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Chapter 6: Q30PGA_4 (page 368)

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

4. Which accounting principle or concept is most relevant to this situation?

Short Answer

Expert verified

The principle of conservatism has been used in this situation.

Step by step solution

01

Step-by-Step SolutionStep 1: Accounting principles in inventory standard

In inventory accounting, there are four principles or concepts that must be followed. These are 鈥�

a) Consistency principle

b) Disclosure principle

c) Materiality concept

d) Conservatism

These principles govern inventory accounting and standards.

02

Accounting principle in the given case

In the given case, the principle of conservatism has been used. As per this principle, there should be reporting of figures at the reduced value and not on overstated value.

The inventory鈥檚 realization value has been decreased by a significant amount and becomes lower than the historical cost. In this situation, for every sale, there would be a loss because the cost would be higher than the market value. So, as per the conservatism principle, this loss must be recognized to COGS and the ending inventory would be reported at a lower of cost and net realizable value.

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Most popular questions from this chapter

Question:Super Mart, a regional convenience store chain, maintains milk inventory by the gallon.

The first month鈥檚 milk purchases and sales at its Freeport, Florida, location follow:

Nov. 2 Purchased 11 gallons @ \(2.15 each

6 Purchased 2 gallons @ \)2.80 each

8 Sold 6 gallons of milk to a customer

13 Purchased 3 gallons @ $2.85 each

14 Sold 4 gallons of milk to a customer

Requirements

3. Determine the amount that would be reported in ending merchandise inventoryon November 15 using the weighted-average inventory costing method. Round allamounts to the nearest cent.

Question:Super Mart, a regional convenience store chain, maintains milk inventory by the gallon.

The first month鈥檚 milk purchases and sales at its Freeport, Florida, location follow:

Nov. 2 Purchased 11 gallons @ \(2.15 each

6 Purchased 2 gallons @ \)2.80 each

8 Sold 6 gallons of milk to a customer

13 Purchased 3 gallons @ $2.85 each

14 Sold 4 gallons of milk to a customer

Requirements

2. Determine the amount that would be reported in ending merchandise inventoryon November 15 using the LIFO inventory costing method

Assume that AB Tire Store completed the following perpetual inventory transactions for a line of tires:

May 1 Beginning merchandise inventory 16 tires @ \( 65 each

11 Purchase 10 tires @ \) 78 each

23 Sale 12 tires @ \( 88 each

26 Purchase 14 tires @ \) 80 each

29 Sale 18 tires @ $ 88 each

Requirements

2. Compute cost of goods sold and gross profit using the LIFO inventory costing method.

Question:This problem continues the Canyon Canoe Company situation from Chapter 5. At the beginning of the January 2019, Canyon Canoe Company decided to carry and sellT-shirts with its logo printed on them. Canyon Canoe Company uses the perpetualinventory system to account for the inventory. During February 2019, Canyon CanoeCompany completed the following merchandising transactions:

Feb. 2 Sold 60 T-shirts at \(10 each.

5 Purchased 50 T-shirts at \)6 each.

7 Sold 45 T-shirts for \(10 each.

8 Sold 20 T-shirts for \)10 each.

10 Canyon Canoe Company realized the inventory was running

low, so it placed a rush order and purchased 20 T-shirts. The

premium cost for these shirts was \(7 each.

12 Placed a second rush order and purchased 40 T-shirts at \)7

each.

13 Sold 20 T-shirts for \(10 each.

15 Purchased 50 T-shirts for \)6 each.

20 In order to avoid future rush orders, purchased 150 T-shirts.

Due to the volume of the order, Canyon Canoe Company

was able to negotiate a cost of \(5 each.

21 Sold 40 T-shirts for \)10 each.

22 Sold 35 T-shirts for \(10 each.

24 Sold 20 T-shirts for \)10 each.

25 Sold 45 T-shirts for \(10 each.

27 Sold 40 T-shirts for \)10 each.

Requirements

1. Assume Canton Canoe Company began February with 94 T-shirts in inventorythat cost $5 each. Prepare the perpetual inventory records for February using theFIFO inventory costing method.

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?
See all solutions

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