Chapter 9, Problem 9.1BYP

Judgment Case 9–1

Inventoriable costs; lower of cost or market; retail inventory method

• LO9–1, LO9–3, LO9–4

Hudson Company, which is both a wholesaler and a retailer, purchases its inventories from various suppliers. Additional facts for Hudson’s wholesale operations are as follows:

a. Hudson incurs substantial warehousing costs.

b. Hudson values inventory at the lower of cost or market. Market is below cost of the inventories.

Additional facts for Hudson’s retail operations are as follows:

a. Hudson determines the estimated cost of its ending inventories held for sale at retail using the conventional retail inventory method, which approximates lower of average cost or market.

b. Hudson incurs substantial freight-in costs.

c. Hudson has net markups and net markdowns.

Required:

1. Theoretically, how should Hudson account for the warehousing costs related to its wholesale inventories? Why?

2.

a. In general, why is inventory valued at the lower of cost or market?

b. At which amount should Hudson’s wholesale inventories be reported in the balance sheet?

3. In the calculation of the cost-to-retail percentage used to determine the estimated cost of its ending retail inventories, how should Hudson treat

a. Freight-in costs?

b. Net markups?

c. Net markdowns?

4. Why does Hudson’s retail inventory method approximate lower of average cost or market?