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Q6CA.

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Intermediate Accounting (Kieso)
Found in: Page 490

Short Answer

Olson Corporation, a retailer and wholesaler of national brand-name household lighting fixtures, purchases its inventories from various suppliers. Instructions (a) (1) What criteria should be used to determine which of Olson’s costs are inventoriable ? (2) Are Olson’s administrative costs inventoriable ? Defend your answer. (b) (1) Olson uses the lower-of-cost-or-market rule for its wholesale inventories. What are the theoretical arguments for that rule? (2) The replacement cost of the inventories is below the net realizable value less a normal profit margin, which, in turn, is below the original cost. What amount should be used to value the inventories? Why? (c) Olson calculates the estimated cost of its ending inventories held for sale at retail using the conventional retail inventory method. How would Olson treat the beginning inventories and net markdowns in calculating the cost ratio used to determine its ending inventories? Why.

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Step by Step Solution

Step1: Inventoriable costs

(a1) The costs incurred to prepare inventory for final sale purposes include the costs such as freight-in charges, which are incurred on the transportation of inventories purchased.

Step2: Treatment of administrative cost

(a2) Administrative costs are the expense incurred on the management part of the business. It is not directly related to the manufacturing or production of goods. Hence, it is not included in the inventory cost, thus not inventoriable.

Step 3: Arguments against lower-of-cost-or-market rule

(b1) Under this method, the decline in the value of the inventory is recorded as a loss in which the value of inventory decreases. It is against the conservatism principle of the balance sheet, as inventories will be recorded at market value.

Step 4: Cost of inventory

(b2) Market value of the inventory cannot be less than the net realizable value less profit margin. Hence net realizable value less profit margin will be used to value the inventory.

Step 5: Treatment of beginning inventories and net markdowns

(c) Beginning inventories are included, and net markdowns are excluded from calculating the cost ratio. Beginning inventories are added to the value of the total goods available for sale.

Most popular questions for Business-studies Textbooks

GROUPWORK (Retail, LIFO Retail, and Inventory Shortage) Late in 2014, Joan Seceda and four other investors took the chain of Becker Department Stores private, and the company has just completed its third year of operations under the ownership of the investment group. Andrea Selig, controller of Becker Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Becker Department Stores contain the following amounts on November 30, 2017, the end of the fiscal year. Cost Retail Beginning inventory $ 68,000 $100,000 Purchases 255,000 400,000 Net markups 50,000 Net markdowns 110,000 Sales revenue 320,000 According to the November 30, 2017, physical inventory, the actual inventory at retail is $115,000. Instructions (a) Describe the circumstances under which the retail inventory method would be applied and the advantages of using the retail inventory method. (b) Assuming that prices have been stable, calculate the value, at cost, of Becker Department Stores’ ending inventory using the last-in, first-out (LIFO) retail method. Be sure to furnish supporting calculations. Problems 487 488 Chapter 9 Inventories: Additional Valuation Issues (c) Estimate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended November 30, 2017. (d) Complications in the retail method can be caused by such items as (1) freight-in costs, (2) purchase returns and allowances, (3) sales returns and allowances, and (4) employee discounts. Explain how each of these four special items is handled in the retail inventory method.

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