Question

Late in the year, Software City began carrying WordCrafter, a new word processing software program. At December 31, Software City's perpetual inventory records included the following cost layers in its inventory of WordCrafter programs. Quantity 10 Purchase Date Nov. 14 Dec. 12 Total available for sale at Dec. 31 Unit Cost $ 430 $ 330 20 Total Cost $ 4,300 6,600 $10,900 30 a. At December 31, Software City takes a physical inventory and finds that all 30 units of WordCrafter are on hand. However, the current replacement cost (wholesale price) of this product is only $260 per unit. 1. Prepare the entries to record this write-down of the inventory to the lower-of-cost-or-market at December 31. (Company policy is to charge LCM adjustments of less than $2,000 to Cost of Goods Sold and larger amounts to a separate loss account.) 2. Prepare the entries to record the cash sale of 24 WordCrafter programs on January 9, at a retail price of $370 each. Assume that Software City uses the FIFO flow assumption. b. Now assume that the current replacement cost of the WordCrafter programs is $450 each. A physical inventory finds only 26 of these programs on hand at December 31. (For this part, return to the original information and ignore what you did in part a.) 1. Prepare the journal entry to record the shrinkage loss assuming that Software City uses the FIFO flow assumption. 2. Prepare the journal entry to record the shrinkage loss assuming that Software City uses the LIFO flow assumption.

Answer 1

a-1)

Date	Accounts titles and explanation	Debit	Credit
Dec 31	Loss from write down of inventory	$3100
	Inventory		$3100
	(To record write down of the inventory)

Loss from write down of inventory= Total cost-Total current replacement cost

= $10900-(30*$260)

= $3100

a-2)

Date	Accounts titles and explanation	Debit	Credit
Jan 9	Cash (24*$370)	$8880
	Sales		$8880
	(To record cash sales)
	Cost of goods sold (24*$260)	$6240
	Inventory		$6240
	(To record cost of goods sold)

As the inventories are write down to lower-of-cost-or-market. Now the unit cost of inventories are $260

b-1) Inventory loss= 30-26= 4

Date	Accounts titles and explanation	Debit	Credit
Dec 31	Cost of goods sold	$1720
	Inventory		$1720
	(To record shrinkage loss using FIFO method)

If the company uses FIFO method that means the company is selling inventory on first-in, first-out basis and the inventory loss is of 4 units. So shrinkage loss= 4*$430= $1720

b-2)

Date	Accounts titles and explanation	Debit	Credit
Dec 31	Cost of goods sold	$1320
	Inventory		$1320
	(To record shrinkage loss using LIFO method)

If the company uses LIFO method that means the company is selling inventory on last-in, first-out basis and the inventory loss is of 4 units. So shrinkage loss= 4*$330= $1320