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Exercise 9-1Requirement 1
(1) (2) Ceiling
(3) Floor
(4)
(5)
NRV-NP Designated (NP= Market Value 20% [Middle value of cost) of (1)-(3)] $228,000 268,000 95,000 830,000 $300,000 268,000 110,000 830,000 Totals
The inventory value is $1,270,000. Requirement 2 Loss from write-down of inventory: $1,370,000 1,270,000 = $100,000
Exercise 9-2
4,500,000 Purchases Freight-in
Alternate Exercise and Problem Solutions
Cost of goods available for sale Less: Cost of goods sold: Sales Less: Estimated gross profit of 40% Estimated loss from fire
(13,800,000) $ 6,200,000
Exercise 9-3
Beginning inventory Plus: Net purchases Net markups Less: Net markdowns Goods available for sale $68,250 Cost-to-retail percentage: $97,500 Less: Net sales Estimated ending inventory at retail Estimated ending inventory at cost (70% x $52,500) Estimated cost of goods sold (45,000) $52,500 (36,750) $31,500 = 70% Cost $40,000 28,250 ______ 68,250 Retail $60,000 37,000 2,000 (1,500) 97,500
Exercise 9-4
Beginning inventory Plus: Purchases Freight-in Less: Purchase returns Plus: Net markups
The McGraw-Hill Companies, Inc., 2011 9-2
$1,629,000 Cost-to-retail percentage: $2,715,000 Less: Net markdowns Goods available for sale Less: Normal spoilage Net sales Estimated ending inventory at retail Estimated ending inventory at cost (60% x $267,000) Estimated cost of goods sold _______ 1,629,000 (45,000) 2,670,000 (63,000) (2,340,000) $ 267,000 (160,200) $1,468,800 = 60%
Exercise 9-5
Beginning inventory Plus: Net purchases Net markups Less: Net markdowns Goods available for sale (excluding beginning inventory) Goods available for sale (including beginning inventory) $213,840 Base year cost-to-retail percentage: $396,000 $360,000 2011 cost-to-retail percentage: $750,000 Less: Net sales Estimated ending inventory at current year retail prices Estimated ending inventory at cost (below) Estimated cost of goods sold = 48% = 54%
___________________________________________________________________________ Step 1 Ending Inventory at Base Year Retail Prices $456,000 $456,000 (above) = $447,059 1.02 $396,000 (base) 51,059 (2011) x 1.00 x 54% = x 1.02 x 48% = $213,840 24,998 $238,838 Step 2 Inventory Layers at Base Year Retail Prices Step 3 Inventory Layers Converted to Cost
Exercise 9-61.
To increase inventory by $1.6 million and increase retained earnings to what it would have been if 2010 cost of goods sold had been calculated correctly.
Analysis: 2010 Beginning inventory Purchases Less: Ending inventory Cost of goods sold Revenues Less: Cost of goods sold Less: Other expenses Net income Retained earnings 2011 Beginning inventory Purchases U O U
O U U
U = Understated O = Overstated
($ in millions)
1.6 1.6
2.
The 2010 financial statements that were incorrect as a result of the error would be retrospectively restated to reflect the correct cost of goods sold, (income tax expense if taxes are considered), net income, ending inventory, and retained earnings when those statements are reported again for comparative purposes in the 2011 annual report. Because retained earnings is one of the accounts incorrect, the correction to that account is reported as a prior period adjustment to the 2010 retained earnings balance in the comparative statements of shareholders equity. Also, a disclosure note should describe the nature of the error and the impact of its correction on each years net income, income before extraordinary items, and earnings per share.
3.
4.
PROBLEMS
Problem 9-11. Average cost
Beginning inventory Plus: Purchases Freight-in Less: Purchase returns Plus: Net markups Less: Net markdowns Goods available for sale $564,000 Cost-to-retail percentage: $940,000 Less: Normal spoilage Sales: Net sales ($700,000 - 20,000) Employee discounts Estimated ending inventory at retail Estimated ending inventory at cost (60% x $249,000) Estimated cost of goods sold (5,000) (680,000) (6,000) $249,000 (149,400) $414,600 = 60% Cost $140,000 420,000 16,000 (12,000) _______ 564,000 Retail $280,000 690,000 (18,000) 24,000 (36,000) 940,000
Problem 9-1 (concluded) 2. Conventional (average, LCM) Beginning inventory Plus: Purchases Freight-in Less: Purchase returns Plus: Net markups $564,000 Cost-to-retail percentage: $976,000 Less: Net markdowns Goods available for sale Normal spoilage Sales: Net sales ($700,000 - 20,000) Employee discounts Estimated ending inventory at retail Estimated ending inventory at cost (57.79% x $249,000) Estimated cost of goods sold _______ 564,000 (36,000) 940,000 (5,000) (680,000) (6,000) $249,000 (143,897) $420,103 = 57.79% Cost $140,000 420,000 16,000 (12,000) Retail $280,000 690,000 (18,000) 24,000 976,000
Less: Purchase returns Net markdowns Goods available for sale (excluding beginning inventory) Goods available for sale (including beginning inventory) $128 Base layer cost-to-retail percentage: $200 $1,129 2011 layer cost-to-retail percentage: $1,590 Less: Net sales Estimated ending inventory at current year retail prices Estimated ending inventory at cost (calculated below) Estimated cost of goods sold = 71% = 64%
___________________________________________________________________________ Step 1 Ending Inventory at Base Year Retail Prices $325 $325 (above) = $301 1.08 $200 (base) 101 (2011) x 1.00 x 64% = x 1.08 x 71% = $128 77 $205 Step 2 Inventory Layers at Base Year Retail Prices Step 3 Inventory Layers Converted to Cost