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Lower of cost-market; Gross profit method; Retail inventory

Part I Lower-of-cost-or-market.
The December 31, 2010 inventory of Gwynn Company consisted of four products, for which certain information is provided below.
Replacement Estimated Expected Normal Profit
Product Original Cost Cost Disposal Cost Selling Price on Sales
A $25.00 $22.00 $6.50 $40.00 20%
B $42.00 $40.00 $12.00 $48.00 25%
C $120.00 $115.00 $25.00 $190.00 30%
D $18.00 $15.80 $3.00 $26.00 10%

1. Using the lower-of-cost-or-market approach applied on an individual-item basis, compute the inventory valuation that should be reported for each product on December 31, 2010.
2. If necessary, prepare the entry at 12/31/10 necessary to implement the lower-of-cost-or market procedure assuming Gwynn uses a contra account for its balance sheet.

Part II Gross profit method.
An inventory taken the morning after a large theft discloses $60,000 of goods on hand as of March 12. The following additional data is available from the books:

Inventory on hand, March 1 $ 84,000
Purchases received, March 1 - 11 63,000
Sales (goods delivered to customers) 120,000

Past records indicate that gross profit has averaged 1/3 of selling price.

Estimate the inventory of goods on hand at the close of business on March 11 by the gross profit method and determine the amount of the theft loss. Show appropriate titles for all amounts in your presentation.

III. Retail inventory method (Conventional Method).
When you undertook the preparation of the financial statements for Telfer Company at January 31, 2011, the following data were available:
At Cost At Retail
Inventory, February 1, 2010 $70,800 $ 98,500
Markdowns 35,000
Markups 63,000
Markdown cancellations 20,000
Markup cancellations 10,000
Purchases 219,500 294,000
Sales 345,000
Purchases returns and allowances 4,300 5,500
Sales returns and allowances 10,000

Compute the ending inventory at cost as of January 31, 2011, using the retail method which approximates lower of cost or market. Your solution should be in good form with amounts clearly labeled.


Solution Summary

The solution computes inventory valuation under Lower-of-cost-or-market; Gross profit method; Retail inventory method.