Financial & Managerial Accounting
Financial & Managerial Accounting
18th Edition
ISBN: 9781260006520
Author: williams
Publisher: MCG
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Chapter 8, Problem 4AP

a.

To determine

Prepare the journal entries for the shrinkage loss under (1) average cost method and (2) LIFO method.

a.

Expert Solution
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Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.

First-in-First-Out (FIFO): In this method, items purchased initially are sold first. So, the value of the ending inventory consist the recent cost for the remaining unsold items.

Last-in-First-Out (LIFO): In this method, items purchased recently are sold first. So, the value of the ending inventory consist the initial cost for the remaining unsold items.

Average Cost method: In this method, the inventories are priced at the average rate of goods available for sales.

Prepare the journal entries for the shrinkage loss under FIFO and LIFO method as follows:

1. Shrinkage loss under average cost method

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (3) $1,208 
 Inventory  $1,208
 (To record the shrinkage loss  incurred under average cost method)   

Table (1)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $1,208. Therefore, debit cost of goods account with $1,208.
  • Inventory is an asset account, and it decreases the value of assets by $1,208. Therefore, credit inventory account with $1,208.

Working note:

Calculate the units of shrinkage loss

Shrinkage loss unit = (Total available sales unitNumber of physical inventory on the hand )=350 units 310 units= 40 units (1)

Calculate the average cost per unit

Average cost per unit }Total cost of unitsTotal Number of units=$10,570350 units=$30.2 (2)

Calculate the value of shrinkage loss under average cost method

Shrinkage loss under Average cost method}= Shrinkage loss units (1)× Average cost per unit  (2) =40 units ×$30.2=$1,208 (3)

2. Shrinkage loss under LIFO method

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (4) $1,560 
 Inventory  $1,560
 (To record the shrinkage loss  incurred under LIFO method)   

Table (2)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $1,560. Therefore, debit cost of goods account with $1,560.
  • Inventory is an asset account, and it decreases the value of assets by $1,560. Therefore, credit inventory account with $1,560.

Working note:

Shrinkage loss under LIFO= Shrinkage loss units (1)× Cost per unit under  LIFO =40 units ×$39=$1,560 (4)

b.

To determine

Prepare the journal entries to record (1) shrinkages losses under FIFO and (2) loss from write-down inventory under lower-of-cost-or market.

b.

Expert Solution
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Explanation of Solution

Lower-of-cost-or-market: The lower-of-cost-or-market (LCM) is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, at its current market value or at is historical cost price, whichever is less.

Prepare the journal entries to record (1) shrinkages losses under FIFO and (2) loss from write-down inventory under lower-of-cost-or market as follows:

(1) Shrinkages losses under FIFO:

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (5) $1,000 
 Inventory  $1,000
 (To record the shrinkage loss  incurred under FIFO method)   

Table (2)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $1,000. Therefore, debit cost of goods account with $1,000.
  • Inventory is an asset account, and it decreases the value of assets by $1,000. Therefore, credit inventory account with $1,000.

Working note:

Shrinkage loss under LIFO= Shrinkage loss units (1)× Cost per unit under  LIFO =40 units ×$25=$1,000 (5)

(2) Loss from write-down inventory under lower-of-cost-or market

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (2) $3,370 
 Inventory  $3,370
 (To record the loss from write-down of inventory)   

Table (1)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $3,370. Therefore, debit cost of goods account with $3,370.
  • Inventory is an asset account, and it decreases the value of assets by $3,370. Therefore, credit inventory account with $3,370.

Working note:

Calculate the value of replacement cost

Relacement cost = [Inventory on hand on December 31×Replacement cost per unit]=310 units×$20=$6,200 (6)

Calculate loss from write-down of inventory

Loss from write-down of inventory} = [(Total cost available for saleShrinkage loss under FIFO (5)) Replacement cost (6)]=[($10,570$1,000)$6,200]=$9,570$6,200=$3,370 (6)

c.

To determine

Explain whether company M has used the hidden camera to entrap its client or not.

c.

Expert Solution
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Explanation of Solution

Explain whether company M has used the hidden camera to entrap its client or not as follows:

No, company M has not used the hidden camera to entrap its client because, company M uses the hidden camera to watch the activities of employees, and it helps to reduce the shrinkage losses of inventory and protects from the fraudulent activities. Hence, company M has not used the hidden camera to entrap its client.

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Chapter 8 Solutions

Financial & Managerial Accounting

Ch. 8 - 5. What are the characteristics of a just-in-time...Ch. 8 - 6. Why do companies that use perpetual inventory...Ch. 8 - 7. Under what circumstances might a company write...Ch. 8 - 8. What is meant by the year-end cutoff of...Ch. 8 - 9. Explain why errors in the valuation of...Ch. 8 - 10. Briefly explain the gross profit method of...Ch. 8 - 11. A store using the retail inventory method...Ch. 8 - 12. How is the inventory turnover computed? Why is...Ch. 8 - 13. Baxter Corporation has been using FIFO during...Ch. 8 - In anticipation of declining inventory replacement...Ch. 8 - Notes to the financial statements of two clothing...Ch. 8 - BRIEF EXERCISE 8.1 FIFO Inventory Smalley, Inc.,...Ch. 8 - BRIEF EXERCISE 8.2 LIFO Inventory Mason Company...Ch. 8 - BRIEF EXERCISE 8.3 Average-Cost Inventory Fox...Ch. 8 - BRIEF EXERCISE 8.4 FIFO and LIFO Inventory Murphy,...Ch. 8 - BRIEF EXERCISE 8.5 FIFO and Average-Cost...Ch. 8 - BRIEF EXERCISE 8.6 Inventory Shrinkage Bruing...Ch. 8 - BRIEF EXERCISE 8.7 Inventory Error Pixy, Inc.,...Ch. 8 - BRIEF EXERCISE 8.8 Inventory Error Due to...Ch. 8 - BRIEF EXERCISE 8.9 Inventory Turnover Alamo...Ch. 8 - BRIEF EXERCISE 8.10 Inventory Turnover Rouse...Ch. 8 - EXERCISE 8.1 Accounting Terminology Listed as...Ch. 8 - EXERCISE 8.2 Cost Flow Assumptions On May 10,...Ch. 8 - EXERCISE 8.3 Physical Flow versus Cost Flow...Ch. 8 - EXERCISE 8.4 Effects of Different Cost Flow...Ch. 8 - EXERCISE 8.5 Transfer of Title Jensen Tire had two...Ch. 8 - Prob. 6ECh. 8 - EXERCISE 8.7 Costing Inventory in a Periodic...Ch. 8 - EXERCISE 8.8 Effects of Errors in Inventory...Ch. 8 - EXERCISE 8.9 Estimating Inventory by the Gross...Ch. 8 - EXERCISE 8.10 Estimating Inventory by the Retail...Ch. 8 - Prob. 11ECh. 8 - Prob. 12ECh. 8 - EXERCISE 8.13 Inventory Turnover A recent annual...Ch. 8 - Prob. 14ECh. 8 - EXERCISE 8.15 Using the Financial Statements of...Ch. 8 - Prob. 1APCh. 8 - PROBLEM 8.2A Alternative Cost Flow Assumptions in...Ch. 8 - PROBLEM 8.3A Alternative Cost Flow Assumptions in...Ch. 8 - Prob. 4APCh. 8 - PROBLEM 8.5A Periodic Inventory Costing...Ch. 8 - PROBLEM 8.6A Effects of Inventory Errors on...Ch. 8 - PROBLEM 8.7A Retail Method Between The Ears...Ch. 8 - PROBLEM 8.8A FIFO versus LIFO Comparisons Walmart...Ch. 8 - Prob. 1BPCh. 8 - PROBLEM 8.2B Alternative Cost Flow Assumptions in...Ch. 8 - PROBLEM 8.3B Alternative Cost Flow Assumptions in...Ch. 8 - Prob. 4BPCh. 8 - PROBLEM 8.5B Periodic Inventory Costing...Ch. 8 - PROBLEM 8.6B Effects of Inventory Errors on...Ch. 8 - PROBLEM 8.7B Retail Method Song Meister is a...Ch. 8 - PROBLEM 8.8B FIFO versus LIFO Comparisons J.C....Ch. 8 - Prob. 1CTCCh. 8 - CASE 8.2 LIFO Liquidation Jackson Specialties has...Ch. 8 - CASE 8.3 Dealing with the Bank Millennium Frozen...Ch. 8 - CASE 8.4 Inventory Turnover A company’s inventory...Ch. 8 - Prob. 2CP
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