Deck 11: Inventories

Question 1

Which of the following sets of inventory are expected to be used a manufacturing entity's normal operating cycle?

A) Merchandise and finished goods
B) Work-in-process and and finished goods
C) Consumable stores and merchandise
D) Finished goods and consumable stores
E) Raw materials and consumable stores

Answer 1

Raw materials and consumable stores

Question 2

Which is not a type of inventory for a manufacturing entity?

A) Consumable stores inventory
B) Raw materials inventory
C) Work in process inventory
D) Merchandise inventory
E) All of the above

Answer 2

Merchandise inventory

Question 3

Which of the following is not characteristic of perpetual inventory systems?

A) The inventory account is continually adjusted for each change in inventory caused by a purchase or sale.
B) Accurate inventory systems allowing management to determine how many items are on hand at any given date.
C) Periodic inventory counts are taking at least annually.
D) All of the above are characteristic of perpetual inventory systems.

Answer 3

All of the above are characteristic of perpetual inventory systems.

Question 4

Lathe & Miter is a fine woodworking supplier in Dresden. This year, L&M sold €5 million in the finest air-dried maple to instrument makers across Europe. The expected inventory balance at the end of the year via L&M's perpetual inventory system is €10.2 million. The inventory count at year end revealed shrinkage of €200,000 due to wood that split or became otherwise unusable during the drying process. L&M purchased a total of €12 million in maple this year. What is L&M's beginning inventory level of air-dried maple?

A) 6.8 million
B) 3.2 million
C) 3.0 million
D) None of the above

Question 5

Dovetail Cabinetry is a custom cabinet and furniture shop in Finland. Dovetail uses a periodic inventory system. This year, Dovetail purchased €15 million in furniture which it officially received on February 13 and €20 million in cabinetry which it officially received on March 3. It's beginning inventory was €56 million and it has sold €21 million in cabinets and furniture through March 31. How much inventory does Dovetail have recorded on its books as of March 31?

A) 112 million
B) 91 million
C) 70 million
D) 56 million

Question 6

Paul Parson's Pickled Peppers compete with Peter Piper's Pickled Peppers. Peter Piper has such a superior product that Paul Parson feels that his pickled peppers might be impaired. Paul calculated that selling costs per peck of pickled peppers are $2. Paul also did market analysis and determined that in order to compete with Peter Piper, he can sell his peppers for $20 per peck at maximum. The cost per peck of Paul's pickled peppers is $19. What is the net realizable value of a peck of Paul Parson's Pickled Peppers? Are they impaired?

A) $17; Impaired
B) $18; Impaired
C) $19; Unimpaired
D) $20; Unimpaired
E) None of the above

Question 7

Schwendiman's is a home improvement store located throughout Australia and Tasmania. The inventory manager wants you to estimate ending inventory of 2x4 lumber for the quarter using the retail method. He tells you that the cost of inventory is 75 percent of retail prices. Schwendiman's official beginning inventory of 2x4 lumber for the quarter was $250 million. During the quarter, Schwendiman's purchased a total of $100 million in 2x4 lumber. Sales of 2x4 lumber during the period totaled $300 million. What is the best estimate of ending inventory for 2x4s for the current quarter?

A) $50 million
B) $67 million
C) $125 million
D) $167 million
E) None of the above

Question 8

On December 31, 20X7, Varsity Motors (VM) had an inventory of five different types of oil well parts. Due to economic downturn and declining demand for oil, the market prices for oil well parts have declined. The year-end unit costs (determined by applying the weighted-average cost formula), estimated unit selling prices, estimated costs to sell, and net realizable values for each of the items are presented below. The determination of the amount of inventories to be reported in the statement of financial position is presented below. VM tests its inventory for impairment on an item-by-item basis.
$$\begin{array} { | l | c | c | c | l | l | } \hline \text { Item } & \begin{array} { l } \text { Original } \\\text { Cost }\end{array} & \begin{array} { l } \text { Selling } \\\text { Price }\end{array} & \begin{array} { l } \text { Estimated } \\\text { Cost to sell }\end{array} & \text { NRV } & \text { LCNRV } \\\hline \mathrm { A } & \$ 6,000 & \$ 5,100 & \$ 500 & & \\\hline \mathrm { B } & 4,500 & 4,300 & 100 & & \\\hline \mathrm { C } & 3,900 & 4,000 & 50 & & \\\hline \mathrm { D } & 1,800 & 1,600 & 75 & & \\\hline \text { E } & 1,400 & 1,450 & 150 & & \\\hline \text { Total } & \$ 17,600 & & & & \\\hline\end{array}$$

-If instead of testing its inventory for impairment on an item-by-item basis, VM decided that this inventory meets the specific criteria for impairment testing as a group, What journal entry is made on December 31, 20X7 to record the adjustment?

Question 9

Inventories are recognized in the entity's statement of financial position as well as an expense charged against revenues.

Question 10

Under an IFRS, impairment testing is only necessary when events during the period suggest that inventories may be impaired.

Question 11

One of the most difficult tasks for both wholesale and retail entities is properly accounting for consumable stores, raw materials, and finished goods inventories.

Question 12

The inventory account balance is not adjusted as sales and purchases are made under a periodic system.

Question 13

Steelhard entity is a hardware retailer with locations throughout Wales, Scotland, and England. Steelhard knows inventory levels in real time. At the end of every quarter, employees count inventory. Steelhard uses a perpetual inventory system.

Question 14

After a write-down of inventories due to sluggish demand, Portia's Premium Pastas (PPP) suddenly and unexpectedly experienced a resurge in demand for its premium pastas. PPP is barely able to produce enough inventory to meet demand. Under IFRS, a reversal of the previous write-down would likely be appropriate with an explanation of the circumstances surrounding the reversal.

Question 15

U.S. GAAP and IFRS both utilize the same methods for determining write-downs.

Question 16

Johnstone Timber is a logging entity that sources its timber primarily from the Ardennes Forest. To maintain efficiency in its logging operations, Johnstone has its loggers apply chain grease and use special steel dowels to sharpen their blades and after every tree they fell. Johnstone considers the grease and sharpening dowels to be peripheral items. Therefore, they do not count as inventory.

Question 17

Johnstone Timber regularly sells lumber mills and land that it holds when they are depreciated or depleted. These lumber mills and tracts of land are considered inventory.

Question 18

Voyageur de Rivière (VR) manufactures white-water kayaks. Information about VR's kayak production includes the following:
a. VR produced 2,000 kayaks this year.
b. During the normal course of production, VR experiences wastage of €80,000
c. This year, VR experienced abnormal wastage of €40,000 in addition to normal wastage.
d. Wood, glue, resin and other materials total €800 per kayak.
e. Overhead and direct labor (conversion costs) total €700 per kayak.
f. Storage costs are €100 per kayak per year.
g. Costs associated with selling each kayak total €50.
h. Appraised fair market value of each kayak at the end of the year is €1,550
Determine the cost of inventory .

Question 19

Refer to question 1. Assume the same facts. Is the inventory impaired? By how much?

Question 20

In the early spring, Harvest Entity planted 1,000 acres of sorghum. The sorghum will not be harvested until the fall. How should Harvest Entity account for the sorghum?

Question 21

At the end of the 20X7 reporting period, Justice Supply Entity has the original cost of legal paper recorded as inventory at $69,000. However, its net realizable value is $65,000. What should Justice Supply Entity do?

Question 22

Bellamy Entity produced two joint products, A and B, from the same process up to split-off. The total costs incurred before split off are $220,000. Assume that A can be sold for $210,000 and B for $140,000, at the total sales value of $350,000. How should Bellamy Entity allocate the costs between the two products?

Question 23

On December 31, 20X7, Varsity Motors (VM) had an inventory of five different types of oil well parts. Due to economic downturn and declining demand for oil, the market prices for oil well parts have declined. The year-end unit costs (determined by applying the weighted-average cost formula), estimated unit selling prices, estimated costs to sell, and net realizable values for each of the items are presented below. The determination of the amount of inventories to be reported in the statement of financial position is presented below. VM tests its inventory for impairment on an item-by-item basis.
$$\begin{array} { | l | c | c | c | l | l | } \hline \text { Item } & \begin{array} { l } \text { Original } \\\text { Cost }\end{array} & \begin{array} { l } \text { Selling } \\\text { Price }\end{array} & \begin{array} { l } \text { Estimated } \\\text { Cost to sell }\end{array} & \text { NRV } & \text { LCNRV } \\\hline \mathrm { A } & \$ 6,000 & \$ 5,100 & \$ 500 & & \\\hline \mathrm { B } & 4,500 & 4,300 & 100 & & \\\hline \mathrm { C } & 3,900 & 4,000 & 50 & & \\\hline \mathrm { D } & 1,800 & 1,600 & 75 & & \\\hline \text { E } & 1,400 & 1,450 & 150 & & \\\hline \text { Total } & \$ 17,600 & & & & \\\hline\end{array}$$

-For each item of inventory, A through E, calculate the separate NRW and LCNRV
$$\begin{array} { | l | c | c | c | l | l | } \hline \text { Item } & \begin{array} { l } \text { Original } \\\text { Cost }\end{array} & \begin{array} { l } \text { Selling } \\\text { Price }\end{array} & \begin{array} { l } \text { Estimated } \\\text { Cost to sell }\end{array} & \text { NRV } & \text { LCNRV } \\\hline \mathrm { A } & \$ 6,000 & \$ 5,100 & \$ 500 & & \\\hline \mathrm { B } & 4,500 & 4,300 & 100 & & \\\hline \mathrm { C } & 3,900 & 4,000 & 50 & & \\\hline \mathrm { D } & 1,800 & 1,600 & 75 & & \\\hline \text { E } & 1,400 & 1,450 & 150 & & \\\hline \text { Total } & \$ 17,600 & & & & \\\hline\end{array}$$

Question 24

On December 31, 20X7, Varsity Motors (VM) had an inventory of five different types of oil well parts. Due to economic downturn and declining demand for oil, the market prices for oil well parts have declined. The year-end unit costs (determined by applying the weighted-average cost formula), estimated unit selling prices, estimated costs to sell, and net realizable values for each of the items are presented below. The determination of the amount of inventories to be reported in the statement of financial position is presented below. VM tests its inventory for impairment on an item-by-item basis.
$$\begin{array} { | l | c | c | c | l | l | } \hline \text { Item } & \begin{array} { l } \text { Original } \\\text { Cost }\end{array} & \begin{array} { l } \text { Selling } \\\text { Price }\end{array} & \begin{array} { l } \text { Estimated } \\\text { Cost to sell }\end{array} & \text { NRV } & \text { LCNRV } \\\hline \mathrm { A } & \$ 6,000 & \$ 5,100 & \$ 500 & & \\\hline \mathrm { B } & 4,500 & 4,300 & 100 & & \\\hline \mathrm { C } & 3,900 & 4,000 & 50 & & \\\hline \mathrm { D } & 1,800 & 1,600 & 75 & & \\\hline \text { E } & 1,400 & 1,450 & 150 & & \\\hline \text { Total } & \$ 17,600 & & & & \\\hline\end{array}$$

-What journal entry is made on December 31, 20X7 to record the adjustment?

Question 25

On December 31, 20X7, Varsity Motors (VM) had an inventory of five different types of oil well parts. Due to economic downturn and declining demand for oil, the market prices for oil well parts have declined. The year-end unit costs (determined by applying the weighted-average cost formula), estimated unit selling prices, estimated costs to sell, and net realizable values for each of the items are presented below. The determination of the amount of inventories to be reported in the statement of financial position is presented below. VM tests its inventory for impairment on an item-by-item basis.
$$\begin{array} { | l | c | c | c | l | l | } \hline \text { Item } & \begin{array} { l } \text { Original } \\\text { Cost }\end{array} & \begin{array} { l } \text { Selling } \\\text { Price }\end{array} & \begin{array} { l } \text { Estimated } \\\text { Cost to sell }\end{array} & \text { NRV } & \text { LCNRV } \\\hline \mathrm { A } & \$ 6,000 & \$ 5,100 & \$ 500 & & \\\hline \mathrm { B } & 4,500 & 4,300 & 100 & & \\\hline \mathrm { C } & 3,900 & 4,000 & 50 & & \\\hline \mathrm { D } & 1,800 & 1,600 & 75 & & \\\hline \text { E } & 1,400 & 1,450 & 150 & & \\\hline \text { Total } & \$ 17,600 & & & & \\\hline\end{array}$$

-Assume that during the next year, due to changed economic circumstances, net realizable value increased to $17,800. What journal entry should be made on December 31, 20X8 to record the adjustment?