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

ID: 2570215 • Letter: Q

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) 2) 3) Prepare the journal entry for the inventory acquisition. Determine the lower of cost or net realizable value for the inventory. Prepare the year-end journal entry for the inventory.

Explanation / Answer

1. As per US GAAP, purchase cost of an asset includes all the costs associated with the purchase of the inventory and making it available for final customer.

Date

Particulars

Dr. Amount (in$)

Cr. Amount (in$)

Purchase

Abnormal Spoilage

Marketing Cost

TO Cash

(See Note 1)

17,000

450

100

17,550

Note 1: In the given case, it is assumed that all the other costs are also paid in cash. Abnormal spoilage is over and above the normal spoilage and therefore, is expensed out separately. Marketing cost is the cost of marketing a product, and is not required for making it available to ultimate customer. Therefore, it is also expensed out separately.

2. Net Realizable value of Inventory = Selling Price - Cost to complete and sell the product

= $17,100 - 600 = $16,500

Cost of Inventory = $16,250

Lower of cost or net realizable value = $16,250 or $16,500 whichever is lower

= $16,250