Concept explainers
Judgment Case 9–1
Inventoriable costs; lower of cost or market; retail inventory method
• LO9–1, LO9–3, LO9–4
Hudson Company, which is both a wholesaler and a retailer, purchases its inventories from various suppliers. Additional facts for Hudson’s wholesale operations are as follows:
a. Hudson incurs substantial warehousing costs.
b. Hudson values inventory at the lower of cost or market. Market is below cost of the inventories.
Additional facts for Hudson’s retail operations are as follows:
a. Hudson determines the estimated cost of its ending inventories held for sale at retail using the conventional retail inventory method, which approximates lower of average cost or market.
b. Hudson incurs substantial freight-in costs.
c. Hudson has net 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, why is inventory valued at the lower of cost or market?
b. At which amount should Hudson’s wholesale inventories be reported in the
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 markups?
c. Net markdowns?
4. Why does Hudson’s retail inventory method approximate lower of average cost or market?
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INTERMEDIATE ACCOUNTING RMU 9TH EDITION
- PARRISH MODULE 5 INVENTORY-DIFFERENCES Please explain the differences between the following transactions. Both involve reduction in price of imperfect inventory but different accounts are used. In Transaction 2 the Periodic and Perpetual Method accounts used are exactly the same. Would you please explain, point out the differences and why they are recorded differently. Transaction 1. Reduction in price of imperfect inventory for $10 Periodic Method Accounts Payable or Cash 10 Purchase Allowances 10 Perpetual Method Accounts Payable or Cash 10 Inventory 10 Transaction 2. Reduction in price of imperfect items sold for $53; reduction allowed is $25 Periodic Method Sales Allowances 25 Accounts Payable or Cash 25 Perpetual Method Sales Allowances 25 Accounts Payable or Cash 25arrow_forwardQUESTION 9 Which of the following statements is NOT true of Economic Order Quantity? O A. The economic order quantity mathematically determines the minimum total inventory cost O B. The EOQ is directly proportional to the sales per period OC. The optìmal order size is determined by the EOQ model O D. The EOQ ignores inventory reorder costs and inventory carrying costsarrow_forwardProblem 11-25 Multiple choice (IAA) 1. IFRS prohibits which cost flow assumption? a. LIFO b. Specific identification 6. Weighted average i Any of these cost flow assumptions is allowed с. , What is the inventory pricing procedure in which the oldest costs rarely have an effect on the ending inventory? a. FIFO b. LIFO c. Specific identification d. Weighted average 3. In a period of falling prices which inventory method generally provides the lowest amount of ending inventory? a. Weighted average b. FIFO c. Moving average d. Specific identification 4. Which inventory cost flow assumption would consistently result in the highest income in a period of rising prices or inflation? a. FIFO b. LIFO c. Weighted average d. Specific identification 3. The costing of inventory must be deferred until the end of reporting period under which of the following method of inventory valuation? a. Moving average b. Weighted average c. LIFÓ perpetual d. FIFO perpetualarrow_forward
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