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Chapter 9: Q6CA. (page 490)

Olson Corporation, a retailer and wholesaler of national brand-name household lighting fixtures, purchases its inventories from various suppliers. Instructions (a) (1) What criteria should be used to determine which of Olson鈥檚 costs are inventoriable ? (2) Are Olson鈥檚 administrative costs inventoriable ? Defend your answer. (b) (1) Olson uses the lower-of-cost-or-market rule for its wholesale inventories. What are the theoretical arguments for that rule? (2) The replacement cost of the inventories is below the net realizable value less a normal profit margin, which, in turn, is below the original cost. What amount should be used to value the inventories? Why? (c) Olson calculates the estimated cost of its ending inventories held for sale at retail using the conventional retail inventory method. How would Olson treat the beginning inventories and net markdowns in calculating the cost ratio used to determine its ending inventories? Why.

Short Answer

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All the requirements are given in the steps.

Step by step solution

01

Inventoriable costs

(a1)The costs incurred to prepare inventory for final sale purposesinclude the costs such as freight-in charges, which are incurred on the transportation of inventories purchased.

02

Treatment of administrative cost

(a2) Administrative costs are the expense incurred on the management part of the business. It is not directly related to the manufacturing or production of goods. Hence, it is not included in the inventory cost, thus not inventoriable.

03

Arguments against lower-of-cost-or-market rule

(b1) Under this method, the decline in the value of the inventory is recorded as a loss in which the value of inventory decreases.It is against the conservatism principle of the balance sheet, as inventories will be recorded at market value.

04

Cost of inventory

(b2) Market value of the inventory cannot be less than the net realizable value less profit margin. Hence net realizable value less profit margin will be used to value the inventory.

05

Treatment of beginning inventories and net markdowns

(c) Beginning inventories are included, and net markdowns are excluded from calculating the cost ratio. Beginning inventories are added to the value of the total goods available for sale.

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Most popular questions from this chapter

Referring to the situation in P9-2 for Garcia Home Improvement Company, consider the following expanded data at May 31, 2017. Assume Garcia uses LIFO inventory costing. Problems 483 Replacement Sales Net Realizable Normal Cost Cost Price Value Profi t Aluminum siding \( 70,000 \) 62,500 \( 64,000 \) 56,000 \( 5,100 Cedar shake siding 86,000 79,400 94,000 84,800 7,400 Louvered glass doors 112,000 124,000 186,400 168,300 18,500 Thermal windows 140,000 126,000 154,800 140,000 15,400 Total \)408,000 \(391,900 \)499,200 \(449,100 \)46,400 Instructions (a) (1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31, 2017. (2) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory to Market. (b) Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories

The net realizable value of Lake Corporation鈥檚 inventory has declined below its cost. Allyn Conan, the controller, wants to use the loss method to write down inventory because it more clearly discloses the decline in the net realizable value and does not distort the cost of goods sold. His supervisor, financial vice president Bill Ortiz, prefers the costof-goods-sold method to write down inventory because it does not call attention to the decline in net realizable value. Instructions Answer the following questions. (a) What, if any, is the ethical issue involved? (b) Is any stakeholder harmed if Bill Ortiz鈥檚 preference is used? (c) What should Allyn Conan do?

Presented below is information related to Langston Hughes Corporation. Price LIFO Index Cost Retail Inventory on December 31, 2017, when dollar-value LIFO is adopted 100 \(36,000 \) 74,500 Inventory, December 31, 2018 110 ? 100,100 Instructions Compute the ending inventory under the dollar-value LIFO method at December 31, 2018. The cost-to-retail ratio for 2018 was 60%.

Question:In some instances, accounting principles require a departure from valuing inventories at cost alone. Determine the proper unit inventory price in the following cases using LCNRV. Cases 1 2 3 4 5 Cost \(15.90 \)16.10 \(15.90 \)15.90 $15.90 Sales value 14.80 19.20 15.20 10.40 17.80 Estimated cost to complete 1.50 1.90 1.65 .80 1.00 Estimated cost to sell .50 .70 .55 .40 .60

You are called by Tim Duncan of Spurs Co. on July 16 and asked to prepare a claim for insurance as a result of a theft that took place the night before. You suggest that an inventory be taken immediately. The following data are available. Inventory, July 1 \( 38,000 Purchases鈥攇oods placed in stock July 1鈥�15 85,000 Sales revenue鈥攇oods delivered to customers (gross) 116,000 Sales returns鈥攇oods returned to stock 4,000 Your client reports that the goods on hand on July 16 cost \)30,500, but you determine that this figure includes goods of $6,000 received on a consignment basis. Your past records show that sales are made at approximately 40% over cost. Duncan鈥檚 insurance covers only goods owned. Instructions Compute the claim against the insurance company.
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