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Chapter 9: Q3P. (page 483)

Malone Company determined its ending inventory at cost and at LCNRV at December 31, 2017, December 31, 2018, and December 31, 2019, as shown below. Cost NRV 12/31/17 \(650,000 \)650,000 12/31/18 780,000 712,000 12/31/19 905,000 830,000 Instructions (a) Prepare the journal entries required at December 31, 2018, and at December 31, 2019, assuming that a perpetual inventory system and the cost-of-goods-sold method of adjusting to LCNRV is used. (b) Prepare the journal entries required at December 31, 2018, and at December 31, 2019, assuming that a perpetual inventory is recorded at cost and reduced to LCNRV using the loss method.

Short Answer

Expert verified

a. Journal entries under the cost of goods sold method are given in Step 2.

b. Journal entries under the loss method are given in Step 3.

Step by step solution

01

Calculation of LCRNRV and reduction in inventory

LCNRV for each date is calculated as follows:

Cost

NRV

LCNRV

Reduction in Inventory

(Cost – LCNRV)

12/31/17

$650,000

$650,000

$650,000

$0

12/31/18

780,000

712,000

712,000

68,000

12/31/19

905,000

830,000

830,000

75,000

Journal entries under cost of goods sold method

02

Journal entries under cost of goods sold method

a. Journal entries are as follows:

Date

Description

Debit

Credit

12/31/17

No Entry

12/31/18

Cost of goods sold

$68,000

Inventory

$68,000

12/31/19

Cost of goods sold

$75,000

Inventory

$75,000

03

Journal entries under the loss method

(b) Journal entries are as follows:

Date

Description

Debit

Credit

12/31/17

No Entry

12/31/18

Loss due to market decline of inventory

$68,000

Allowance to reduce inventory to market

$68,000

12/31/19

Loss due to market decline of inventory

$7,000

Allowance to reduce inventory to market

$7,000

04

Calculation of loss in 2019

Inventory loss in 2019 is calculated as follows:

LossDuetoMarketdecline=Reductionin2019-AllowanceBalnecin2018=$75,000-$68,000=$7,000

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Most popular questions from this chapter

Boyne Inc. had beginning inventory of \(12,000 at cost and \)20,000 at retail. Net purchases were \(120,000 at cost and \)170,000 at retail. Net markups were \(10,000, net markdowns were \)7,000, and sales revenue was $147,000. Compute ending inventory at cost using the conventional retail method

Gheorghe Moresan Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost. Lumber 25% Millwork 30% Hardware and fittings 40% On August 18, a fire destroyed the office, lumber shed, and a considerable portion of the lumber stacked in the yard. To file a report of loss for insurance purposes, the company must know what the inventories were immediately preceding the fire. No detail or perpetual inventory records of any kind were maintained. The only pertinent information you are able to obtain are the following facts from the general ledger, which was kept in a fireproof vault and thus escaped destruction. Lumber Millwork Hardware Inventory, Jan. 1, 2017 \( 250,000 \) 90,000 $ 45,000 Purchases to Aug. 18, 2017 1,500,000 375,000 160,000 Sales revenue to Aug. 18, 2017 2,080,000 533,000 210,000 Exercises 479 480 Chapter 9 Inventories: Additional Valuation Issues Instructions Submit your estimate of the inventory amounts immediately preceding the fire.

Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Merchandise on hand on January 1 was \(38,000. Purchases since January 1 were \)72,000; freight-in, \(3,400; purchase returns and allowances, \)2,400. Sales are made at 331 /3% above cost and totaled \(100,000 to March 9. Goods costing \)10,900 were left undamaged by the fire; remaining goods were destroyed. Instructions (a) Compute the cost of goods destroyed. (b) Compute the cost of goods destroyed, assuming that the gross profit is 331 /3% of sales.

Question:What approaches may be employed in applying the LCNRV procedure? Which approach is normally used and why?

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 \( 38,000 Purchases—goods placed in stock July 1–15 85,000 Sales revenue—goods delivered to customers (gross) 116,000 Sales returns—goods returned to stock 4,000 Your client reports that the goods on hand on July 16 cost \)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’s insurance covers only goods owned. Instructions Compute the claim against the insurance company.
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