Chapter 5, Problem 5.10E

Lower of Cost or Market Garcia Company uses FIFO, and its inventory at the end of the year was recorded in the accounting records at $17,800. Due to technological changes in the market, Garcia would be able to replace its inventory for $16,500. Required: 1. Using the lower of cost or market method, what amount should Garcia report for inventory on its balance sheet at the end of the year? 2. Prepare the journal entry required to value the inventory at the lower of cost or market.

Under the periodic inventory system, what account is debited when an estimate is made for the cost of merchandise inventory sold this year, but expected to be returned next year? (a) Estimated Returns Inventory (b) Sales Returns and Allowances (c) Merchandise Inventory (d) Customer Refunds Payable

Financial statement data for years ending December 31 for Tango Company follow: a. Determine the inventory turnover for 20Y7 and 20Y6. b. Determine the days sales in inventory for 20Y7 and 20Y6. Use 365 days and round to one decimal place. c. Does the change in inventory turnover and the days sales in inventory from 20Y6 to 20Y7 indicate a favorable or an unfavorable trend?

Inventory Valuation You are engaged in an audit of Roche Mfg. Company for the year ended December 31, 2019. To reduce the workload at year-end, Roche took its annual physical inventory under your observation on November 30, 2019. Roches inventory account, which includes raw materials and work in process, is on a perpetual basis, and it uses the first-in, first-out method of pricing. It has no finished goods inventory. The companys physical inventory revealed that the book inventory of 60,570 was understated by 3,000. To avoid distorting the interim financial statements, Roche decided not to adjust the book inventory until year-end except for obsolete inventory items. Your audit revealed this information about the November 30 inventory: Pricing tests showed that the physical inventory was overpriced by 2,200. Footing and extension errors resulted in a 150 understatement of the physical inventory. Direct labor included in the physical inventory amounted to 10,000. Overhead was included at the rate of 200% of direct labor. You determined that the amount of direct labor was correct and the overhead rate was proper. The physical inventory included obsolete materials recorded at 250. During December, these materials were removed from the inventory account by a charge to cost of sales. Your audit also disclosed the following information about the December 31, 2019, inventory. Total debits to certain accounts during December are: The cost of sales of 68,600 included direct labor of 13,800. Normal scrap loss on established product lines is negligible. However, a special order started and completed during December had excessive scrap loss of 800 which was charged to Manufacturing Overhead Expense. Required: 1. Compute the correct amount of the physical inventory at November 30, 2019. 2. Without prejudice to your solution to Requirement 1, assume that the correct amount of the inventory at November 30, 2019, was 57,700. Compute the amount of the inventory at December 31,2019.

Errors As controller of Lerner Company, which uses a periodic inventory system, you discover the following errors in the current year: 1. Merchandise with a cost of 17,500 was properly included in the final inventory, but the purchase was not recorded until the following year. 2. Merchandise purchases are in transit under terms of FOB shipping point. They have been excluded from the inventory, but the purchase was recorded in the current year on the receipt of the invoice of 4,300. 3. Goods out on consignment have been excluded from inventory. 4. Merchandise purchases under terms FOB shipping point have been omitted from the purchases account and the ending inventory. The purchases were recorded in the following year. 5. Goods held on consignment from Talbert Supply Co. were included in the inventory. Required: For each error, indicate the effect on the ending inventory and the net income for the current year and on the net income for the following year.

Inventory Errors McLelland Inc. reported net income of $175,000 for 2019 and $210,000 for 2020. Early in 2020, McLelland discovers that the December 31, 2019 ending inventory was overstated by $20,000. For simplicity, ignore taxes. Required: 1. What is the correct net income for 2019? For 2020? 2. Assuming the error was not corrected, what is the effect on the balance sheet at December 31, 2019? At December 31, 2020?

Inventory Analysis The following account balances are taken from the records of Lewis Inc., a wholesaler of fresh fruits and vegetables: Required Compute Lewiss inventory turnover ratio for 2016 and 2015. Compute the number of days sales in inventory for 2016 and 2015. Assume 360 days in a year. Comment on your answers in parts (1) and (2) relative to the companys management of inventory over the two years. What problems do you see in its inventory management?