Chapter 9: Q5Q (page 474)
Question:What method(s) might be used in the accounts to record a loss due to a price decline in the inventories? Discuss
The two methods to record decline in the value of inventories are recording inventories loss is the cost of goods sold method and loss method.
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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?
In some instances, accounting principles require a departure from valuing inventories at cost alone. Determine the proper unit inventory price in the following cases. Cases 1 2 3 4 5 Cost \(15.90 \)16.10 \(15.90 \)15.90 $15.90 Sales price 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
Steele Corporation purchased a significant amount of raw materials inventory for a new product that it is manufacturing. Steele uses the lower-of-average-cost-or-net realizable value (LCNRV) rule for these raw materials. The net realizable value of the raw materials is below the original cost. In the last 2 years, each purchase has been at a lower price than the previous purchase, and the ending inventory quantity for each period has been higher than the beginning inventory quantity for that period. Instructions (a) (1) At which amount should Steele’s raw materials inventory be reported on the balance sheet? Why? (2) In general, why is the LCNRV rule used to report inventory? (b) What would have been the effect on ending inventory and cost of goods sold had Steele used the LIFO inventory method instead of the average-cost inventory method for the raw materials? Why?
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:Under what circumstances is relative sales value an appropriate basis for determining the price assigned to inventory?
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