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Exercise 9–
(1) (2) (3) (4) (5)
Product RC
Ceiling
NRV ()*
Floor
NRV – NP ()**
Designated Market Value [Middle value of (1), (2) & (3)] Cost
Per Unit Inventory Value [Lower of (4) and (5)]
1 $18 $ 34 $29 $29 $20 $
2 85 80 50 80 90 80
3 40 60 48 48 50 48
***** Selling price less disposal costs.
****** NRV less normal profit margin.
Exercise 9–
According to IFRS, inventory is valued at the lower of cost and net realizable value. Inventory valuation for the three products would be as follows:
Product NRV Cost Inventory Value 1 $34 $20 $ 2 80 90 80 3 60 50 50
Product 3 would be valued at $50 under IFRS, but $48 according to U.S. GAAP. The inventory values of the other two products would be the same under U.S. and the international standard.
CHAPTER 9 EXERCISES
Exercise 9–
Beginning inventory (from records) $140, Plus: Net purchases (from records) 370, Cost of goods available for sale 510, Less: Cost of goods sold: Net sales $550, Less: Estimated gross profit of 25% (137,500) Estimated cost of goods sold (412,500) Estimated cost of inventory destroyed $ 97,
Exercise 9–
Cost Retail Beginning inventory $35,000 $50, Plus: Net purchases 19,120 31, Net markups 1, Less: Net markdowns ______ (800) Goods available for sale 54,120 82,
$54, Cost-to-retail percentage: = 66% $82,
Less: Net sales (32,000) Estimated ending inventory at retail $50, Estimated ending inventory at cost (66% x $50,000) (33,000) Estimated cost of goods sold $21,
Exercise 9–
Cost Retail Beginning inventory $160,000 $ 280, Plus: Net purchases 607,760 840, Net markups 20, Less: Net markdowns _______ (4,000) Goods available for sale (excluding beg. inventory) 607,760 856, Goods available for sale (including beg. inventory) 767,760 1,136,
Cost-to-retail percentage: = 71% $856,
Less: Net sales (800,000) Estimated ending inventory at retail $ 336, Estimated ending inventory at cost: Retail Cost Beginning inventory $280,000 $160, Current period’s layer 56,000 x 71% = 39, Total $336,000 $199,760 (199,760) Estimated cost of goods sold $568,
Exercise 9–
Requirement 1
Retained earnings................................................................... 5, Inventory ($83,000 – 78,000) ............................................. 5,
Requirement 2 Effect on cost of goods sold:
Decrease in beginning inventory ($78,000 – 71,000) - $7,
Decrease in ending inventory ($83,000 – 78,000) + 5, Decrease in cost of goods sold $2,
Cost of goods sold for 2012 would be $2,000 lower in the revised income statement.
Exercise 9–25 (concluded)
However, the 2012 error has not yet self-corrected. Both retained earnings and inventory still are overstated as a result of the second error.
Analysis of 2012 ending inventory error effects:
U = Understated O = Overstated 2012 Beginning inventory Plus: net purchases Less: ending inventory O Cost of goods sold U
Revenues Less: cost of goods sold U Less: other expenses Net income O
Retained earnings O
Requirement 2
Retained earnings (overstatement of 2012 income) .............. 150, Inventory (overstatement of 2013 beginning inventory) .... 150,
Requirement 3 The financial statements that were incorrect as a result of both errors (effect of one error in 2011 and effect of two errors in 2012) would be retrospectively restated to report the correct inventory amount, cost of goods sold, net income, and retained earnings when those statements are reported again for comparative purposes in the current annual report. A “prior period adjustment” to retained earnings would be reported, and a disclosure note should describe the nature of the error and the impact of its correction on each year’s net income, income before extraordinary items, and earnings per share.
Exercise 9–
U = understated O = overstated NE = no effect Cost of Net Retained Goods Sold Income Earnings
- Overstatement of ending inventory U O O
- Overstatement of purchases O U U
- Understatement of beginning inventory U O O
- Freight-in charges are understated U O O
- Understatement of ending inventory O U U
- Understatement of purchases U O O
- Overstatement of beginning inventory O U U
- Understatement of purchases + understatement of ending inventory by the same amount NE NE NE
Problem 9–
Requirement 1
Product NRV per unit NRV – NP per unit A $16 – (15% x $16) = $13.60 $13.60 – (40% x $16) = $7. B $18 – (15% x $18) = $15.30 $15.30 – (40% x $18) = $8. C $ 8 – (15% x $8) = $ 6.80 $ 6.80 – (40% x $ 8) = $3. D $ 6 – (15% x $6) = $ 5.10 $ 5.10 – (40% x $ 6) = $2. E $13 – (15% x $13) = $11.05 $11.05 – (40% x $13) = $5.
(1) (2) (3) (4) (5)
Product (units) RC
Ceiling
NRV
Floor
NRV – NP
Designated Market Value [Middle value of (1), (2) & (3)] Cost
Inventory Value [Lower of (4) and (5)]
A (1,000) $12,000 $13,600 $7,200 $12,000 $10,000 $10,
B (800) 8,800 12,240 6,480 8,800 12,000 8,
C (600) 1,200 4,080 2,160 2,160 1,800 1,
D (200) 800 1,020 540 800 1,400 800
E (600) 7,200 6,630 3,510 6,630 8,400 6,
Totals $30,390 $33,600 $28,
Inventory carrying value would be $28,030.
Requirement 2 Inventory carrying value would be $30,390, the lower of aggregate inventory cost ($33,600) and aggregate inventory market ($30,390). The amount of the loss from inventory write-down is $3,210 ($33,600 – 30,390).
PROBLEMS
Problem 9–1 (concluded)
Requirement 3
According to IFRS, inventory is valued at the lower of cost and net realizable value.
Inventory Product Cost NRV Value
A $10,000 $13,600 $10,
B 12,000 12,240 12,
C 1,800 4,080 1,
D 1,400 1,020 1,
E 8,400 6,630 6,
Inventory carrying value $31,
Problem 9–
1. Average cost Cost Retail Beginning inventory $ 90,000 $180, Plus: Purchases 355,000 580, Freight-in 9, Less: Purchase returns (7,000) (11,000) Plus: Net markups 16, Less: Net markdowns (12,000) Abnormal spoilage (4,800) (8,000) Goods available for sale 442,200 745, $442, Cost-to-retail percentage: = 59.36% $745, Less: Normal spoilage (3,000) Sales: Net sales ($540,000 – 10,000) (530,000) Employee discounts (4,000) Estimated ending inventory at retail $208, Estimated ending inventory at cost (59.36% x $208,000) (123,469) Estimated cost of goods sold $318,
Problem 9–4 (concluded)
2. Conventional (average, LCM) Cost Retail Beginning inventory $ 90,000 $180, Plus: Purchases 355,000 580, Freight-in 9, Less: Purchase returns (7,000) (11,000) Plus: Net markups 16, Less: Abnormal spoilage (4,800) (8,000) 757, $442, Cost-to-retail percentage: = 58.41% $757, Less: Net markdowns _______ (12,000) Goods available for sale 442,200 745, Less: Normal spoilage (3,000) Sales: Net sales ($540,000 – 10,000) (530,000) Employee discounts (4,000) Estimated ending inventory at retail $208, Estimated ending inventory at cost (58.41% x $208,000) (121,493) Estimated cost of goods sold $320,
Problem 9–
Requirement 1
Accounts Accounts Sales Inventory Purchases payable receivable revenue Unadjusted balance $326,000 $620,000 $210,000 $225,000 $840, Item:
- (32,000)
- (27,000) (27,000)
- (25,000) (25,000)
- 36,000*
- Corrected by a prior period adjustment.
- 22,000 (40,000) (40,000)
- 18,000 18,000 18, Adjusted balance $370,000 $586,000 $176,000 $185,000 $800,
- 1,000 units – 100 units = 900 units x $40 = $36,
Requirement 2
Beginning inventory ($352,000 + 62,000) $414, Plus: Purchases (from requirement 1) 586, Less: Ending inventory (from requirement 1) (370,000) Cost of goods sold $630,
Requirement 3
The 2012 financial statements that were incorrect as a result of the error would be retrospectively restated to report the correct inventory amounts, cost of goods sold, income, and retained earnings when those statements are reported again for comparative purposes in the 2013 annual report. A “prior period adjustment” to 2013 beginning retained earnings would be reported, and a disclosure note should describe the nature of the error and the impact of its correction on 2012 net income and earnings per share. An understatement of ending inventory causes cost of goods sold to be overstated. Therefore, 2012 before-tax income was understated by $62,000.
