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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Inventory Valuation Issues

Hanlon Company purchased a significant amount of raw materials inventory for a new product that it is manufacturing. Hanlon purchased insurance on these raw materials while they were in transit from the supplier.

Hanlon uses the average cost inventory method for these raw materials. In the last 2 years, each purchase has been at a lower price than the previous purchase, and the ending inventory quantity for each period has been higher than the beginning inventory quantity for that period.

Required:

  1. 1. Explain the theoretically appropriate method that Hanlon should use to account for the insurance costs on the raw materials while they were in transit from the supplier.
  2. 2.
    1. a. Explain the amount at which Hanlon should report the raw materials inventory on its balance sheet,
    2. b. In general, explain why the lower of cost or net realizable value rule is used to report inventory.
  3. 3. Explain what would have been the effect on ending inventory and cost of goods sold had Hanlon used the LIFO inventory method instead of the average cost inventory method for the raw materials. Assume LIFO cost of ending inventory is below both the replacement cost and net realizable value.

1.

To determine

Explain the method to be used for accounting the insurance costs on the raw materials while it is transited from the supplier.

Explanation

The cost of insurance spent on the raw materials while it is transited from the supplier must be accounted as a part of inventory...

2a.

To determine

Describe the amount at which H reports the raw material inventory on the balance sheet. 

2b.

To determine

Describe the reasons for lower of cost or net realizable value rule for reporting of the inventory.  

3.

To determine

Describe the effect on the ending inventory and cost of goods sold used by H while using the LIFO inventory method. 

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