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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
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.
Expert Solution
PFA
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