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Accounting for Smashing Pumpkins Company

1. (Lower-of-Cost-or-Market) Smashing Pumpkins Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2008, consists of products D, E, F, G, H, and I. Relevant per-unit data for these products appear below.
Item D Item E Item F Item G Item H Item I
Estimated selling price $120 $110 $95 $90 $110 $90
Cost 75 80 80 80 50 36
Replacement cost 120 72 70 30 70 30
Estimated selling expense 30 30 30 25 30 30
Normal profit 20 20 20 20 20 20

Using the lower-of-cost-or-market rule, determine the proper unit value for balance sheet reporting purposes at December 31, 2008, for each of the inventory items above.

2. (Gross Profit Method) Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Merchandise on hand on January 1 was $38,000. Purchases since January 1 were $72,000; freight-in, $3,400; purchase returns and allowances, $2,400. Sales are made at 33?% above cost and totaled $100,000 to March 9. Goods costing $10,900 were left undamaged by the fire; remaining goods were destroyed.

1. Compute the cost of goods destroyed.
2. Compute the cost of goods destroyed, assuming that the gross profit is 33?% of sales.

3. (Retail Inventory Method) Presented below is information related to Bobby Engram Company.
Cost Retail
Beginning inventory $ 58,000 $100,000
Purchases (net) 122,000 200,000
Net markups 10,345
Net markdowns 26,135
Sales 186,000

1. Compute the ending inventory at retail.
2. 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.
3. 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 lower-of-cost-or-market.
3. Is used in the conventional retail method.
4. Compute ending inventory at lower-of-cost-or-market (round to nearest dollar).
5. Compute cost of goods sold based on (d).
6. Compute gross margin based on (d).

4. (Correction of Improper Cost Entries) Plant acquisitions for selected companies are as follows.
1. Belanna Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Torres Co., for a lump-sum price of $700,000. At the time of purchase, Torres's assets had the following book and appraisal values.
Book Values Appraisal Values
Land $200,000 $150,000
Buildings 250,000 350,000
Equipment 300,000 300,000
To be conservative, the company decided to take the lower of the two values for each asset acquired. The following entry was made.
Land 150,000
Buildings 250,000
Equipment 300,000
Cash 700,000
2. Harry Enterprises purchased store equipment by making a $2,000 cash down payment and signing a 1-year, $23,000, 10% note payable. The purchase was recorded as follows.
Store Equipment 27,300
Cash 2,000
Note Payable 23,000
Interest Payable 2,300
3. Kim Company purchased office equipment for $20,000, terms 2/10, n/30. Because the company intended to take the discount, it made no entry until it paid for the acquisition. The entry was:
Office Equipment 20,000
Cash 19,600
Purchase Discounts 400
4. Kaisson Inc. recently received at zero cost land from the Village of Cardassia as an inducement to locate its business in the Village. The appraised value of the land is $27,000. The company made no entry to record the land because it had no cost basis.
5. Zimmerman Company built a warehouse for $600,000. It could have purchased the building for $740,000. The controller made the following entry.
Warehouse 740,000
Cash 600,000
Profit on Construction 140,000

Prepare the entry that should have been made at the date of each acquisition.

5. Entries for Equipment Acquisitions) Jane Geddes Engineering Corporation purchased
conveyor equipment with a list price of $10,000. Presented below are three independent cases related to the equipment. (Round to nearest dollar.)
1. Geddes paid cash for the equipment 8 days after the purchase. The vendor's credit terms are 2/10, n/30.
Assume that equipment purchases are recorded gross.
3. Geddes gave the vendor a $10,800 zero-interest-bearing note for the equipment on the date of purchase.
The note was due in one year and was paid on time. Assume that the effective interest rate in the market was 9%.

Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.
Round to the nearest dollar.

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Solution Summary

The solution examines accounting for the Smashing Pumpkins Company. The expert computes the cost of goods destroyed.