Quantity Unit Cost Total Cos 130 $25.00 $3,250 120 28.50 3,420 100 39.00 3,900
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
![Mario'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, Mario's 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.)
Instructions
Prepare the journal entries required to adjust the inventory records at year-end, assuming that:
a. Mario's uses:
1. Average cost.
2. Last-in, first-out.
b. Mario's 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.]
c. Assume that the company had been experiencing monthly inventory shrinkage of 30 to 60
trees for several months. In response, management placed several hidden security cameras
throughout the premises. Within days, an employee was caught on film loading potted trees
into his pickup truck. The employee's attorney asked that the case be dropped because the
company had "unethically used a hidden camera to entrap his client." Do you agree with the
attorney? Defend your answer.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5e5463a2-c8a7-43c6-8d0e-4cd1d5c02128%2Fd2eca39d-2496-4e05-b38c-3459a1d0a072%2Fgbdx08q_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Mario'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, Mario's 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.)
Instructions
Prepare the journal entries required to adjust the inventory records at year-end, assuming that:
a. Mario's uses:
1. Average cost.
2. Last-in, first-out.
b. Mario's 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.]
c. Assume that the company had been experiencing monthly inventory shrinkage of 30 to 60
trees for several months. In response, management placed several hidden security cameras
throughout the premises. Within days, an employee was caught on film loading potted trees
into his pickup truck. The employee's attorney asked that the case be dropped because the
company had "unethically used a hidden camera to entrap his client." Do you agree with the
attorney? Defend your answer.
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