Test bank with answers intermediate accounting 12e by kieso chapter 08

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CHAPTER 9
INVENTORIES: ADDITIONAL VALUATION ISSUES

TRUE-FALSE—Conceptual
Answer
T
F
F
T
F
T
T
F
F
T
F
T
F
T
F
F
T
F
T
T

No.

Description

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20

When to use lower-of-cost-or-market.
Lower-of-cost-or-market and conservatism.
Purpose of the “floor” in LCM.
Lower-of-cost-or-market and consistency.
Reporting inventory at net realizable value.
Valuing inventory at net realizable value.
Valuation using relative sales value.
Definition of a basket purchase.

Recording purchase commitments.
Loss on purchase commitments.
Recording noncancelable purchase contract.
Gross profit method.
Gross profit percentage.
Disadvantage of gross profit method.
Conventional retail method.
Definition of markup.
Accounting for abnormal shortages.
Computing inventory turnover ratio.
Average days to sell inventory.
LIFO retail method.

MULTIPLE CHOICE—Conceptual
Answer
d
d
c
b
a
c
d
d
c
b
d
a
d
a
a

b

No.
21.
22.
23.
24.
25.
26.
27.
S
28.
S
29.
30.
31.
32.
33.
34.
35.
P
36.

Description
Knowledge of lower-of-cost-or-market valuations.
Appropriate use of LCM valuation.
Definition of "market" under LCM.
Definition of "ceiling."
Definition of "designated market value."
Application of lower-of-cost-or-market valuation.

Effect of inventory write-down.
Recording inventory loss under direct method.
Recording inventory at net realizable value.
Net realizable value under LCM.
Definition of "net realizable value."
Valuation of inventory at net realizable value.
Appropriate use of net realizable value.
Material purchase commitments.
Loss recognition on purchase commitments.
Reporting purchase commitments loss.


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Test Bank for Intermediate Accounting, Twelfth Edition

9-2

MULTIPLE CHOICE—Conceptual (cont.)
Answer
d
d
b
d
c
a
d
b
a
b

a
d
b
a
c
c

No.
S

37.
38.
39.
40.
41.
42.
43.
44.
45.
*46.
S
47.
S
48.
P
49.
P
50.
51.
*52.

Description
Gross profit method assumptions.
Appropriate use of the gross profit method.
Appropriate use of the gross profit method.
Advantage of retail inventory method.
Conventional retail inventory method.
Assumptions of the retail inventory method.
Appropriate use of the retail inventory method.
Markdowns and the conventional retail method.
Markups and the conventional retail method.
Knowledge of the cost ratio for retail inventory methods.
Information needed in retail inventory method.
Reasons for using retail inventory method.
Inventory cost flow assumptions.
Computing average days to sell inventory.
Inventory turnover ratio.
Dollar-value LIFO retail method.

MULTIPLE CHOICE—Computational
Answer

.

a
b
b
c
c
b

b
c
c
c
b
a
a
d
d
a
a
b
c
b
a
a
b
b
a
b
b
c
a

No.
53.
54.
55.
56.
57.

58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
*79.
*80.
81.

Description
Value inventory at LCM.
Lower-of-cost-or-market.
Lower-of-cost-or-market.
Determining net realizable value.

Determining net realizable value.
Relative sales value method.
Relative sales value method.
Relative sales method of inventory valuation.
Entry for purchase commitment loss.
Recognizing loss on purchase commitments.
Recognizing loss on purchase commitments.
Estimating ending inventory using gross profit method.
Estimating ending inventory using gross profit method.
Calculate cost of goods sold given a markup on cost.
Calculate merchandise purchases given a markup on cost.
Calculate total sales from cost information.
Markup on cost equivalent to a markup on selling price.
Estimate ending inventory using gross profit method.
Calculate ending inventory using gross profit method
Calculate ending inventory using gross profit method.
Estimate cost of inventory destroyed by fire.
Determine items to be included in inventory.
Calculate cost of retail ratio to approximate LCM.
Calculate ending inventory at retail.
Calculate cost to retail ratio approximating LCM.
Calculate cost of inventory lost using retail method.
Calculate ending inventory at cost using LIFO retail.
Determine cost to retail ratio using LIFO retail.
Calculate ending inventory at retail.


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Inventories: Additional Valuation Issues

MULTIPLE CHOICE—Computational (cont.)
Answer
a
c
c
b
d
d
a
c
a
b
a

No.
82.
83.
84.
85.
86.
87.
88.
*89.
*90.
*91.
*92.

Description
Calculate ending inventory at retail.

Average days to sell inventory.
Average days to sell inventory.
Calculate inventory turnover ratio.
Determine cost to retail ratio to approximate LCM.
Calculate ending inventory at retail.
Calculate ending inventory using conventional retail.
Determine cost to retail ratio using LIFO cost.
Calculate ending inventory cost using dollar-value LIFO.
Calculate cost of ending inventory using LIFO retail.
Calculate ending inventory cost using dollar-value LIFO.

P

These questions also appear in the Problem-Solving Survival Guide.
These questions also appear in the Study Guide.
* This topic is dealt with in an Appendix to the chapter.

S

MULTIPLE CHOICE—CPA Adapted
Answer
d
b
b
a
a
d
a

No.

93.
94.
95.
96.
97.
98.
*99.

Description
Recognizing a loss due to LCM.
Appropriate use of replacement costs in LCM.
Identification of the designated market value.
Estimate cost of inventory lost by theft.
Determine cost of ending inventory using retail method.
Determine cost of ending inventory using retail method.
Calculate ending inventory using LIFO retail.

EXERCISES
Item
E9-100
E9-101
E9-102
E9-103
E9-104
E9-105
E9-106
E9-107
E9-108
E9-109

Description
Lower-of-cost-or-market.
Lower-of-cost-or-market.
Lower-of-cost-or-market.
Lower-of-cost-or-market.
Lower-of-cost-or-market.
Relative sales value method.
Gross profit method.
Gross profit method.
Gross profit method.
Comparison of inventory methods.

9-3


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9-4

Test Bank for Intermediate Accounting, Twelfth Edition

PROBLEMS
Item
P9-110
P9-111
*P9-112
*P9-113
*P9-114
*P9-115
*P9-116

Description
Gross profit method.
Retail inventory method.
Retail inventory method.
LIFO retail inventory method, fluctuating prices.
LIFO retail inventory method, stable prices.
Dollar-value LIFO retail method.
Retail LIFO.

CHAPTER LEARNING OBJECTIVES
1. Describe and apply the lower-of-cost-or-market rule.
2. Explain when companies value inventories at net realizable value.
3. Explain when companies use the relative 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.
*8. Determine ending inventory by applying the LIFO retail methods.


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Inventories: Additional Valuation Issues

9-5

*SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item

Type

1.
2.
3.
4.

TF
TF
TF
TF

5.
6.

TF
TF

7.

Item

Type

Item

21.
22.
23.
24.

MC
MC
MC
MC

25.
26.
27.
S
28.

29.
30.

MC
MC

31.
32.

TF

8.

TF

58.

9.

10.

TF
TF

11.
34.

TF
MC

12.
13.
14.
S
37.

TF
TF
TF
MC

38.
39.
64.
65.

MC
MC
MC

MC

66.
67.
68.
69.

15.
16.
17.
40.

TF
TF
TF
MC

41.
42.
43.
44.

MC
MC
MC
MC

45.
46.
S

47.
S
48.

18.
19.

TF
TF

49.
50.

MC
MC

51.
83.

20.
46.
52.

TF
MC
MC

79.
80.
89.

MC
MC
MC

90.
91.
92.

Note:

S

P
P

35.
36.

P

TF = True-False
MC = Multiple Choice
E = Exercise
P = Problem

Type

Item

Type

Item

Learning Objective 1
MC
53. MC
94.
MC
54. MC
95.
MC
55. MC
100.
MC
93. MC
101.
Learning Objective 2
MC
33. MC
57.
MC
56. MC
Learning Objective 3
MC
59. MC
60.
Learning Objective 4
MC
61. MC

63.
MC
62. MC
Learning Objective 5
MC
70. MC
74.
MC
71. MC
96.
MC
72. MC
106.
MC
73. MC
107.
Learning Objective 6
MC
75. MC
81.
MC
76. MC
82.
MC
77. MC
86.
MC
78. MC
87.
Learning Objective 7

MC
84. MC
MC
85. MC
Learning Objective *8
MC
99. MC
113.
MC
109.
E
114.
MC
112.
P
115.

Type

Item

Type

MC
MC
E
E

102.
103.

104.
109.

E
E
E
E

105.

E

MC
MC
E
E

108.
110.

E
P

MC
MC
MC
MC

88.
97.

98.
109.

MC
MC
MC
E

P
P
P

116.

P

Item

Type

111.

P

MC

MC
MC

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9-6

Test Bank for Intermediate Accounting, Twelfth Edition

TRUE-FALSE—Conceptual
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-market method is used for inventory despite being less conservative
than valuing inventory at market value.

3.

The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid overstating
inventory.

4.

Application of the lower-of-cost-or-market rule results in inconsistency because a
company may value inventory at cost in one year and at market in the next year.

5.

GAAP requires reporting inventory at net realizable value, even if above cost, whenever

there is a controlled market with a quoted price applicable to all quantities.

6.

A reason for valuing inventory at net realizable value is that sometimes it is too difficult to
obtain the cost figures.

7.

In a basket purchase, the cost of the individual assets acquired is determined on the basis
of their relative sales value.

8.

A basket purchase occurs when a company agrees to buy inventory weeks or months in
advance.

9.

Most purchase commitments must be recorded as a liability.

10.

If the contract price on a noncancelable purchase commitment exceeds the market price,
the buyer should record any expected losses on the commitment in the period in which
the market decline takes place.

11.

When a buyer enters into a formal, noncancelable purchase contract, an asset and a

liability are recorded at the inception of the contract.

12.

The gross profit method can be used to approximate the dollar amount of inventory on
hand.

13.

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

14.

A disadvantage of the gross profit method is that it uses past percentages in determining
the markup.

15.

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-market valuation.

16.

In the retail inventory method, the term markup means a markup on the original cost of an
inventory item.

17.

In the retail inventory method, abnormal shortages are deducted from both the cost and
retail amounts and reported as a loss.

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Inventories: Additional Valuation Issues

9-7

18.

The inventory turnover ratio is computed by dividing the cost of goods sold by the ending
inventory on hand.

19.

The average days to sell inventory represents the average number of days’ sales for
which a company has inventory on hand.

*20.

The LIFO retail method assumes that markups and markdowns apply only to the goods
purchased during the period.

True False Answers—Conceptual
Item
1.
2.
3.
4.
5.

Ans.
T
F
F
T
F

Item
6.
7.
8.
9.
10.

Ans.
T
T
F
F
T

Item
11.
12.
13.
14.
15.

Ans.

F
T
F
T
F

Item
16.
17.
18.
19.
20.

Ans.
F
T
F
T
T

MULTIPLE CHOICE—Conceptual
21.

Which of the following is true about lower-of-cost-or-market?
a. It is inconsistent because losses are recognized but not gains.
b. It usually understates assets.
c. It can increase future income.
d. All of these.

22.

The primary basis of accounting for inventories is cost. A departure from the cost basis of
pricing the inventory is required where there is evidence that when the goods are sold in
the ordinary course of business their
a. selling price will be less than their replacement cost.
b. replacement cost will be more than their net realizable value.
c. cost will be less than their replacement cost.
d. future utility will be less than their cost.

23.

When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of
the term "market"?
a. Net realizable value
b. Net realizable value less a normal profit margin
c. Current replacement cost
d. Discounted present value

24.

In no case can "market" in the lower-of-cost-or-market rule be more than
a. estimated selling price in the ordinary course of business.
b. estimated selling price in the ordinary course of business less reasonably predictable
costs of completion and disposal.
c. estimated selling price in the ordinary course of business less reasonably predictable
costs of completion and disposal and an allowance for an approximately normal profit
margin.
d. estimated selling price in the ordinary course of business less reasonably predictable
costs of completion and disposal, an allowance for an approximately normal profit
margin, and an adequate reserve for possible future losses.

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9-8

Test Bank for Intermediate Accounting, Twelfth Edition

25.

Designated market value
a. is always the middle value of replacement cost, net realizable value, and net realizable
value less a normal profit margin.
b. should always be equal to net realizable value.
c. may sometimes exceed net realizable value.
d. should always be equal to net realizable value less a normal profit margin.

26.

Lower-of-cost-or-market
a. is most conservative if applied to the total inventory.
b. is most conservative if applied to major categories of inventory.
c. is most conservative if applied to individual items of inventory.
d. must be applied to major categories for taxes.

27.

An item of inventory purchased this period for $15.00 has been incorrectly written down to
its current replacement cost of $10.00. It sells during the following period for $30.00, its
normal selling price, with disposal costs of $3.00 and normal profit of $12.00. Which of

the following statements is not true?
a. The cost of sales of the following year will be understated.
b. The current year's income is understated.
c. The closing inventory of the current year is understated.
d. Income of the following year will be understated.

S

When the direct method is used to record inventory at market
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 market value figure for ending inventory is substituted for cost and the loss is
buried in cost of goods sold.

S

29.

Recording inventory at net realizable value is permitted, even if it is above cost, when
there are no significant costs of disposal involved and
a. the ending inventory is determined by a physical inventory count.
b. a normal profit is not anticipated.
c. there is a controlled market with a quoted price applicable to all quantities.
d. the internal revenue service is assured that the practice is not used only to distort
reported net income.

30.

When inventory declines in value below original (historical) cost, and this decline is
considered other than temporary, what is the maximum amount that the inventory can be
valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal profit margin

28.


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Inventories: Additional Valuation Issues

9-9

31.

Net realizable value is
a. acquisition cost plus costs to complete and sell.
b. selling price.
c. selling price plus costs to complete and sell.
d. selling price less costs to complete and sell.

32.

If a unit of inventory has declined in value below original cost, but the market value

exceeds net realizable value, the amount to be used for purposes of inventory valuation is
a. net realizable value.
b. original cost.
c. market value.
d. net realizable value less a normal profit margin.

33.

Inventory may be recorded at net realizable value if
a. there is a controlled market with a quoted price.
b. there are no significant costs of disposal.
c. the inventory consists of precious metals or agricultural products.
d. all of these.

34.

If a material amount of inventory has been ordered through a formal purchase contract at
the balance sheet 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.

35.

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.

P

In 2006, Lucas Manufacturing signed a contract with a supplier to purchase raw materials
in 2007 for $700,000. Before the December 31, 2006 balance sheet date, the market price
for these materials dropped to $510,000. The journal entry to record this situation at
December 31, 2006 will result in a credit that should be reported
a. as a valuation account to Inventory on the balance sheet.
b. as a current liability.
c. as an appropriation of retained earnings.
d. on the income statement.

S

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.

36.

37.


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9 - 10

Test Bank for Intermediate Accounting, Twelfth Edition

38.

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.

39.

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. None of these.

40.

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.

41.

An inventory method which is designed to approximate inventory valuation at the lower of
cost or market is
a. last-in, first-out.
b. first-in, first-out.
c. conventional retail method.
d. specific identification.

42.

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.

43.

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.

44.

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 market.
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.


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Inventories: Additional Valuation Issues

9 - 11

45.

To produce an inventory valuation which approximates the lower of cost or market 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.

*46.

When calculating the cost ratio for the retail inventory method,
a. if it is the conventional method, the beginning inventory is included and markdowns
are deducted.
b. if it is the LIFO method, the beginning inventory is excluded and markdowns are
deducted.

c. if it is the LIFO method, the beginning inventory is included and markdowns are not
deducted.
d. if it is the conventional method, the beginning inventory is excluded and markdowns
are not deducted.

S

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 item's 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.

S

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

P

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.

P

50.

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

51.

The inventory turnover ratio 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.

47.

48.

49.


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9 - 12

*52.

Test Bank for Intermediate Accounting, Twelfth Edition
When using dollar-value LIFO, if the incremental layer was added last year, it should be
multiplied by
a. last year's cost ratio and this year's index.
b. this year's cost ratio and this year's index.
c. last year's cost ratio and last year's index.
d. this year's cost ratio and last year's index.

Multiple Choice Answers—Conceptual
Item

21.
22.
23.
24.
25.

Ans.

d
d
c
b
a

Item

26.

27.
28.
29.
30.

Ans.

c
d
d
c
b

Item

31.
32.
33.
34.
35.

Ans.

d
a
d
a
a

Item

36.
37.
38.
39.
40.

Ans.

b
d
d
b
d

Item

41.
42.
43.
44.
45.

Ans.

Item

Ans.

Item

Ans.

c
a
d
b
a

*46.
47.
48.
49.
50.

b
a
d
b
a

51.
*52.

c
c

Solutions to those Multiple Choice questions for which the answer is “none of these.”
38.

The gross profit percentage applicable to the goods in ending inventory is different from
the percentage applicable to the goods sold during the period.

43.

Many answers are possible.

MULTIPLE CHOICE—Computational
53.

Marr Corporation has two products in its ending inventory, each accounted for at the lower
of cost or market. A profit margin of 30% on selling price is considered normal for each
product. Specific data with respect to each product follows:
Historical cost
Replacement cost
Estimated cost to dispose
Estimated selling price

Product #1
$40.00
45.00
10.00
80.00

Product #2
$ 70.00
54.00
26.00
130.00

In pricing its ending inventory using the lower-of-cost-or-market, what unit values should
Marr use for products #1 and #2, respectively?
a. $40.00 and $65.00.
b. $46.00 and $65.00.
c. $46.00 and $60.00.
d. $45.00 and $54.00.
54.

Paul Konerko Company sells product 2005WSC for $20 per unit. The cost of one unit of
2005WSC is $18, and the replacement cost is $17. The estimated cost to dispose of a unit
is $4, and the normal profit is 40%. At what amount per unit should product 2005WSC be
reported, applying lower-of-cost-or-market?
a. $8.
b. $16.
c. $17.
d. $18.


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Inventories: Additional Valuation Issues

9 - 13

55.

Remington Company sells product 1976NLC for $40 per unit. The cost of one unit of
1976NLC is $36, and the replacement cost is $34. The estimated cost to dispose of a unit
is $8, and the normal profit is 40%. At what amount per unit should product 1976NLC be
reported, applying lower-of-cost-or-market?

a. $16.
b. $32.
c. $34.
d. $36.

56.

Joe Crede Corporation sells its product, a rare metal, in a controlled market with a quoted
price applicable to all quantities. The total cost of 5,000 pounds of the metal now held in
inventory is $250,000. The total selling price is $600,000, and estimated costs of disposal
are $10,000. At what amount should the inventory of 5,000 pounds be reported in the
balance sheet?
a. $240,000.
b. $250,000.
c. $590,000.
d. $600,000.

57.

Pettengal Corporation sells its product, a rare metal, in a controlled market with a quoted
price applicable to all quantities. The total cost of 5,000 pounds of the metal now held in
inventory is $150,000. The total selling price is $350,000, and estimated costs of disposal
are $5,000. At what amount should the inventory of 5,000 pounds be reported in the
balance sheet?
a. $145,000.
b. $150,000.
c. $345,000.
d. $350,000.

58.

Jermaine Dye 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 Dye 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.

59.

Williamson 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 Williamson 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.


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9 - 14
60.

Test Bank for Intermediate Accounting, Twelfth Edition
At a lump-sum cost of $48,000, Sealy 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:
N
O
M
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
61.

During 2006, Reese 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
2007. Because a record harvest is predicted for 2007, the price per pound for cocoa
beans had fallen to $3.10 by December 31, 2006.
Of the following journal entries, the one which would properly reflect in 2006 the effect of
the commitment of Reese 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. Estimated Loss on Purchase Commitments ...................
90,000
Estimated Liability on Purchase Commitments ...
90,000
d. No entry would be necessary in 2006

62.

AJ Corporation, a manufacturer of ethnic foods, contracted in 2007 to purchase 500

pounds of a spice mixture at $5.00 per pound, delivery to be made in spring of 2008. By
12/31/07, the price per pound of the spice mixture had risen to $5.60 per pound. In 2007,
AJ should recognize
a. a loss of $2,500.
b. a loss of $300.
c. no gain or loss.
d. a gain of $300.

63.

DT Corporation, a manufacturer of Mexican foods, contracted in 2007 to purchase 1,000
pounds of a spice mixture at $5.00 per pound, delivery to be made in spring of 2008. By
12/31/07, the price per pound of the spice mixture had dropped to $4.60 per pound. In
2007, DT should recognize
a a loss of $5,000.
b. a loss of $400.
c. no gain or loss.
d. a gain of $400.


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Inventories: Additional Valuation Issues
64.

9 - 15

The following information is available for October for Jordan Company.
Beginning inventory
Net purchases

Net sales
Percentage markup on cost

$ 50,000
150,000
300,000
66.67%

A fire destroyed Jordan’s 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.
65.

The following information is available for October for Horton Company.
Beginning inventory
Net purchases
Net sales
Percentage markup on cost

$100,000
300,000
600,000
66.67%

A fire destroyed Horton’s 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 66 and 67.
Sloan 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 month's projected cost of goods sold.
66.

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.

67.

Merchandise purchases for July are anticipated to be
a. $1,632,000.
b. $2,076,000.
c. $1,700,000.
d. $1,730,000.


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9 - 16

Test Bank for Intermediate Accounting, Twelfth Edition

68.

Gomez 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. Gomez’s sales in
its first year must have been
a. $540,000.
b. $660,000.
c. $180,000.
d. $600,000.

69.

A markup of 40% on cost is equivalent to what markup on selling price?
a. 29%
b. 40%
c. 60%
d. 71%

70.

Miller, 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.
71.

On January 1, 2007, the merchandise inventory of Colaw, Inc. was $800,000. During 2007
Colaw 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 Colaw at
December 31, 2007?
a. $400,000.
b. $500,000.
c. $900,000.
d. $1,500,000.

72.

For 2007, cost of goods available for sale for Vale 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.

73.

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%


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Inventories: Additional Valuation Issues

9 - 17

The amount of the inventory loss is estimated to be
a. $60,000.
b. $30,000.
c. $75,000.
d. $50,000.
74.

The inventory account of Lance Company at December 31, 2007, included the following
items:
Inventory Amount
Merchandise out on consignment at sales price
(including markup of 40% on selling price)
$15,000
Goods purchased, in transit (shipped f.o.b. shipping point)
12,000
Goods held on consignment by Lance
13,000
Goods out on approval (sales price $7,600, cost $6,400)
7,600

Based on the above information, the inventory account at December 31, 2007, should be
reduced by
a. $20,200.
b. $22,600.
c. $32,200.
d. $32,000.

75.

Flynn 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-market, 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 76 through 80.
The following data concerning the retail inventory method are taken from the financial records of
Stone 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


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9 - 18

Test Bank for Intermediate Accounting, Twelfth Edition

76.

The ending inventory at retail should be
a. $74,000.
b. $60,000.
c. $64,000.
d. $42,000.

77.

If the ending inventory is to be valued at approximately the lower of cost or market, 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.

78.

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.

*79.

Assuming no change in the price level if the LIFO inventory method were used in
conjunction with the data, the ending inventory at cost would be
a. $42,600.
b. $42,000.
c. $40,800.
d. $43,200.

*80.

Assuming that the LIFO inventory method were used in conjunction with the data and that
the inventory at retail had increased during the period, then the computation of retail in the
cost to retail ratio would
a. exclude both markups and markdowns and include beginning inventory.
b. include markups and exclude both markdowns and beginning inventory.
c. include both markups and markdowns and exclude beginning inventory.
d. exclude markups and include both markdowns and beginning inventory.

81.

Gooch 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

What is Gooch’s ending inventory at retail?
a. $54,400.
b. $56,000.
c. $57,600.
d. $58,400

$120,000
18,000
2,800

1,800
2,600


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Inventories: Additional Valuation Issues
82.

9 - 19

Dryer 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

$100,000
18,000
2,800
1,800
2,600

What is Dryer’s ending inventory at retail?
a. $34,400.
b. $36,000.
c. $37,600.
d. $38,400
83.

Dye Corporation’s 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
90,000
$375,000

The average days to sell inventory for Dye are
a. 58.4 days.
b. 67.6 days.
c. 73.0 days.

d. 87.6 days.
84.

Ace Corporation’s 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 Ace are
a. 56.9 days.
b. 63.1 days.
c. 66.4 days.
d. 75.8 days.
85.

The 2007 financial statements of Wert 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. Wert’s inventory turnover ratio for 2007 is
a. 7.5 times.
b. 6.0 times.
c. 5.0 times.
d. 4.3 times.

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9 - 20

Test Bank for Intermediate Accounting, Twelfth Edition

Use the following information for questions 86 through 90.
Trent 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
86.

If the ending inventory is to be valued at approximately lower of average cost or market,
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.

87.

The ending inventory at retail should be
a. $160,000.
b. $150,000.
c. $144,000.
d. $140,000.

88.

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.

*89.

If the ending inventory is to be valued at approximately LIFO cost, the calculation of the
cost ratio should be based on cost and retail of
a. $378,000 and $552,000.
b. $378,000 and $532,000.
c. $300,000 and $410,000.
d. $300,000 and $430,000.

*90.

Assuming that the LIFO inventory method is used, that the beginning inventory is the base
inventory when the index was 100, and that the index at year end is 112, the ending
inventory at dollar-value LIFO retail cost is
a. $80,460.
b. $92,757.
c. $95,900.
d. $102,480.


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Inventories: Additional Valuation Issues

9 - 21

Use the following information for questions 91 and 92.
Baker Company, which uses the retail LIFO method to determine inventory cost, has provided the
following information for 2007:
Cost
Retail

Inventory, 1/1/07
$ 94,000
$140,000
Net purchases
378,000
562,000
Net markups
68,000
Net markdowns
30,000
Net sales
530,000
*91.

Assuming stable prices (no change in the price index during 2007), what is the cost of
Baker's inventory at December 31, 2007?
a. $128,100.
b. $138,100.
c. $136,000.
d. $132,300.

*92.

Assuming that the price index was 105 at December 31, 2007 and 100 at January 1,
2007, what is the cost of Baker's inventory at December 31, 2007 under the dollar-valueLIFO retail method?
a. $133,690.
b. $138,915.
c. $140,305.
d. $131,800.

Multiple Choice Answers—Computational
Item

53.
54.
55.
56.
57.
58.

Ans.

a
b
b
c
c
b

Item

59.
60.
61.
62.
63.
64.

Ans.

b
c
c
c
b
a

Item

65.
66.
67.
68.
69.
70.

Ans.

a
d
d
a
a
b

Item

71.
72.
73.

74.
75.
76.

Ans.

Item

Ans.

c
b
a
a
b
b

77.
78.
*79.
*80.
81.
82.

a
b
b
c
a
a

Item

83.
84.
85.
86.
87.
88.

Ans.

Item

Ans.

c
c
b
d
d
a

*89.
*90.
*91.
*92.

c
a

b
a


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9 - 22

Test Bank for Intermediate Accounting, Twelfth Edition

MULTIPLE CHOICE—CPA Adapted
93.

Teel Distribution Co. has determined its December 31, 2007 inventory on a FIFO basis at
$250,000. Information pertaining to that inventory follows:
Estimated selling price
Estimated cost of disposal
Normal profit margin
Current replacement cost

$255,000
10,000
30,000
225,000

Teel records losses that result from applying the lower-of-cost-or-market rule. At December
31, 2007, the loss that Teel should recognize is
a. $0.
b. $5,000.
c. $20,000.

d. $25,000.
94.

Under the lower-of-cost-or-market method, the replacement cost of an inventory item
would be used as the designated market value
a. when it is below the net realizable value less the normal profit margin.
b. when it is below the net realizable value and above the net realizable value less the
normal profit margin.
c. when it is above the net realizable value.
d. regardless of net realizable value.

95.

The original cost of an inventory item is above the replacement cost and the net realizable
value. The replacement cost is below the net realizable value less the normal profit
margin. As a result, under the lower-of-cost-or-market method, the inventory item should
be reported at the
a. net realizable value.
b. net realizable value less the normal profit margin.
c. replacement cost.
d. original cost.

96.

Gore Company's accounting records indicated the following information:
Inventory, 1/1/07
Purchases during 2007
Sales during 2007

$ 600,000

3,000,000
3,800,000

A physical inventory taken on December 31, 2007, resulted in an ending inventory of
$700,000. Gore's gross profit on sales has remained constant at 25% in recent years.
Gore suspects some inventory may have been taken by a new employee. At December
31, 2007, what is the estimated cost of missing inventory?
a. $50,000.
b. $150,000.
c. $200,000.
d. $250,000.


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Inventories: Additional Valuation Issues
97.

9 - 23

Eaton 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, 2007, are as
follows:
Cost
Retail
Inventory, 2/1/07
$ 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-market method, Eaton's estimated inventory at July 31, 2007 is
a. $72,000.
b. $84,000.
c. $96,000.
d. $120,000.

98.

At December 31, 2007, the following information was available from Dole Co.'s accounting
records:
Cost
Retail
Inventory, 1/1/07
$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-market method, Dole's inventory at December 31, 2007 was
a. $294,000.
b. $245,000.
c. $252,000.
d. $238,000.

*99.

On December 31, 2006, Lilly Co. adopted the dollar-value LIFO retail inventory method.
Inventory data for 2007 are as follows:
LIFO Cost
Retail
Inventory, 12/31/06
$300,000
$420,000
Inventory, 12/31/07
?
550,000
Increase in price level for 2007
10%
Cost to retail ratio for 2007
70%
Under the LIFO retail method, Lilly's inventory at December 31, 2007, should be
a. $361,600.
b. $385,000.
c. $391,000.
d $400,100.

Multiple Choice Answers—CPA Adapted
Item

93.

Ans.

d

Item

94.

Ans.

b

Item

95.

Ans.

b

Item

96.

Ans.

Item

Ans.

a

97.

a

Item

98.

Ans.

Item

Ans.

d

*99.

a


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9 - 24

Test Bank for Intermediate Accounting, Twelfth Edition

DERIVATIONS — Computational
No.

Answer Derivation

53.

a

Product 1: RC = $45, NRV = $80 – $10 = $70
NRV – PM = $70 – ($80 × .3) = $46, cost = $40.
Product 2: RC = $54, NRV = $130 – $26 = $104
NRV – PM = $104 – ($130 × .3) = $65, cost = $70.

54.

b

NRV = $20 – $4 = $16, RC = $17
NRV – PM = $16 – ($20 × .40) = $8, cost = $18.

55.

b

NRV = $40 – $8 = $32, RC = $34

NRV – PM = $32 – ($40 × .40) = $16, cost = $36.

56.

c

$600,000 – $10,000 = $590,000.

57.

c

$350,000 – $5,000 = $345,000.

58.

b

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.

59.

b

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.

60.

c

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

61.

c

($4.00 – $3.10) × 100,000 = $90,000.

62.

c

No gain or loss since 12/31 price ($5.60) > contract price ($5,00).

63.

b

($5.00 – $4.60) × 1,000 = $400.

64.

a

($50,000 + $150,000) – ($300,000 ÷ 5/3) – $3,000 = $17,000.

65.

a

($100,000 + $300,000) – ($600,000 ÷ 5/3) – $6,000 = $34,000.

66.

d

(1 + .2)C = 1,980,000; C = $1,650,000.

67.

d

COGS:

68.

a

$360,000 + ($420,000 – $240,000) = $540,000.

July = $2,040,000 ÷ 1.2 = $1,700,000
Aug. = $2,160,000 ÷ 1.2 = $1,800,000
July's purchase = ($1,700,000 × .7) + ($1,800,000 × .3) = $1,730,000.


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Inventories: Additional Valuation Issues

9 - 25

DERIVATIONS — Computational (cont.)
No.

Answer Derivation
.40
———— = .29 = 29%.
1 + .40

69.

a

70.

b

COGS = $300,000 ÷ 1.25 = $240,000
($220,000 + $172,000 – $8,000) – $240,000 = $144,000.

71.

c

COGS = $2,000,000 × .75 = $1,500,000
$800,000 + $1,600,000 – $1,500,000 = $900,000.

72.

b

$900,000 – ($800,000 × .80) = $260,000.

73.

a

$300,000
$50,000 + $250,000 – ————— = $60,000.
1.25

74.

a

($15,000 × 40%) + $13,000 + ($7,600 – $6,400) = $20,200.

75.

b

Cost: $30,000 + $145,000 + $2,500 = $177,500.
Retail: $50,000 + $200,000 + $8,500 = $258,500.

76.

b

$70,000 + $320,000 + $20,000 – $14,000 – $336,000 = $60,000.

77.

a

Cost: $49,000 + $224,000 + $6,000 = $279,000.
Retail: $70,000 + $320,000 + $20,000 = $410,000.

78.

b

Conceptual.

*79.

b

$49,000
———— × $60,000 = $42,000.
$70,000

*80.

c

Conceptual.

81.

a

$3,600 + $114,000 + $18,000 – $4,000 – $70,200 – $1,600 – $2,800 – $2,600
= $54,400.

82.

a

$3,600 + $94,000 + $18,000 – $4,000 – $70,200 – $1,600 – $2,800 – $2,600
= $34,400.

83.

c

$375,000 ÷ [($60,000 + $90,000) ÷ 2] = 5; 365 ÷ 5 = 73.0.

84.

c

$385,000 ÷ [($60,000 + $80,000) ÷ 2] = 5.5; 365 ÷ 5.5 = 66.4.

85.

b

$600,000 ÷ [($80,000 + $120,000) ÷ 2] = 6 times

86.

d

Cost: $78,000 + $295,000 + $5,000 = $378,000.
Retail: $122,000 + $415,000 + $15,000 = $552,000.

87.

d

$122,000 + $415,000 – $2,000 + $15,000 – $20,000 – $390,000 = $140,000.