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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

Question:At December 31, 2017, Ashley Co. has outstanding purchase commitments for 150,000 gallons, at \(6.20 per gallon, of a raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower. Assuming that the market price as of December 31, 2017, is \)5.90, how would you treat this situation in the accounts?

Prophet Company signed a long-term purchase contract to buy timber from the U.S. Forest Service at \(300 per thousand board feet. Under these terms, Prophet must cut and pay \)6,000,000 for this timber during the next year. Currently, the market value is \(250 per thousand board feet. At this rate, the market price is \)5,000,000. Jerry Herman, the controller, wants to recognize the loss in value on the year-end financial statements, but the financial vice president, Billie Hands, argues that the loss is temporary and should be ignored. Herman notes that market value has remained near $250 for many months, and he sees no sign of significant change. Instructions (a) What are the ethical issues, if any? (b) Is any particular stakeholder harmed by the financial vice president’s decision? (c) What should the controller do?

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

Kumar Inc. uses a perpetual inventory system. At January 1, 2017, inventory was \(214,000,000 at both cost and net realizable value. At December 31, 2017, the inventory was \)286,000,000 at cost and $265,000,000 at net realizable value. Prepare the entry under (a) the cost-of-goods-sold method and (b) the loss method.

Barrick Gold Corporation, with headquarters in Toronto, Canada, is the world’s most profitable and largest gold mining company outside South Africa. Part of the key to Barrick’s success has been due to its ability to maintain cash flow while improving production and increasing its reserves of gold-containing property. In the most recent year, Barrick achieved record growth in cash flow, production, and reserves. The company maintains an aggressive policy of developing previously identified target areas that have the possibility of a large amount of gold ore, and that have not been previously developed. Barrick limits the riskiness of this development by choosing only properties that are located in politically stable regions, and by the company’s use of internally generated funds, rather than debt, to finance growth. Using Your Judgment 491 492 Chapter 9 Inventories: Additional Valuation Issues Barrick’s inventories are as follows. Barrick Gold Corporation Inventories (in millions, US dollars) Current Gold in process \(133 Mine operating supplies 82 \)215 Non-current (included in Other assets) Ore in stockpiles \(65 Instructions (a) Why do you think that there are no finished goods inventories? Why do you think the raw material, ore in stockpiles, is considered to be a non-current asset? (b) Consider that Barrick has no finished goods inventories. What journal entries are made to record a sale? (c) Suppose that gold bullion that cost \)1.8 million to produce was sold for $2.4 million. The journal entry was made to record the sale, but no entry was made to remove the gold from the gold in process inventory. How would this error affect the following? Balance Sheet Income Statement Inventory ? Cost of goods sold ? Retained earnings ? Net income ? Accounts payable ? Working capital ? Current ratio ?
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