Sam’s Lawn Mowers uses a perpetual inventory system. At December 31, the perpetual inventory records indicate the following quantities of a particular mower.

A year-end physical inventory, however, shows only 199 of these lawn mowers on hand.
In its financial statements, Sam’s values its inventories at the lower-of-cost-or-market. At year-end, the per-unit replacement cost of this particular model is $125.
Prepare the journal entries required to adjust the inventory records at year-end assuming that:
a. Sam’s uses:
1. Average cost.
2. Last-in, first-out.
b. Sam’s uses the first-in, first-out method. However, the replacement cost of the lawn mowers at year-end is $90 apiece, rather than the $125 stated originally. Make separate journal entries to record
(1) the shrinkage loss and
(2) the restatement of the inventory at a market value lower than cost. Record the shrinkage loss first.
c. Assume that the company had been experiencing monthly inventory shrinkage of one to four lawn mowers for several months. In response, management placed several hidden security cameras throughout the premises. Within days, an employee was caught on film loading lawnmowers 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 youranswer.

  • CreatedApril 17, 2014
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