E9-5.

(LCNRV—Valuation Account)
LO ( 1 )
Presented below is information related to Knight Enterprises.
Jan. 31 Feb. 28 Mar. 31 Apr. 30
$17,00
Inventory at cost $15,000 $15,100 $14,000
0
Inventory at LCNRV 14,500 12,600 15,600 13,300
Purchases for the
17,000 24,000 26,500
month
Sales for the month 29,000 35,000 40,000
Instructions
(a)
From the information, prepare (as far as the data permit) monthly income statements in
columnar form for February, March, and April. The inventory is to be shown in the statement
at cost; the gain or loss due to market fluctuations is to be shown separately (using a
valuation account).
* Jan. 31 Feb. 28 Mar. 31 Apr. 30
Inventory at cost $15,000 $15,100 $17,000 $14,000
Inventory at LCNRV (14,500) (12,600) (15,600) (13,300)
Allowance amount needed to
reduce inventory to NRV $ 500 $ 2,500 $ 1,400 $ 700
Gain (loss) due to market
fluctuations of inventory** $ (2,000) $ 1,100 $ 700

**$500 – $2,500 = $(2,000)

$2,500 – $1,400 = $1,100
$1,400 – $700 = $700

(b) Prepare the journal entry required to establish the valuation account at January 31 and
entries to adjust it monthly thereafter.

January 31
Loss Due to Decline of Inventory to NRV 500
Allowance to Reduce Inventory to NRV 500

February 28
Loss Due to Decline of Inventory to NRV 2,000
 Allowance to Reduce Inventory to NRV 2,000

March 31
Allowance to Reduce Inventory to NRV 1,100
Recovery of Inventory Loss 1,100

April 30
Allowance to Reduce Inventory to NRV 700
Recovery of Inventory Loss 700

E9-9. (Relative Standalone Sales Value Method)

LO ( 3 )
Larsen Realty Corporation purchased a tract of unimproved land for £55,000. This land was
improved and subdivided into building lots at an additional cost of £30,000. These building
lots were all of the same size. However, owing to differences in location, the lots were offered
for sale at different prices as follows.
Grou
No. of Lots Price per Lot
p
1 9 £3,000
2 15 4,000
3 19 2,000
Operating expenses for the year allocated to this project total £18,200. Lots unsold at the
year-end were as follows.
Group
5 lots
1
Group
7 lots
2
Group
2 lots
3
Instructions
At the end of the fiscal year, Larsen Realty Corporation instructs you to arrive at the net
income realized on this operation to date.
 Total Cost Cost Per Lot
No. of Sales Sales Price Relative Sales Price Total Allocated to (Cost Allocated/
Lots Price Per Lot Cost Lots No. of Lots)
9 £3,000 £ 27,000 £27,000/£125,000X £85,000 £18,360 £2,040

15 4,000 60,000 £60,000/£125,000X 85,000 40,800 2,720

19 2,000 38,000 £38,000/£125,000X 85,000 25,840 1,360
£125,000 £85,000

SoldNumber Lot Cost

Sold Cost of Sales Profit
of Lots Per Lots Gross

4 £2,040 £ 8,160 £12,000 £ 3,840

8 2,720 21,760 32,000 10,240
17 1,360 23,120 34,000 10,880
29 £53,040 £78,000 £24,960

Sales (see schedule) £78,000

Cost of goods sold (see schedule) 53,040

Gross profit 24,960

Operating expenses 18,200

Net income £ 6,760

E9-12. (Purchase Commitments)
LO ( 4 )
At December 31, 2015, Volkan Company has outstanding non-cancelable purchase
commitments for 40,000 gallons, at €3.00 per gallon, of raw material to be used in its
manufacturing process. The company prices its raw material inventory at lower-of-cost-or-net
realizable value.
Instructions
(a)
Assuming that the market price as of December 31, 2015, is €3.30, how would this matter be
treated in the accounts and statements? Explain.
If the commitment is material in amount, there should be a footnote in the statement of
financial position stating the nature and extent of the commitment. The footnote may
also disclose the market price of the materials.
The excess of market price over contracted price = gain contingency = not be recognized
in the accounts until it is realized.
(b)
Assuming that the market price as of December 31, 2015, is €2.70 instead of €3.30, how
would you treat this situation in the accounts and statements?
The drop in the market price of the commitment should be charged to operations in the
current year if it is material in amount. The following entry would be made:

Unrealized Holding Gain or Loss—Income 12,000*

Purchase Commitment Liability 12,000

*(€3.00 – €2.70) X 40,000

A loss in utility has occurred during the period in which the market decline took place.
The account credited in the above entry should be included among the current liabilities
on the statement of financial position, with an appropriate footnote indicating the
nature and extent of the commitment.
This liability indicates the minimum obligation on the commitment contract at the
present time—the amount that would have to be forfeited in case of breach of contract.

(c) Give the entry in January 2016, when the 40,000-gallon shipment is received, assuming
that the situation given in (b) above existed at December 31, 2015, and that the market price
in January 2016 was €2.70 per gallon. Give an explanation of your treatment.

Assuming the €12,000 market decline entry was made on December 31, 2015, as
indicated in (b), the entry when the materials are received in January 2016 would be:

Raw Materials (€40,000 X €2.70) 108,000

Purchase Commitment Liability (€40,000 X €3.00) 12,000
Accounts Payable 120,000
E9-20. (Retail Inventory Method)
LO ( 6 )
Presented below is information related to Luzon Company.
Cost Retail
Beginning
R$ 58,000 R$100,000
inventory
Purchases (net) 122,000 200,000
Net markups 20,000
Net markdowns 30,000
Sales 186,000
Instructions
(a) Compute the ending inventory at retail.
Cost Retail
Beginning inventory R$ 58,000 R$100,000
Purchases 122,000 200,000
Net markups — 20,000
Totals R$180,000 320,000
Net markdowns (30,000)
Sales price of goods available 290,000
Deduct: Sales 186,000
Ending inventory at retail R$104,000

(b) Compute a cost-to-retail percentage (round to two decimals) under the following
conditions.
(1) Excluding both markups and markdowns.
(2) Excluding markups but including markdowns.
(3) Excluding markdowns but including markups.
(4) Including both markdowns and markups.
(b) 1. R$180,000 ÷ R$300,000 = 60%
2. R$180,000 ÷ R$270,000 = 66.67%
3. R$180,000 ÷ R$320,000 = 56.25%
4. R$180,000 ÷ R$290,000 = 62.07%

(c) Which of the methods in (b) above (1, 2, 3, or 4) does the following?
(1) Provides the most conservative estimate of ending inventory.
(2) Provides an approximation of LCNRV.
(3) Is used in the conventional retail method.
1. Method 3.
2. Method 3.
3. Method 3.
(d) Compute ending inventory at LCNRV (round to nearest dollar).
56.25% X R$104,000 = R$58,500

(e) Compute cost of goods sold based on(d).

R$180,000 – R$58,500 = R$121,500

(f) Compute gross margin based on (d).

R$186,000 – R$121,500 = R$64,500

P9-4. (Valuation at Net Realizable Value)
LO ( 2 )
Finn Berge realized his lifelong dream of becoming a vineyard owner when he was able to
purchase the Hillside Vineyard at an estate auction in August 2015 for €750,000. Finn
retained the Hillside name for his new business. The purchase was risky because the growing
season was coming to an end, the grapes must be harvested in the next several weeks, and
Finn has limited experience in carrying off a grape harvest.
At the end of the first quarter of operations, Finn is feeling pretty good about his early results.
The first harvest was a success; 300 bushels of grapes were harvested with a value of €30,000
(based on current local commodity prices at the time of harvest). And, given the strong yield
from area vineyards during this season, the net realizable value of Finn's vineyard has
increased by €15,000 at the end of the quarter. After storing the grapes for a short period of
time, Finn was able to sell the entire harvest for €35,000.
Instructions

(a) Prepare the journal entries for the Hillside biological asset (grape vines) for the first
quarter of operations (the beginning carrying and net realizable value is €750,000).

Biological Assets—Grape Vineyard 15,000

Unrealized Holding Gain or Loss – Income 15,000

(b) Prepare the journal entry for the grapes harvested during the first quarter.

Grape Inventory 30,000

Unrealized Holding Gain or Loss – Income 30,000

(c) Prepare the journal entry to record the sale of the grapes harvested in the first quarter.

Cash 35,000
Cost of Goods Sold 30,000
Grape Inventory 30,000
Sales Revenue 35,000
(d) Determine the total effect on income for the quarter related to the Hillside biological
asset and agricultural produce.

Unrealized Holding Gain or Loss – Income €15,000

Unrealized Holding Gain or Loss – Income 30,000
Gross Profit on Sold Grapes 5,000
Total Effect on Income €50,000

(e) Looking to the next growing season, Finn is doing some forecasting, based on the
following two developments: (1) demand for the type of grapes his vineyard produces is
expected to increase, and (2) there are new producing vineyards coming on line that will
increase the supply of similar grapevines in the market. Briefly discuss how these
developments are likely to affect the value of Hillside's biological assets and agricultural
produce in the next growing season.

The increase in demand for the type of grapes that Finn produces = increase the sales
prices received for the grapes, increase the value of the harvested grapes since the value
is based on the current commodity price, and increase the potential that the full harvest
will be sold.
The new producing vineyards coming on line next year = negative effects on both the
value of any increase in the grape vineyard (biological asset) and the value of the
harvested grapes.
The new vineyards may also increase supply and decrease prices as a result.
P9-5. (Gross Profit Method)
LO ( 5 )
Yu Company lost most of its inventory in a fire in December just before the year-end physical
inventory was taken. Corporate records disclose the following (yen in thousands).
Inventory
¥ 80,000 Sales ¥415,000
(beginning)
Purchases 290,000 Sales returns 21,000
Purchase returns 28,000 Gross profit % based on net selling price 35%
Merchandise with a selling price of ¥30,000 remained undamaged after the fire, and damaged
merchandise has a residual value of ¥8,150. The company does not carry fire insurance on its
inventory.
Instructions
Prepare a formal labeled schedule computing the fire loss incurred. (Do not use the retail
inventory method.)
Beginning inventory ¥ 80,000
Purchases 290,000
370,000
Purchase returns (28,000)
Total goods available 342,000
Sales ¥415,000
Sales returns (21,000)
394,000
Less: Gross profit (35% of ¥394,000) 137,900 (256,100)
Ending inventory (unadjusted for damage) 85,900
Less: Goods on hand—undamaged
(¥30,000 X [1 – 35%]) 19,500
Inventory damaged 66,400
Less: Residual value of damaged inventory 8,150
Fire loss on inventory ¥ 58,250
P9-8. (Retail Inventory Method)
LO ( 6 )
Presented below is information related to Waveland Inc.
Cost Retail
Inventory, 12/31/15 $250,000 $ 390,000
Purchases 914,500 1,460,000
Purchase returns 60,000 80,000
Purchase discounts 18,000 —
Gross sales (after employee
— 1,410,000
discounts)
Sales returns — 97,500
Markups — 120,000
Markup cancellations — 40,000
Markdowns — 45,000
Markdown cancellations — 20,000
Freight-in 42,000 —
Employee discounts granted — 8,000
Loss from breakage (normal) — 4,500
Instructions
Assuming that Waveland Inc. uses the conventional retail inventory method, compute the cost
of its ending inventory at December 31, 2015.

Beginning inventory
Purchases
Purchase returns
Purchase discounts
Freight-in
Markups
Markup cancellations
Totals
Markdowns
Markdown cancellations
Sales
Sales returns
Inventory losses due to breakage
Employee discounts
Ending inventory at retail

$1,128,500
Cost-to-retail ratio =
$1,850,000
Ending inventory at cost
(61% of $500,000)

P9-10. (Statement and Note Disclosure, LCNRV, and Purchase Commitment)

LO ( 1 4 7 )
Maddox Specialty Company, a division of Lost World Inc., manufactures three models of
gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and
catalog outlets. Since beginning operations in 1983, Maddox has used normal absorption
costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The
balances of the inventory accounts at the end of Maddox's fiscal year, November 30, 2015,
are shown below. The inventories are stated at cost before any year-end adjustments.
Finished goods $647,000
Work in process 112,500
Raw materials 264,000
Factory supplies 69,000
The following information relates to Maddox's inventory and operations.

 1.The finished goods inventory consists of the items analyzed below.

Cost Net Realizable Value

Down tube shifter
Standard model $ 67,500 $ 67,000
Click adjustment model 94,500 89,000
Deluxe model 108,000 110,000
Total down tube shifters 270,000 266,000
Bar end shifter
Standard model 83,000 90,050
Click adjustment model 99,000 97,550
Total bar end shifters 182,000 187,600
Head tube shifter
Standard model 78,000 77,650
Click adjustment model 117,000 119,300
Total head tube shifters 195,000 196,950
$647,00
Total finished goods $650,550
0

 2.One-half of the head tube shifter finished goods inventory is held by catalog outlets
on consignment.
 3.Three-quarters of the bar end shifter finished goods inventory has been pledged as
collateral for a bank loan.

 4.One-half of the raw materials balance represents derailleurs acquired at a contracted

price 20 percent above the current market price. The net realizable value of the rest of the
raw materials is $127,400.

 5.The net realizable value of the work in process inventory is $108,700.

 6.Included in the cost of factory supplies are obsolete items with an historical cost of
$4,200. The net realizable value of the remaining factory supplies is $65,900.

 7.Maddox applies the LCNRV method to each of the three types of shifters in finished
goods inventory. For each of the other three inventory accounts, Maddox applies the
LCNRV method to the total of each inventory account.

 8.Consider all amounts presented above to be material in relation to Maddox's

financial statements taken as a whole.

Instructions
(a) Prepare the inventory section of Maddox's statement of financial position as of November
30, 2015, including any required note(s).

The inventory section of Maddox’s statement of financial position at November 30,

2015, including required footnotes, is presented below. Also presented below are
supporting calculations.

Current assets
Inventory Section (Note 1.)
Finished goods (Note 2.) $643,000
Work-in-process 108,700
Raw materials 237,400
Factory supplies 64,800
Total inventories $1,053,900

Note 1.Lower-of-cost (first-in, first-out) or-net realizable value is applied on a

major category basis for finished goods, and on a total inventory basis for work-in-
process, raw materials, and factory supplies.

Note 2.Seventy-five percent of bar end shifters finished goods inventory in the
amount of $136,500 ($182,000 X .75) is pledged as collateral for a bank loan, and one-
half of the head tube shifters finished goods is held by catalog outlets on consignment.
 PROBLEM 9-10 (Continued)

Supporting Calculations

Finished Work-in- Raw Factory

Goods Process Materials Supplies
Down tube shifters at NRV $266,000
Bar end shifters at cost 182,000
Head tube shifters at cost 195,000
Work-in-process at NRV $108,700
Derailleurs at NRV $110,0001
Remaining items at NRV 127,400
Supplies at cost $64,8002
Totals $643,000 $108,700 $237,400 $64,800

1
$264,000 X 1/2 = $132,000; $132,000 ÷ 1.2 = $110,000.
2
$69,000 – $4,200 = $64,800.

(b) Without prejudice to your answer to (a), assume that the net realizable value of Maddox's
inventories is less than cost. Explain how this decline would be presented in Maddox's
income statement for the fiscal year ended November 30, 2015.

The decline in the net realizable value of inventory below cost may be reported using
one of two alternate methods = cost-of-goods-sold method / loss method.
The decline in the net realizable value of inventory may be reflected in Maddox’s
income statement as a separate loss item for the fiscal year ended November 30, 2015.
The loss amount may also be written off directly, increasing the cost of goods sold on
Maddox’s income statement.
The loss must be reported in continuing operations. The loss must be included in the
income statement since it is material to Maddox’s financial statements.
(c) Assume that Maddox has a firm purchase commitment for the same type of derailleur
included in the raw materials inventory as of November 30, 2015, and that the purchase
commitment is at a contracted price 15% greater than the current market price. These
derailleurs are to be delivered to Maddox after November 30, 2015. Discuss the impact, if
any, that this purchase commitment would have on Maddox's financial statements prepared
for the fiscal year ended November 30, 2015.

Purchase contracts for which a firm price has been established should be disclosed on
the financial statements of the buyer.
If the contract price is greater than the current market price and a loss is expected when
the purchase takes place, an unrealized holding loss amounting to the difference
between the contracted price and the current market price should be recognized on the
income statement in the period during which the price decline takes place.
Also, an estimated liability on purchase commitments should be recognized on the
statement of financial position. The recognition of the loss is unnecessary if a firm sales
commitment exists which precludes the loss.