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Chapter 6: Q35PGB_2 (page 371)

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

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

Short Answer

Expert verified

The ending inventory would be reported at $32,000 on the balance sheet.

Step by step solution

01

Lower-of-cost-or-net-realizable value approach

Per the lower of cost or net realizable approach, the inventory should be shown at the lowest value among the two. This is because if the adjustment has not been made, there would be overvalued gross profit and ending inventory.

02

Inventory value in the balance sheet

As discussed above, the inventory should be shown at the lower value of cost or net realizable value.

In the given case, the cost of the inventory is $98,000. But the net realizable value of the inventory is $32,000.

So, per the rule, the ending inventory should be shown at $32,000 on the balance sheet.

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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鈥擣IFO

Requirements

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

Right Now Electronic Center began October with 100 units of merchandise inventory that cost \(70 each. During October, the store made the following purchases:

Oct. 3 35 units @ \) 82 each

12 45 units @ \( 84 each

18 75 units @ \) 90 each

Right Now uses the periodic inventory system, and the physical count at October 31indicates that 130 units of merchandise inventory are on hand.

Requirements

2. Net sales revenue for October totaled $26,000. Compute Right Now鈥檚 gross profitfor October using each method.

What is the effect on the cost of goods sold, gross profit, and net income if ending merchandise inventory is understated?

During periods of rising costs, which inventory costing method produces the highest gross profit?

Clarmont 91影视, which uses the FIFO inventory costing method, has the following account balances at May 31, 2019, prior to releasing the financial statements for the year:

Merchandise Inventory, ending \( 13,500

Cost of Goods Sold 68,000

Net Sales Revenue 123,000

Clarmont has determined that the current replacement cost (current market value) of the May 31, 2019, ending merchandise inventory is \)12,400.

Requirements

1. Prepare any adjusting journal entry required from the information given.
See all solutions

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