CA8.5 (LO 1, 4) (Cost Determination, LCNRV, Retail Method) Olson ASA, a retailer and wholesaler of brand-name household lighting fixtures, purchases its inventories from various suppliers.

Instructions

a. 1. What criteria should be used to determine which of Olson’s costs are inventoriable?

2. Are Olson’s administrative costs inventoriable? Defend your answer.

b. 1. Olson uses the LCNRV rule for its wholesale inventories. What are the theoretical arguments for that rule?

2. The net realizable value of the inventories is below the original cost. What amount should be used to value the inventories? Why?

c. Olson calculates the estimated cost of its ending inventories held for sale at retail using the conventional retail inventory method. How would Olson treat the beginning inventories and net markdowns in calculating the cost ratio used to determine its ending inventories? Why?