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Chapter 9: Q1Q (page 442)

Question:Where there is evidence that the utility of inventory goods, as part of their disposal in the ordinary course of business, will be less than cost, what is the proper accounting treatment?

Short Answer

Expert verified

The loss should be recorded for the decrease in the value of the inventory, and inventories will be reported at net realizable value.

Step by step solution

01

Step-by-step-solutionStep1:

Inventories are reported at the cost for which it is purchased. However, in the situation when the cost of inventories declines, it violates the historical cost principle, as a decline in the value of inventories is treated as a loss. And in the balance sheet, it will be shown at net realizable value, not at the cost.

02

Step 2:

Net realizable is the estimated amount to be collected from the sale of inventory. It can be calculated by deducting the estimated collection cost, disposal cost, transportation cost, from the original cost of the inventory.

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Most popular questions from this chapter

Marvin Gaye Company has been having difficulty obtaining key raw materials for its manufacturing process. The company therefore signed a long-term noncancelable purchase commitment with its largest supplier of this raw material on November 30, 2017, at an agreed price of \(400,000. At December 31, 2017, the raw material had declined in price to \)365,000. Instructions What entry would you make on December 31, 2017, to recognize these facts?

Dover Company began operations in 2017 and determined its ending inventory at cost and at LCNRV at December 31, 2017, and December 31, 2018. This information is presented below. Cost Net Realizable Value 12/31/17 \(346,000 \)322,000 12/31/18 410,000 390,000 Instructions (a) Prepare the journal entries required at December 31, 2017, and December 31, 2018, assuming inventory is recorded at LCNRV and a perpetual inventory system using the cost-of-goods-sold method. (b) Prepare journal entries required at December 31, 2017, and December 31, 2018, assuming inventory is recorded at LCNRV and a perpetual system using the loss method. (c) Which of the two methods above provides the higher net income in each year?

Presented below is information related to Knight Enterprises. Jan. 31 Feb. 28 Mar. 31 Apr. 30 Inventory at cost \(15,000 \)15,100 \(17,000 \)14,000 Inventory at LCNRV 14,500 12,600 15,600 13,300 Purchases for the month 17,000 24,000 26,500 Sales for the month 29,000 35,000 40,000 Instructions (a) From the information, prepare (as far as the data permit) monthly income statements in columnar form for February, March, and April. The inventory is to be shown in the statement at cost; the gain or loss due to market fluctuations is to be shown separately (using a valuation account). (b) Prepare the journal entry required to establish the valuation account at January 31 and entries to adjust it monthly thereafter. E9-6 (L01) (LCNR

Gross Profit Method) Each of the following gross profit percentages is expressed in terms of cost. 1. 20%. 3. 331 /3%. 2. 25%. 4. 50%. Instructions Indicate the gross profit percentage in terms of sales for each of the above.

What conditions must exist for the retail inventory method to provide valid results?
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