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Question 11Q

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Intermediate Accounting (Kieso)
Found in: Page 421

Short Answer

Specific identification is sometimes said to be the ideal method of assigning a cost to inventory and to the cost of goods sold. Briefly indicate the arguments for and againstthis method of inventory valuation.

Special identification is a method of valuing inventory at a specific cost for each specific item. This is an ideal method with several difficulties.

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Step by Step Solution

Arguments for the special identification method

The major argument for the special identification method is that it is the ideal method of valuing inventory. This is because it is the only method through which the actual cot can match with actual revenue. Thus under this method, the physical flow of goods matches the cost flow of goods.

Arguments against special identification method

One of the arguments against the special identification method is that the reported income can be manipulated by showing higher costs or lower costs. This may lead to tax evasion or other malpractices.

Another problem with this method is the arbitrary issue. This arbitrary issue is due to the difficulty of allocating indirect expenses to inventory.

Most popular questions for Business-studies Textbooks

Colin Davis Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, which is debited for materials purchased and credited for materials requisitioned for use.

1. An invoice for $8,100, terms f.o.b. destination, was received and entered January 2, 2017. The receiving report shows that the materials were received December 28, 2016.

2. Materials costing $28,000, shipped f.o.b. destination, were not entered by December 31, 2016, “because they were in a railroad car on the company’s siding on that date and had not been unloaded.”

3. Materials costing $7,300 were returned to the supplier on December 29, 2016, and were shipped f.o.b. shipping point. The return was entered on that date, even though the materials are not expected to reach the supplier’s place of business until January 6, 2017.

4. An invoice for $7,500, terms f.o.b. shipping point, was received and entered December 30, 2016. The receiving report shows that the materials were received January 4, 2017, and the bill of lading shows that they were shipped January 2, 2017.

5. Materials costing $19,800 were received December 30, 2016, but no entry was made for them because “they were ordered with a specified delivery of no earlier than January 10, 2017.”

Instructions -

Prepare correcting general journal entries required at December 31, 2016, assuming that the books have not been closed.

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