felts gross profit has averaged 40% of selling price.
Instructions
Compute the estimated cost of inventory burned, and give entries as of December 31, 2015 to
close merchandise accounts.
Solution 9-155
Beginning inventory
Add: Purchases
Cost of goods available
Sales
Less (40% $1,400,000)
Estimated inventory lost
$ 170,000
980,000
1,150,000
$1,400,000
560,000
840,000
$ 310,000

Sales Revenue................................................................................ 1,400,000
Income Summary.................................................................
Cost of Goods Sold.........................................................................
Fire Loss.........................................................................................
Inventory..............................................................................
Purchases............................................................................
9 - 39
1,400,000
840,000
310,000
170,000
980,000
Pr. 9-156Retail inventory method.

When you undertook the preparation of the financial statements for Telfer Company at January
31, 2016, the following data were available:
At Cost
At Retail
Inventory, February 1, 2015
$70,800
$ 98,500
Markdowns
35,000
Markups
63,000
20,000
10,000
Purchases
219,500
294,000
Sales
345,000
Purchases returns and allowances
4,300
5,500
Sales returns and allowances
10,000
Instructions
Compute the ending inventory at cost as of January 31, 2016, using the retail method which
approximates lower of cost or net realizable value. Your solution should be in good form with
amounts clearly labeled.
Solution 9-156
At Cost
Beginning inventory, 2/1/15
$ 70,800
Purchases
$219,500
Less purchase returns
4,300
215,200
Totals
$286,000
Add markups (net)
Totals
Deduct markdowns (net)
Sales price of goods available
Net sales
Ending inventory, 1/31/16 at retail
Ending inventory at cost: Ratio of cost to retail =
$286,000 $440,000 = 65%;
$90,000 65% = $58,500
$ 58,500
At Retail
$ 98,500
$294,000
5,500
288,500
387,000
53,000
440,000
15,000
425,000
(335,000)
$ 90,000
9 - 40
Pr. 9-157Retail inventory method.

Presented below is information related to Carpenter Inc.
Cost
$375,000
1,369,000
90,000
27,000
Inventory, 12/31/15
Purchases
Purchase returns
Purchase discounts
Gross sales (after employee discounts)
Sales returns
Markups
Markdowns
Freight-in
Employee discounts granted
Loss from breakage (normal)
63,000
Retail
$ 550,000
2,050,000
120,000
2,110,000
145,000
180,000
60,000
65,000
30,000
12,000
8,000
Instructions
Assuming that carpenter Inc. uses the conventional retail inventory method, compute the cost of
its ending inventory at December 31, 2016.
Solution 9-157
Beginning Inventory..
Purchases..
Purchase returns
Purchase discounts
Freight-in..
Markups
Markup cancellations.
Totals.
Markdowns..
Sales.
Sales returns
Inventory losses due to breakage.
Employee discounts
Ending inventory at retail
Cost-to-retail ratio =
Cost
$ 375,000
1,369,000
(90,000)
(27,000)
63,000
$
180,000
(60,000)
$1,690,000
$1,690,000
65%
$2,600,000
Ending inventory at cost: $580,000 x 65% = $377,000
(65,000)
30,000
(2,110,000)
145,000
Retail
$ 550,000
2,050,000
(120,000)
120,000
2,600,000
(35,000)
(1,965,000)
(8,000)
(12,000)
$ 580,000

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CHAPTER 9

INVENTORIES: ADDITIONAL VALUATION ISSUES

Test Bank for Intermediate Accounting: IFRS Edition, 2e

Application of the lower-of-cost-or-net realizable value rule results in inconsistency

International Financial Reporting Standards (IFRS) require that a company record an

Under International Financial Reporting Standards (IFRS), when companies value

Under International Financial Reporting Standards (IFRS), separate reporting of reversals

An inventory of wheat held by a broker-trader is valued at net realizable value.

Most purchase commitments must be recorded as a liability.

Inventories: Additional Valuation Issues

Under International Financial Reporting Standards (IFRS), a company who recorded a

In most situations, the gross profit percentage is stated as a percentage of cost.

True False AnswersConceptual

Test Bank for Intermediate Accounting: IFRS Edition, 2e

Lower-of-cost-or-net realizable value

Lower-of-cost-or-net realizable value as it applies to inventory is best described as the

Why are inventories stated at lower-of-cost-or-net realizable value?

Which of the following is not an acceptable method of applying the lower-of-cost-or-net

Inventories: Additional Valuation Issues

Net realizable value is

Shake Companys inventory experienced a decline in value necessitating a write-down to

Which of the following statements is incorrect regarding the lower-of-cost-or-net

Test Bank for Intermediate Accounting: IFRS Edition, 2e

Under International Financial Reporting Standards (IFRS), agricultural activity results in

Situations in which net realizable value is used to value inventory include

Inventories: Additional Valuation Issues

How is the gross profit method used as it relates to inventory valuation?

The gross profit method of inventory valuation is invalid when

A major advantage of the retail inventory method is that it

Test Bank for Intermediate Accounting: IFRS Edition, 2e

An inventory method which is designed to approximate inventory valuation at the lower of

The retail inventory method is based on the assumption that the

Which statement is true about the retail inventory method?

To produce an inventory valuation which approximates the lower-of-cost-or-net realizable

Inventories: Additional Valuation Issues

Which of the following is not a common disclosure for inventories?

The average days to sell inventory is computed by dividing

The inventory turnover is computed by dividing the cost of goods sold by

Test Bank for Intermediate Accounting: IFRS Edition, 2e

Which of the following statements is correct regarding International Financing Reporting

Multiple Choice AnswersConceptual

Many answers are possible.

Inventories: Additional Valuation Issues

Test Bank for Intermediate Accounting: IFRS Edition, 2e

Inventories: Additional Valuation Issues

Test Bank for Intermediate Accounting: IFRS Edition, 2e

Inventories: Additional Valuation Issues

Test Bank for Intermediate Accounting: IFRS Edition, 2e

No. of Items Purchased

Resale Price Per Unit

The appropriate cost per unit of inventory is:

Inventories: Additional Valuation Issues

Test Bank for Intermediate Accounting: IFRS Edition, 2e

RS Corporation, a manufacturer of ethnic foods, contracted in 2015 to purchase 500

LF Corporation, a manufacturer of Mexican foods, contracted in 2015 to purchase 1,000

The following information is available for October for Barton Company.

Inventories: Additional Valuation Issues

The following information is available for October for Norton Company.

The cost of goods sold for the month of June is anticipated to be

Merchandise purchases for July are anticipated to be

A markup of 40% on cost is equivalent to what markup on selling price?

Test Bank for Intermediate Accounting: IFRS Edition, 2e

The estimate of the cost of inventory at March 31 would be