FINANCIAL ACCOUNTING (LOOSELEAF)
FINANCIAL ACCOUNTING (LOOSELEAF)
18th Edition
ISBN: 9781260706239
Author: williams
Publisher: MCG
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Chapter 8, Problem 6E

1. a.

To determine

Prepare the journal entry for the loss from the write-down of inventory.

1. 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.

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 entry for the loss from the write-down of inventory as follows:

DateAccount Title and ExplanationPost Ref.DebitCredit
 Loss from write-down of inventory (2) $2,400 
 Inventory  $2,400
 (To record the loss from write-down of inventory)   

Table (1)

  • Loss from write-down of inventory is an operating expense account and decreases the stockholders’ equity account by $2,400. Therefore, debit loss from write-down of inventory with $2,400.
  • Inventory is an asset account, and it decreases the value of assets by $2,400. Therefore, credit inventory account with $2,400.

Working note:

Calculate the value of replacement cost

Relacement cost = [Inventory on hand on December 31×Replacement cost per unit]=28 units×$250=$7,000 (1)

Calculate loss from write-down of inventory

Loss from write-down of inventory} = [Total cost available for sale Replacement cost (1)]=$9,400$7,000=$2,400 (2)

1. b.

To determine

Prepare the journal entries to record the sales revenue and cost of goods sold (FIFO).

1. b.

Expert Solution
Check Mark

Explanation of Solution

Prepare the journal entries to record the sales revenue and cost of goods sold as follows:

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cash (3) $5,250 
 Sales revenue  $5,250
 (To record the loss from write-down of inventory)   

Table (1)

  • Cash is an asset account, and it increases the value of assets by $5,250. Therefore, debit the cash account with $5,250.
  • Sales revenue is a revenue account and increases the stockholders’ equity account by $5,250. Therefore, credit the sales account with $5,250.

Working note:

Calculate the value of sales revenue

Sales revenue = Number of units sold×Retail price per unit=15 units ×$350=$5,250 (3)

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (4) $3,750 
 Inventory  $3,750
 (To record the cost of goods sold incurred)   

Table (1)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $3,750. Therefore, debit cost of goods account with $3,750.
  • Inventory is an asset account, and it decreases the value of assets by $3,750. Therefore, credit inventory account with $3,750.

Working note:

Calculate the value of cost of goods sold (lower-of-cost-or-market)

Cost of goods sold = Number of units sold×Replacement cost per unit=15 units ×$250=$3,750 (4)

2.

To determine

Prepare the journal entries for the shrinkage loss under FIFO and LIFO method, and explain the cost flow assumption that gives the lowest net income for the period.

2.

Expert Solution
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Explanation of Solution

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

a. Shrinkage loss under FIFO method

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (6) $1,200 
 Inventory  $1,200
 To record the shrinkage loss  incurred under FIFO method)   

Table (1)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $1,200. Therefore, debit cost of goods account with $1,200.
  • Inventory is an asset account, and it decreases the value of assets by $1,200. Therefore, credit inventory account with $1,200.

Working note:

Calculate the units of shrinkage loss

Shrinkage loss unit = (Total available sales unitNumber of physical inventory finds )=28 units 25 units=3 units (5)

Shrinkage loss under FIFO= Shrinkage loss units× Cost per unit under  FIFO =3 units ×$400=$1,200 (6)

b. Shrinkage loss under LIFO method

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (6) $930 
 Inventory  $930
 (To record the shrinkage loss  incurred under LIFO method)   

Table (1)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $930. Therefore, debit cost of goods account with $930.
  • Inventory is an asset account, and it decreases the value of assets by $930. Therefore, credit inventory account with $930.

Working note:

Shrinkage loss under LIFO= Shrinkage loss units× Cost per unit under  LIFO =3 units ×$310=$930 (6)

c. Explain the cost flow assumption that gives the lowest net income for the period as follows:

LIFO produces the lowest net income because, under the LIFO method, the costs of the last purchased items are considered as the cost of goods sold for the items which are sold first. When the inventory costs are rising, LIFO method would produce the higher cost of goods sold, because of the increased purchase price of the last item. The higher cost of goods sold reduces the value of net income, at the same time the lower amount of net income produces less income tax expense. Hence, LIFO method gives the lowest net income.

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Chapter 8 Solutions

FINANCIAL ACCOUNTING (LOOSELEAF)

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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