Problem 5-20A Allocating product costs between cost of goods sold and ending inventory: intermittent purchases and sales of merchandise
Pam’s Creations had the following sales and purchase transactions during Year 2. Beginning inventory consisted of 60 items at $350 each. The company uses the FIFO cost flow assumption and keeps perpetual inventory records.
| Date | Transaction | Description |
|---|---|---|
| Mar. 5 | Purchase | 50 items @ $370 |
| Apr. 10 | Sale | 30 items @ $450 |
| June 19 | Sale | 60 items @ $450 |
| Sep. 16 | Purchase | 70 items @ $390 |
| Nov. 28 | Sale | 45 items @ $480 |
Required
a. Record the inventory transactions in general journal format.
b. Calculate the gross margin Pam’s Creations would report on the Year 2 income statement.
c. Determine the ending inventory balance Pam’s Creations would report on the December 31, Year 2, balance sheet.
Problem 5-21A Inventory valuation based on the lower-of-cost-or-market rule
At the end of the year, Randy’s Parts Co. had the following items in inventory:
| Item | Quantity | unit Cost | unit Market Value |
|---|---|---|---|
| P1 | 60 | $85 | $90 |
| P2 | 40 | $70 | $72 |
| P3 | 80 | $130 | $120 |
| P4 | 70 | $125 | $130 |
Required
a. Determine the amount of ending inventory using the lower-of-cost-or-market rule applied to each individual inventory item.
b. Provide the general journal entry necessary to write down the inventory based on Requirement a. Assume that Randy’s Parts Co. uses the perpetual inventory system.
c. Determine the amount of ending inventory, assuming that the lower-of-cost-or-market rule is applied to the total inventory in aggregate.
d. Provide the general journal entry necessary to write down the inventory based on Requirement c. Assume that Randy’s Parts Co. uses the perpetual inventory system.
e. Explain how the inventory loss would be reported when the periodic inventory system is used.
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