Question 1 - Herman Company has three products in its ending inventory. Specific per unit data for each of the products are as follows:
|
|
Product 1
|
Product 2
|
Product 3
|
|
Cost
|
$20
|
$90
|
$50
|
|
Replacement cost
|
18
|
85
|
40
|
|
Selling price
|
40
|
120
|
70
|
|
Disposal costs
|
6
|
40
|
10
|
|
Normal profit margin
|
5
|
30
|
12
|
Required: What unit values should Herman use for each of its products when applying the LCM rule to ending inventory?
Question 2. A fire destroyed a warehouse of the Goren Group, Inc., on May 4, 2011. Accounting records on that date indicated the following:
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Mechandise inventory, January 1, 2011
|
$1,900,000
|
|
Purchases to date
|
5,800,000
|
|
Freight-in
|
400,000
|
|
Sales to date
|
8,200,000
|
The gross profit ratio has averaged 20% of sales for the past four years.
Required: Use the gross profit method to estimate the cost of the inventory destroyed in the fire.
Question 3 - On November 21, 2011, a fire at Hodge Company's warehouse caused severe damage to its entire inventory of Product Tex. Hodge estimates that all usable damaged goods can be sold for $12,000. The following information was available from the records of Hodge's periodic inventory system:
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Inventory, November 1
|
$100,000
|
|
Net purchases from November 1, to the date of the fire
|
140,000
|
|
Net sales from November 1, to the date of the fire
|
220,000
|
Based on recent history, Hodge's gross profit ratio on Product Tex is 35% of net sales.
Required: Calculate the estimated loss on the inventory from the fire, using the gross profit method.
Question 4 - Tatum Company has four products in its inventory. Information about the December 31, 2011, inventory is as follows:
|
Product
|
Total Cost
|
Total Replacement Cost
|
Total Net Realizable Value
|
|
101
|
$120,000
|
$110,000
|
$100,000
|
|
102
|
90,000
|
85,000
|
110,000
|
|
103
|
60,000
|
40,000
|
50,000
|
|
104
|
30,000
|
28,000
|
50,000
|
The normal gross profit percentage is 25% of cost.
Assume that Tatum Company prepares its financial statements according to IFRS.
Required:
1. Determine the balance sheet inventory carrying value at December 31, 2011, assuming Tatum applies LCM rule to individual products.
2. Prepare a journal entry to record the inventory write-down, if necessary.