Exercise $8\mathrm{.}6($Algo$)$ Inventory Write$-$Downs $($LO$8-3)$

Late in the year, Software City began carrying WordCrafter, a new word processing software program. At December $31,$ Software City$$s perpetual inventory records included the following cost layers in its inventory of WordCrafter programs.

Purchase Date Quantity Unit Cost Total Cost

Nov. $1412$ $ $390$ $ $4,680$

Dec. $1230$ $ $3309,900$

Total available for sale at Dec. $3142$ $ $14,580$

a$.$ At December $31,$ Software City takes a physical inventory and finds that all $42$ units of WordCrafter are on hand. However, the current replacement cost $($wholesale price$)$ of this product is only $$260$ per unit.

$1.$ Prepare the entries to record this write$-$down of the inventory to the lower$-$of$-$cost$-$or$-$market at December $31.($Company policy is to charge LCM adjustments of less than $$2,000$ to Cost of Goods Sold and larger amounts to a separate loss account.$)$

$2.$ Prepare the entries to record the cash sale of $36$ WordCrafter programs on January $9,$ at a retail price of $$370$ each. Assume that Software City uses the FIFO flow assumption.

b$.$ Now assume that the current replacement cost of the WordCrafter programs is $$480$ each. A physical inventory finds only $41$ of these programs on hand at December $31.($For this part, return to the original information and ignore what you did in part a$.)$

$1.$ Prepare the journal entry to record the shrinkage loss assuming that Software City uses the FIFO flow assumption.

$2.$ Prepare the journal entry to record the shrinkage loss assuming that Software City uses the LIFO flow assumption.