Question

In: Accounting

Late in the year, Software City began carrying WordCrafter, a new word processing software program. At...

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 $ 410 $ 4,100
Dec. 12 24 $ 330 7,920
Total available for sale at Dec. 31 34 $ 12,020

a. At December 31, Software City takes a physical inventory and finds that all 34 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 28 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 $370 each. A physical inventory finds only 32 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.

Solutions

Expert Solution

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Part a
Date Account Debit Credit
1. Journal entries Dec 31 Loss from write down inventory $     3,520
Inventory $    3,520
(12020-(34*250)
2. Journal entries Dec 31 Cash 28*310 $     8,680
Sales $    8,680
Cost of Goods Sold 28*250 $     7,000
Inventory $    7,000
Part b Dec 31 Cost of Goods Sold 2*410 $         820
Inventory $       820
Dec 31 Cost of Goods Sold 2*330 $         660
Inventory $       660

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