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Chapter 6: 8SE (page 359)

Question:Assume that a Logan Burger restaurant has the following perpetual inventory record for hamburger patties:

Date PurchasesCost ofMerchandise

Goods SoldInventory on Hand

Jul. 9 \( 450 \) 450

22 \( 270 180

31 210 390

At July 31, the accountant for the restaurant determines that the current replacementcost of the ending merchandise inventory is \)435. Make any adjusting entry needed toapply the lower-of-cost-or-market rule. Merchandise inventory would be reported onthe balance sheet at what value on July 31?

Short Answer

Expert verified

There is no need for any adjustment as per the LCM rule. The ending inventory would be reported at$390 on the balance sheet.

Step by step solution

01

Step-by-Step-SolutionStep1: Lower of cost or market rule

LCM rule in inventory valuation is an implication of the principle of conservatism. As per this rule, the inventories should be valued at a lower value only be it the cost at which it was acquired or the current market cost (replacement cost). If there is any difference between the market price and historic cost, an adjustment needs to be made in the balance sheet value of inventory.

02

 Step 2: Adjustment as per the LCM rule

At July 31,the book value (cost) of ending inventory = $390

On July 31, the replacement cost (market value) of inventory = $435

As per the LCM rule, the replacement cost is higher than the historical cost. Thus the ending inventory would be reported at its historical cost only.

There is no need for any adjustment in the balance sheet value of inventory.

Merchandise on July 31 would be reported on the balance sheet at a value of $390.

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Most popular questions from this chapter

Question:Boston Cycles started October with 12 bicycles that cost \(42 each. On October 16, Boston bought 40 bicycles at \)68 each. On October 31, Boston sold 34 bicycles for$100 each.

Preparing a perpetual inventory record and journal entries鈥擫IFO

Requirements

2. Journalize the October 16 purchase of merchandise inventory on the account and theOctober 31 sale of merchandise inventory on the account.

Some of M and C Electronics鈥檚 merchandise is gathering dust. It is now December 31, 2018, and the current replacement cost of the ending merchandise inventory is \(24,000 below the business鈥檚 cost of the goods, which was \)97,000. Before any adjustments at the end of the period, the company鈥檚 Cost of Goods Sold account has a balance of $380,000.

Requirements

2. At what amount should the company report merchandise inventory on the balance sheet?

Question:Golf Unlimited carries an inventory of putters and other golf clubs. The sales price of each putter is \(119. Company records indicate the following for a particular line ofGolf Unlimited鈥檚 putters:

Date Item Quantity Unit Cost

Nov. 1 Balance 24 \) 53

6 Sale 20

8 Purchase 30 70

17 Sale 30

30 Sale 2

Requirements

1. Prepare Golf Unlimited鈥檚 perpetual inventory record for the putters assuming GolfUnlimited uses the weighted-average inventory costing method. Round weightedaveragecost per unit to the nearest cent and all other amounts to the nearest dollar.Then identify the cost of ending inventory and cost of goods sold for the month.

Some of L and K Electronics鈥檚 merchandise is gathering dust. It is now December 31, 2018, and the current replacement cost of the ending merchandise inventory is\(32,000 below the business鈥檚 cost of the goods, which was \)98,000. Before any adjustmentsat the end of the period, the company鈥檚 Cost of Goods Sold account has a balanceof $410,000.

Requirements

3. At what amount should the company report cost of goods sold on the incomestatement?

Question:Golf Unlimited carries an inventory of putters and other golf clubs. The sales price of each putter is \(119. Company records indicate the following for a particular line ofGolf Unlimited鈥檚 putters:

Date Item Quantity Unit Cost

Nov. 1 Balance 24 \) 53

6 Sale 20

8 Purchase 30 70

17 Sale 30

30 Sale 2

Requirements

1. Prepare Golf Unlimited鈥檚 perpetual inventory record for the putters assumingGolf Unlimited uses the LIFO inventory costing method. Then identify the costof ending inventory and cost of goods sold for the month.
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