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University of North Texas, Dallas - ACCT 3110 1)On March 17, 2006, a flood destroyed the entire inventory of Beatty Co

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University of North Texas, Dallas - ACCT 3110

1)On March 17, 2006, a flood destroyed the entire inventory of Beatty Co. The following information is available from its accounting records:

 

Inventory, January 1, 2006     $208,000

Purchases, Jan. 1 – Mar. 17    420,000

Sales, Jan. 1 - Mar. 17 600,000

Normal gross margin  40%

 

Required:

Compute the estimated cost of inventory lost in the flood.

 

 

           

 

 

2.         On July 5, 2006, a fire destroyed the entire inventory of Kinard Music Mart. The following information is available from its accounting records:

 

Inventory, January 1, 2006     $211,000

Purchases, Jan. 1 - July 5        500,000

Sales, Jan. 1 – July 5    900,000

Normal gross margin  30%

 

Required:

Compute the estimated cost of inventory lost in the fire.

 

 

           

 

3.         On August 31, 2006, Hurricane Chuck destroyed Bedford Craft Mart's entire inventory. The following information is available from its accounting records:

 

Inventory, January 1, 2006     $360,000

Purchases, Jan. 1 - Aug. 31     960,000

Sales, Jan. 1 - Aug. 31 1,350,000

 

Required:

Assuming that Bedford estimates the cost of destroyed inventory at $510,000, compute gross profit margin % that Bedford uses in estimating inventory.

 

 

           

 

 

4.         Andover Stores uses the average cost retail method to estimate its ending inventory. Information as of June 30, 2006, is as follows:

 

            Cost     Retail

Beginning inventory    $ 45,000          $ 82,000

Net purchases 245,000           418,000

Net sales                     400,000

 

Required:

Use the retail method to estimate the June 30, 2006, inventory.

 

           

 

 

           

 

5.         DK Super Stores Inc. uses the average cost retail method to estimate its ending inventory. Information at June 30, 2006, is as follows:

 

            Cost     Retail

Beginning inventory                $ 105,000

Net purchases             375,000

Net sales                     380,000

Ending inventory         $64,000          

 

Required:

Compute the cost-to-retail percentage used by DK.

 

 

           

 

 

6.         Trask Inc. uses the average cost retail method to estimate its ending inventory. Partial information at June 30, 2006, is as follows:

 

            Cost     Retail

Beginning inventory    $ 62,000          ???

Net purchases 238,000           319,000

Net sales                     430,000

Ending inventory         42,000

 

Required:

Assuming Trask's cost-to-retail = 60%, compute Trask's beginning inventory at retail.

 

           

 

           

 

7.         Manila Bread Company uses the average cost retail method to estimate its ending inventories. The following data has been summarized for the year 2006:

 

            Cost     Retail

Inventory, January 1   $ 54,205          $ 78,000

Purchases        326,000           466,000

Net markups               8,200

Net markdowns                       16,700

Net sales                     412,000

 

Required:

Estimate the ending inventory as of December 31, 2006.                

 

                                   

 

 

8.         Penfold's Paints uses the average cost retail method to estimate its ending inventories. The following data has been summarized for the year 2006:

 

            Cost     Retail

Inventory, January 1               $ 65,000

Purchases                    270,000

Net markups               3,600

Net markdowns                       2,100

Net sales                     260,000

Inventory, December 31         $55,080          

 

Required:

Compute the cost-to-retail percentage used by Penfold's Paints.

 

 

           

 

 

9.         Billingsly Products uses the conventional retail method to estimate its ending inventories. The following data has been summarized for the year 2006:

 

            Cost     Retail

Inventory, January 1   $ 53,000          $ 78,000

Purchases        322,360           466,000

Net markups               8,000

Net markdowns                       16,700

Net sales                     392,000

 

Required:

Estimate the ending inventory as of December 31, 2006.

 

 

           

 

10.       New York Sales Inc. uses the conventional retail method to estimate its ending inventories. The following data has been summarized for December 31, 2006:

 

            Cost     Retail

Inventory, January 1               $160,000

Purchases                    538,000

Net markups               12,000

Net markdowns                       9,100

Net sales                     582,000

Inventory, Dec. 31       $77,285          

 

Required:

Compute the cost-to-retail percentage used by New York Sales Inc.

 

 

           

11.       Murdock Industries uses a periodic inventory system and the LIFO retail method to estimate its ending inventories. The following data has been summarized for December 31, 2006:

 

            Cost     Retail

Inventory, January 1   $116,000         $165,000

Purchases        355,000           540,000

Net markups               15,600

Net markdowns                       9,800

Net sales                     522,000

 

Required:

Estimate the LIFO cost of ending inventory. Assume stable retail prices during the period.

 

 

           

           

 

 

12.       Littleton Company uses a periodic inventory system and the LIFO retail method to estimate its ending inventories. The following partial data has been summarized for December 31, 2006:

 

 

Inventory, January 1   Cost

$216,000         Retail

$285,000

Purchases                    650,000

Net markups               18,300

Net markdowns                       21,200

Net sales

Inventory, Dec. 31      

$232,730         625,000

 

Required:

Determine the cost-to-retail percentage used the period.   

 

by Littleton.    

 

Assume stable retail prices during

 

           

 

 

13.       Harley Inc. uses the conventional retail method to estimate its ending inventories. The following data has been summarized for December 31, 2006:

 

            Cost     Retail

Inventory, January 1   $208,000         $ 280,000

Purchases        470,000           610,000

Net markups               15,300

Net markdowns                       11,200

Normal spoilage                     4,600

Net sales                     489,500

 

Required:

Estimate the cost of ending inventory applying the conventional retail method.

 

 

 

 

 

 

 

 

 

 

 

 

 

14.       Zanesville Pots Co. uses the conventional retail method to estimate ending inventories. The following data has been summarized for the year ended December 31, 2006:

 

            Cost     Retail

Inventory, January 1   $ 88,000          $ 132,000

Purchases        163,000           240,000

Net markups               10,100

Net markdowns                       9,200

Normal spoilage                     43,200

Net sales                     213,000

 

Required:

Estimate the cost of ending inventory applying the conventional retail method.

 

 

 

 

                                   

 

15.       Cornhusker Can Co. uses the conventional retail method to estimate ending inventories. The following data has been summarized for year ended December 31, 2006:

 

            Cost     Retail

Inventory, January 1   $ 80,000          $ 126,000

Purchases        166,000           244,000

Net markups               9,100

Net markdowns                       8,200

Normal spoilage                     13,200

Employee discounts                15,600

Net sales                     238,000

 

Required:

Estimate the cost of ending inventory applying the conventional retail method. Assume that sales are recorded net of employee discounts.

 

 

                                   

 

 

16.       Cindy Lou Linens. uses the conventional retail method to estimate its ending inventories. The company records sales net of employee discounts. The following partial data has been summarized for the year ended December 31, 2006:

 

            Cost     Retail

Inventory, January 1   $ 465,460        $ 736,000

Purchases        1,412,000        2,344,000

Net markups               ???

Net markdowns                       48,200

Normal spoilage                     43,200

Employee discounts                75,600

Net sales                     2,138,000

Inventory, Dec. 31       494,460           824,100

 

Required:

Compute the net markups for Cindy Lou Linens during 2006.

 

 

                       

 

 

17.       Charleston Company has elected to use the dollar-value LIFO retail method to value its inventory. The following data has been accumulated from the accounting records:

 

            Cost     Retail

Merchandise inventory, January 1, 2006       $320,000         $ 500,000

Net purchases 670,000           1,020,000

Net markups               14,000

Net markdowns                       4,000

Net sales                     650,000

Pertinent retail price indexes:

January 1, 2006           1.00

December 31, 2006    1.10

Required:

Estimate the ending inventory for December 31, 2006.

 

 

                       

 

 

18.       Green Acres Co. has elected to use the dollar-value LIFO retail method to value its inventory. The following data has been accumulated from the accounting records:

 

Pertinent retail price indexes:

Cost     Retail

Merchandise inventory, January 1, 2006       $240,000         $375,000 Net purchases                     505,000                        765,000

Net markups               10,500

Net markdowns                       3,000

Net sales                     570,000

January 1, 2006           1.00    

December 31, 2006    1.10    

 

Required:

Estimate the cost of ending inventory for December 31, 2006.

 

 

 

           

 

 

19.       Orlando Company has used the average cost method for inventory valuation since it began business in 2002, but has elected to change to the FIFO method starting in 2005. Year-end inventory valuations under each method are shown below:

 

            Average          

Year     Cost     FIFO

2002    $42,000           $47,000

2003    53,000 61,000

2004    59,000 68,000

2005    62,000 72,000

 

Required:

What journal entry, if any, would Orlando record in 2005 for the cumulative effect of the change in accounting principle (ignore income taxes)?

 

 

           

 

20.       Ramsgate Company has used the FIFO method for inventory valuation since it began business in 2002, but has elected to change to the average cost method starting in 2005. Year-end inventory valuations under each method are shown below:

 

            Average

Year     FIFO     Cost

2002    $49,000           $46,000

2003    55,000 48,000

2004    57,000 51,000

2005    61,000 53,000

 

Required:

What journal entry, if any, would Ramsgate record in 2005 for the cumulative effect of the change in accounting principle (ignore income taxes)?

 

 

 

ESSAY

Instructions:

 

The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be.

 

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

 

 

           

 

2.         Briefly explain what is meant by "market" in the lower-of-cost-or-market (LCM) approach.

 

 

           

 

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

 

 

           

 

 

4.         The gross profit method and retail method are both ways of estimating ending inventory. Briefly explain how the two methods differ.

 

 

           

 

5.         Briefly explain the difference between the LIFO retail method and the dollar-value LIFO retail method.

 

 

           

 

6.         Briefly explain the financial reporting required when a company changes to or from the LIFO inventory method.

 

 

           

 

7.         Briefly explain the financial reporting required when material misstatements are found in previous years' financial statements that are included for comparative purposes in the current year's financial statements.

 

 

           

 

 

8.         The following footnote appeared in the 2005 Annual report to shareholders of Upton Systems Inc.

 

Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company provides inventory allowances based on excess and obsolete inventories.

 

Another footnote in the annual report stated:

 

The Company recorded a provision for inventory, including purchase commitments, totaling

$1.40 billion during fiscal 2005, which included an additional excess inventory charge as previously discussed. This additional excess inventory charge was due to a sudden and significant decrease in demand for the Company's products and was calculated in accordance with the Company's accounting policy.

 

A skeptic may conclude that Upton's policy and practices threaten earnings quality. Discuss how it may do so.