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Inventory Question, Conventional Retail Method

1. The ending inventory of the Bonie Company is understated in Year One by $20,000. This error is not corrected in Year One or Year Two. What impact will this error have on total net income for Years One and Two combined?
a. Understate total income by $20,000
b. No effect on total income for the two years
c. Overstate total income by $20,000
d. Overstate net income for Year One by $20,000 and Year Two by $20,000 to a total overstatement of $40,000.
2. Apple Corp has an item in inventory with a cost of $85. Current replacement cost is $75. The expected selling price is $100, estimated selling costs are $18, and the normal profit is $5. Using the lower-of-cost-or-market rule, the item should be included in the inventory at:
a. $82
b. $85
c. $75
d. $77
3. On January 31, fire destroyed the entire inventory of Mojares Company. The following data are available:
Sales for January                           $60,000
Inventory, January 1                       10,000
Purchases for January                    55,000
Markup on Sales                             20%
The amount of the loss is estimated to be:
a. $15,000
b. $16,250
c. $17,000
d. $20,000
4. Smith Co, a clothing store, uses the retail inventory method. The following relates to 2005 operations:
Inventory, January 1, 2005 at cost                       $14,200
Inventory, January 1, 2005 at retail                       20.100
Purchases in 2005 at cost                                        32,600
Purchases in 2005 at retail                                      50,000
Additional markups on normal sales price              1,900
Markdowns on normal sales price                           2,200
Sales                                                                             60,000
The cost of the December 31, 2005 inventory determined by the conventional retail method is
a. $6,743
b. $6,543
c. $9,800
d. $6,370

Solution Preview

1 - c. Overstate total income by $20,000

2 - $77.

Net realizable value = 100 - 18 = 82 (Upper Ceiling)
Floor Amount = 82 - 5 = 77 (Lower ceiling)

The market amount is floor amount if current replacement cost is lower than floor amount.

3 ...

Solution Summary

The solution solve few inventory valuation question including computing ending inventory using conventional retail method.

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