Question 1: Richards Inc., a U.S. company following GAAP, pays a vendor cash of

Question

Question 1: Richards Inc., a U.S. company following GAAP, pays a vendor cash of $16,050 at the beginning of the year for goods that Richards will ultimately include in its inventory. In addition, Richards associates the following costs with the purchase: Freight in Freight out Normal spoilage Abnormal spoilage Marketing costs $500 150 300 450 100 At the end of the year, Richards is valuing the inventory in current dollars in order to prepare its financial statements. As of year-end, the inventory would have a net selling price of $17,100 with costs to complete and sell of $600. The same inventory on that date would cost Richards $16,250. Richards assumes a normal profit margin of 10% on all sales. Required: 1) Prepare the journal entry for the inventory acquisition. 2) Determine the lower of cost or net realizable value for the inventory. 3) Prepare the year-end journal entry for the inventory

Explanation / Answer

1) Journal entry for the inventory acquisition:

Purchase A/C Dr. 16,050

To Cash A/C 16,050

2) Lower of cost or net realizable value for the inventory can be shown as under:

Cost = $16,050

Net Realizable Value = $17,100 - $600 = $16,500

So cost of $16,050 is lower.

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