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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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Various Inventory Issues

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

  • Hudson incurs substantial warehousing costs.
  • Hudson uses the lower of cost or market rule.
  • The replacement cost of the inventories is below the net realizable value and above the net realizable value minus the normal profit margin. The original cost of the inventories is above the replacement cost and below the net realizable value.

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

  • Hudson determines the estimated cost of its ending inventories held for sale at retail using the conventional retail inventory method.
  • Hudson incurs substantial freight-in costs.
  • Hudson has net additional 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, explain why the lower of cost or market rule is used to report inventory.

b. At which amount should Hudson report the wholesale inventories on its balance sheet? Explain the application of the lower of cost or market rule in this situation.

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 additional markups

c. net markdowns

4. Explain why Hudson’s retail inventory method approximates lower of average cost or market.

1.

To determine

Explain the reason for the accounting treatment for the warehousing costs related to its wholesale inventories by Company H.

Explanation

Retail inventory method: It takes into account all the retail amounts that is, the current selling prices. Under this method, the goods available for sale, at retail is deducted from the sales, at retail to determine the ending inventory, at retail.

Company H should account its warehousing costs as a part of i...

2.

To determine

Explain the reason for the valuation of inventory at the lower of cost or market and state the amount at which the Company H’s wholesale inventories should be reported in the balance sheet.

3.

To determine

Explain the treatment of the freight-in costs, net mark ups, and net markdowns in the calculation of the cost-to-retail percentage used to determine the estimated cost of its ending retail inventories.

4.

To determine

Explain the reason for the retail inventory method of Company H approximates lower of average cost or market.

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