Question

Problem 8.4A Year-End Adjustments; Shrinkage Losses and LCM (LO8-1,LO8-2,LO8-3)

Mary’s Nursery uses a perpetual inventory system. At December 31, the perpetual inventory records indicate the following quantities of a particular blue spruce tree.

	Quantity		Unit Cost				Total Cost
First purchase (oldest)	130		$	25.00			$	3,250
Second purchase	120			28.50				3,420
Third purchase	100			39.00				3,900
Total	350						$	10,570

A year-end physical inventory, however, shows only 310 of these trees on hand.

In its financial statements, Mary’s Nursery values its inventories at the lower-of-cost-­or-market. At year-end, the per-unit replacement cost of this tree is $40. (Use $3,500 as the “level of ­materiality” in deciding whether to debit losses to Cost of Goods Sold or to a separate loss account.)

Required:

a. Prepare the journal entries required to adjust the inventory records at year-end, assuming that Mary’s Nursery uses (1) Average cost, (2) Last-in, first-out.

b. Prepare the journal entries required to adjust the inventory records at year-end, assuming that Mary’s Nursery uses the first-in, first-out method. However, the replacement cost of the trees at year-end is $20 apiece, rather than the $40 stated originally. [Make separate journal entries to record (1) the shrinkage losses and (2) the restatement of the inventory at a market value lower than cost. Record the shrinkage losses first.]

Answer 1

Solution & system, Mary's nursery uses a perpetual inventory A year-end- physicai inventory, shows only 36 of these . on hand in its financial Statements. At year-end the per unit replacement cost of this - tree is $40. the inventory Journal entries required to adjust records at year end, 1) Averoge cost Assuming the i mary's uses. Average cost 1,208 Accouni title & expia nation PR Debit Credit cost of goods sold inventory i 1,208 * Recod shrinkage Loss of 10 trees using áverage cost is => 10,570 - 350 $30.2 0

Le firstOut 1 LIFO method :- The adios ting entry under Lif0 method, cost of goods should be debited & inventory should be credited * The pen - unit repiace ment cost of this free is $40 * Third purchase unit cost is 39 Cos ods Soid = 40 39 = 1,560 Debit ($9 Credit(8) Accounts tittie & explanation PR ..cost of goods.sold . inventory 1560 1560 * TO Record Shrinkage loss of 40 trees ar $ Hoper.lee b) Mary's Norsery uses Fifo method 1) The Shrinkage losses The Ye piacement of the cost of trees at year end $ 20 apiece; rather than $40

Account title & explana- PR Debit Giedt 6,000 Cost of goods Soid inventory 1,000 * To record shrinkage loss of 40 trees using the FIFO frow, assuming for $40 trees @ $25 cost of goods - Uox?5 => 1,000 2) the restatement of the Inventory ata mowket Vaive tower than cost. Debit Credit Account tittie & explanation PR cost of goods sold inventory 3,370 3370 * To record shrinkage 1053 of 40 trees using the lower of Cost OY maske! assumption

9570 After Shrinkage ioss [cost] [10:570- 1,0007 Market [310 x 20) LOSS from write down to market 6,200 9.570-6,200 -3370 * The loss from writing - down to market value