
Concept explainers
a.
Prepare the journal entries for the shrinkage loss under (1) average cost method and (2) LIFO method.
a.

Explanation of Solution
Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.
First-in-First-Out (FIFO): In this method, items purchased initially are sold first. So, the value of the ending inventory consist the recent cost for the remaining unsold items.
Last-in-First-Out (LIFO): In this method, items purchased recently are sold first. So, the value of the ending inventory consist the initial cost for the remaining unsold items.
Average Cost method: In this method, the inventories are priced at the average rate of goods available for sales.
Prepare the journal entries for the shrinkage loss under FIFO and LIFO method as follows:
1. Shrinkage loss under average cost method
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cost of goods sold (3) | $1,208 | |||
Inventory | $1,208 | |||
(To record the shrinkage loss incurred under average cost method) |
Table (1)
- Cost of goods sold is an operating expense account and decreases the
stockholders’ equity account by $1,208. Therefore, debit cost of goods account with $1,208. - Inventory is an asset account, and it decreases the value of assets by $1,208. Therefore, credit inventory account with $1,208.
Working note:
Calculate the units of shrinkage loss
Calculate the average cost per unit
Calculate the value of shrinkage loss under average cost method
2. Shrinkage loss under LIFO method
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cost of goods sold (4) | $1,560 | |||
Inventory | $1,560 | |||
(To record the shrinkage loss incurred under LIFO method) |
Table (2)
- Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $1,560. Therefore, debit cost of goods account with $1,560.
- Inventory is an asset account, and it decreases the value of assets by $1,560. Therefore, credit inventory account with $1,560.
Working note:
b.
Prepare the journal entries to record (1) shrinkages losses under FIFO and (2) loss from write-down inventory under lower-of-cost-or market.
b.

Explanation of Solution
Lower-of-cost-or-market: The lower-of-cost-or-market (LCM) is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, at its current market value or at is historical cost price, whichever is less.
Prepare the journal entries to record (1) shrinkages losses under FIFO and (2) loss from write-down inventory under lower-of-cost-or market as follows:
(1) Shrinkages losses under FIFO:
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cost of goods sold (5) | $1,000 | |||
Inventory | $1,000 | |||
(To record the shrinkage loss incurred under FIFO method) |
Table (2)
- Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $1,000. Therefore, debit cost of goods account with $1,000.
- Inventory is an asset account, and it decreases the value of assets by $1,000. Therefore, credit inventory account with $1,000.
Working note:
(2) Loss from write-down inventory under lower-of-cost-or market
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cost of goods sold (2) | $3,370 | |||
Inventory | $3,370 | |||
(To record the loss from write-down of inventory) |
Table (1)
- Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $3,370. Therefore, debit cost of goods account with $3,370.
- Inventory is an asset account, and it decreases the value of assets by $3,370. Therefore, credit inventory account with $3,370.
Working note:
Calculate the value of replacement cost
Calculate loss from write-down of inventory
c.
Explain whether company M has used the hidden camera to entrap its client or not.
c.

Explanation of Solution
Explain whether company M has used the hidden camera to entrap its client or not as follows:
No, company M has not used the hidden camera to entrap its client because, company M uses the hidden camera to watch the activities of employees, and it helps to reduce the shrinkage losses of inventory and protects from the fraudulent activities. Hence, company M has not used the hidden camera to entrap its client.
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