I3-1:

The Red Sky company is a wholesale company that purchases items from manufacturers and sells them to retail establishments.

On December 31, 2010 Red Sky had the following in ending inventory:

Product Code
Quantity
Cost Each
Current Replacement Cost Each

AB72YZ
1,970
$58
$63
CT68WS
3,280
38
36
FA92PL
1,640
51
57
GG18CF
660
109
125
IR39QL
1,310
131
145
TG56LK
5,250
10
15
HB83SD
985
154
152

Product GG18CF has been replaced by product IR39QL. Red Sky expects to be able to sell its remaining inventory of product GG18CF at a deep discount to an outlet store for a net realizable value of $38 each.

1)Compute the value of the inventory as of December 31, 2010 using each of the following assumptions:

a.The lower of cost or market method is applied directly to each item.

b.The lower of cost or market method is applied to the total inventory.

2)Prepare any necessary adjusting journal entries assuming that the company used the direct method, using each of the following assumptions

a.The lower of cost or market method is applied directly to each item.

b.The lower of cost or market method is applied to the total inventory.

I3-2:

The Green Grass Company reports the following information as of June 30, 2011:

Accounts Receivable
$3,600,000
Accounts Payable
2,800,000
June Sales
4,700,000
June Sales Returns
330,000
Purchases of Inventory (gross)
3,000,000
Purchase Discounts
60,000
Purchases Freight In
140,000
Inventory, June 1
750,000

1)Assuming that the gross profit is 27% of sales, compute the estimated ending inventory as of June 30, 2011.

2)Assuming that the gross profit is 32% of cost, compute the estimated ending inventory as of June 30, 2011.

I3-3:

The Deep Blue Sea Company sells sailing and other nautical related clothing from it’s retail store is Walla Walla, Washington. The following information pertains to Deep Bue Sea’s retain inventory as of September 31, 2011:

Cost
Retail

Inventory, September 1
$75,000
$102,000
Purchases
500,000
775,000
Markups

$35,000
Markup cancellations

5,500
Markdowns

12,500
Markdown cancellations

2,000
Sales

800,000

1)Using the conventional inventory method, compute the value of the ending ending inventory that is to be shown on Deep Blue Sea’s balance sheet.
I3-4:

During the past year, a company completed the following transactions related to the acquisition of property and the construction thereon of a new factory:

A.Paid $200,000 to landscape the property. The landscaping is considered permanent in nature.

B.Paid $70,000 to have an old building removed from the property.

C.Paid $240,000 commission to the commercial real estate agency in payment for services provided related to the acquisition of the property.

D.Purchased factory machinery for $16,000,000.

E.Purchased a tract of land for $12,000,000. The land was larger than needed but the seller would not break up the parcel. The company intends to use 2/3 of the property for the new factory site and retain the remainder as an investment.

F.Paid an architect firm $250,000 to design the new factory building.

G.Received $5,000 in salvage from the materials removed from the old building that was removed from the property.

H.Paid $17,000 for building permits for the new factory.

I.Paid $200,000 to have the land excavated according to the architect’s plans in preparation for the factory building foundation to be poured.

J.Paid $28,000,000 to a contractor for the construction of the new factory building.

K.Paid $950,000 to have the factory machinery installed.

L.Paid $45,000 in back property taxes owed by a previous owner, now deceased.

M.Paid $150,000 to have the portion of the land to be used for the factory cleared and graded to level. The portion of the land held for investment was left heavily wooded.

N.Per an agreement with the local government, paid $400,000 to have a public road extended to the factory site.

O.Paid $73,000 for freight charges on the factory machinery.

P.Paid a law firm $30,000 for services related to perfecting the title on the land purchase.

Q.Paid $300,000 for the construction of driveways and parking lots on the property to service the factory building.

R.Borrowed $35,000,000 to pay for a portion of the property.

Instructions:

Ignoring any impact of interest:

1)Prepare the necessary journal entries to record the above transactions. Assume that all transactions were paid with cash.

2)Prepare schedules computing the amount, by each appropriate account title, to be shown on the balance sheet under the plant, property, and equipment section of assets. Ignore depreciation.

I3-5:

During the current year, the Yellow Rose Company completed construction of a new assembly facility in Ocala, Florida. The facility will receive components from Yellow Rose’s other facilities and assemble them for shipment to distributors. The following transactions occurred in conjunction with the facility.

Item A: The City of Ocala provided Yellow Rose with a parcel of land at no cost in exchange for Yellow Rose constructing the facility in Ocala. The appraised value of the land was $750,000. The land had an abandoned city maintenance facility that Yellow Rose had demolished at a cost of $50,000.

Item B: Yellow Rose entered into a contract with the Ocala Construction Company (OCC) to build the manufacturing facility. The agreed to price of the construction was $5,500,000. The contract called for Yellow Rose to pay OCC $4,000,000 plus 30,000 shares of Yellow Rose common stock. The common stock has a $1 par value and, as Yellow Rose is a private corporation, the stock is not traded on any public stock exchange. The facility has been completed and the payment has been tendered to OCC.

Item C: The assembly process does not involve heavy machinery and is mostly completed by hand at assembly workstations. Yellow Rose received two bids from other companies to construct the necessary workstations. One bid was for $250,000 and the other was for $265,000. After considering the bids, Yellow Rose decided to construct the workstations for the new facility at another Yellow Rose facility. In doing so, Yellow Rose used $72,000 in materials from inventory and $87,000 in direct labor. That facility applies fixed overhead at 50% of direct labor cost.

1)Prepare the necessary journal entries to record the above items.

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