Page 320 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

steadily until at year-end it was USD 120. The inventory at year-end was 18,000 units. State which method of
inventory measurement, LIFO or FIFO, would have resulted in higher reported net income, and explain briefly.
Exercise M Levi Motor Company owns a luxury automobile that it has used as a demonstrator for eight

months. The auto has a list or sticker price of USD 85,000 and cost Levi USD 75,000. At the end of the fiscal year,
the auto is on hand and has an expected selling price of USD 80,000. Costs expected to be incurred to sell the auto
include tune-up and maintenance costs of USD 3,000, advertising of USD 1,000, and a commission of 5 per cent of
the selling price to the employee selling the auto. Compute the amount at which the auto should be carried in
inventory.
Exercise N Pure Sound Systems used one sound system as a floor model. It cost USD 3,600 and had an
original selling price of USD 4,800. After six months, the sound system was damaged and replaced by a newer

model. The sound system had an estimated selling price of USD 2,880, but when the company performed USD 480
in repairs, it could be sold for USD 3,840. Prepare the journal entry, if any, that must be made on Pure Sound's
books to record the decline in market value.
Exercise O Your assistant has compiled the following data:
Quantity Unit Unit Total Total
Item (units) Cost Market Cost Market
A 300 $ 57.60 $ 55.20 $17,280 $16,560
B 300 28.80 33.60 8,640 10,080
C 900 21.60 21.60 19,440 19,440
D 500 12.00 13.20 6,000 6,600
Calculate the dollar amount of the ending inventory using the LCM method, applied on an item-by-item basis,
and the amount of the decline from cost to lower-of-cost-or-market.
Exercise P Use the data in the previous exercise to compute the cost of the ending inventory using the LCM
method applied to the total inventory.
Exercise Q Tilley-Mill Company takes a physical inventory at the end of each calendar-year accounting period

to establish the ending inventory amount for financial statement purposes. Its financial statements for the past few
years indicate an average gross margin on net sales of 25 per cent. On July 18, a fire destroyed the entire store
building and its contents. The records in a fireproof vault were intact. Through July 17, these records show:
Merchandise inventory, January 1 USD 672,000
Merchandise purchases USD 9,408,000
Purchase returns USD 134,400
Transportation-in USD 504,000

Sales USD 14,336,000
Sales returns USD 672,000
The company was fully covered by insurance and asks you to determine the amount of its claim for loss of
merchandise.
Exercise R Ryan Company takes a physical inventory at the end of each calendar-year accounting period. Its
financial statements for the past few years indicate an average gross margin on net sales of 30 per cent.
On June 12, a fire destroyed the entire store building and the inventory. The records in a fireproof vault were
intact. Through June 11, these records show:
Merchandise inventory, January 1 $120,000
Merchandise purchases $3,000,000
Purchase returns $36,000

Accounting Principles: A Business Perspective 321 A Global Text