Mario’s Nursery uses a perpetual inventory system. At December 31, the perpetual inventory records indicate the following quantities of a particular blue spruce tree:
A year-end physical inventory, however, shows only 310 of these trees on hand.
In its financial statements, Mario’s values its inventories at the lower-of-cost-or-market. At year-end, the per-unit replacement cost of this tree is $40. (Use $3,500 as the “level of materiality” in deciding whether to debit losses to Cost of Goods Sold or to a separate loss account.)
Prepare the journal entries required to adjust the inventory records at year-end, assuming that:
a. Mario’s uses:
1. Average cost.
2. Last-in, first-out.
b. Mario’s uses the first-in, first-out method. However, the replacement cost of the trees at year-end is $20 apiece, rather than the $40 stated originally. [Make separate journal entries to record (1) the shrinkage losses and (2) the restatement of the inventory at a market value lower than cost. Record the shrinkage losses first.]
c. Assume that the company had been experiencing monthly inventory shrinkage of 30 to 60 trees for several months. In response, management placed several hidden security cameras throughout the premises. Within days, an employee was caught on film loading potted trees into his pickup truck. The employee’s attorney asked that the case be dropped because the company had “unethically used a hidden camera to entrap his client.” Do you agree with the attorney? Defend your answer.