Question 1 (Inventoriable Costs) Presented below is a list of items that may or may not be reported as inventory in a company's December 31 balance sheet.
1. Goods out on consignment at another company's store.
2. Goods sold on an installment basis (bad debts can be reasonably estimated).
3. Goods purchased f.o.b. shipping point that are in transit at December 31.
4. Goods purchased f.o.b. destination that are in transit at December 31.
5. Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that covers all costs related to the inventory.
6. Goods sold where large returns are predictable.
7. Goods sold f.o.b. shipping point that are in transit at December 31.
8. Freight charges on goods purchased.
9. Interest costs incurred for inventories that are routinely manufactured.
10. Costs incurred to advertise goods held for resale.
11. Materials on hand not yet placed into production by a manufacturing firm.
12. Office supplies.
13. Raw materials on which a manufacturing firm has started production but which are not completely processed.
14. Factory supplies.
15. Goods held on consignment from another company.
16. Costs identified with units completed by a manufacturing firm but not yet sold.
17. Goods sold f.o.b. destination that are in transit at December 31.
18. Short-term investments in stocks and bonds that will be resold in the near future
Instructions
Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements.
Question 2 (Inventoriable Costs-Perpetual) Colin Davis Machine Company maintains a general ledger ac-count for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, which is debited for materials purchased and credited for materials requisitioned for use.
1. An invoice for $8,100, terms f.o.b. destination, was received and entered January 2, 2014. The receiv-ing report shows that the materials were received December 28, 2013.
2. Materials costing $28,000, shipped f.o.b. destination, were not entered by December 31, 2013, "be-cause they were in a railroad car on the company's siding on that date and had not been unloaded."
3. Materials costing $7,300 were returned to the supplier on December 29, 2013, and were shipped f.o.b. shipping point. The return was entered on that date, even though the materials are not expected to reach the supplier's place of business until January 6, 2014.
4. An invoice for $7,500, terms f.o.b. shipping point, was received and entered December 30, 2013. The receiving report shows that the materials were received January 4, 2014, and the bill of lading shows that they were shipped January 2, 2014.
5. Materials costing $19,800 were received December 30, 2013, but no entry was made for them because "they were ordered with a specified delivery of no earlier than January 10, 2014."
Instructions
Prepare correcting general journal entries required at December 31, 2013, assuming that the books have not been closed.
Question 3 (Lower-of-Cost-or-Market) Garcia Home Improvement Company installs replacement siding, windows, and louvered glass doors for single-family homes and condominium complexes in northern New Jersey and southern New York. The company is in the process of preparing its annual financial state-ments for the fiscal year ended May 31, 2014, and Jim Alcide, controller for Garcia, has gathered the following data concerning inventory.At May 31, 2014, the balance in Garcia's Raw Materials Inventory account was $408,000, and Allowance to Reduce Inventory to Market had a credit balance of $27,500. Alcide summarized the relevant inventory cost and market data at May 31, 2014, in the schedule below.Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Garcia's May 31, 2014, financial statements for inventory under the lower-of-cost- or-market rule as applied to each item in inventory. Devereaux expressed concern over departing from the historical cost principle.
CostReplacement CostSales PriceNet RealizableValue Normal Profit
Aluminum siding $70,000 $62,500 $64,000 $56,000 $5,100
Cedar shake siding 86,000 79,400 94,000 84,800 7,400
Louvered glass doors 112,000 124,000 186,400 168,300 18,500
Thermal windows 140,000 126,000 154,800 140,000 15,400
Total $408,000 $391,900 $499,200 $449,100 $46,400
Instructions
(a) (1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31, 2014.
(2) For the fiscal year ended May 31, 2014, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory to Market.
(b) Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories.(CMA adapted)