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.

Purchase Date	Quantity		Unit Cost				Total Cost
Nov. 14	10		$	390			$	3,900
Dec. 12	22		$	330				7,260
Total available for sale at Dec. 31	32						$	11,160

a. At December 31, Software City takes a physical inventory and finds that all 32 units of WordCrafter are on hand. However, the current replacement cost (wholesale price) of this product is only $250 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 26 WordCrafter programs on January 9, at a retail price of $310 each. Assume that Software City uses the FIFO flow assumption.

b. Now assume that the current replacement cost of the WordCrafter programs is $500 each. A physical inventory finds only 25 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

Answer:

A		Qty	rate	Value
1	Inventory in books	10	390	3,900
		22	330	7,260
		32		11,160
	Current Whole sale price per unit	250
	Then book new value	10	250	2,500
		22	250	5,500
	Total	28		8,000
	Loss (11160-8000)			3,160
	Accounts titles and Explanation	Debit ($)	Credit ($)
	Loss on LCM	3,160
	Inventory		3,160
2.1	Cash (26*310)	8060
	sale		8060
2.2	Cost of good sold (26*250)	6500
	Inventory		6500
B
	Accounts titles and Explanation	Debit ($)	Credit ($)
1	Cost of goods Sold (32-25)*390	2730
	Inventory		2730
2	Cost of goods Sold (32-25)*330	2310
	Inventory		2310