Step $1$: Warehousing Costs

$1.$ Conceptually, in which accounts should Hudson report the warehousing cost related to its wholesale inventory and why?

Answer:

$-$ Warehousing costs should be reported as part of the Cost of Goods Sold $($COGS$)$ or as an operating expense.

$-$ Reason: Warehousing costs are necessary to store inventory until it is sold, thus they are part of the costs incurred to bring the inventory to a saleable condition.

Do you have any questions about why warehousing costs are included in these accounts?

Related Questions:

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Related questions

$$ What is the conventional retail inventory method?How does the lower of cost or market principle work in accounting? $$ What are the effects of freight$-$in costs on inventory valuation?

Full Answer

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Step $2$: Lower of Cost or Market Principle

$2.$ a$.$ Inventory valued at lower of cost or market is an example of which principle in accounting?

Answer:

$-$ Lower of cost or market is an example of the Conservatism Principle.

$-$ Reason: This principle ensures that assets are not overstated and potential losses are recognized promptly. $$

Step $3$: Reporting Wholesale Inventories

$2.$ b$.$ At which amount should Hudson$$s wholesale inventories be reported in the balance sheet?

Answer:

$-$ Hudson's wholesale inventories should be reported at the lower of cost or market value.

$-$ Reason: This aligns with the conservatism principle to avoid overstating inventory value.

Step $4$: Cost$-$to$-$Retail Percentage Calculation

$3.$ In the calculation of the cost$-$to$-$retail percentage used to determine the estimated cost of its ending retail inventory, how should Hudson treat:

$-$ Freight$-$in cost$?$

$-$ Answer: Include freight$-$in costs in the cost side of the cost$-$to$-$retail percentage. $$

$-$ Net markups?

$-$ Answer: Include net markups in the retail side of the cost$-$to$-$retail percentage. $$

$-$ Net markdowns?

$-$ Answer: Exclude net markdowns from the retail side of the cost$-$to$-$retail percentage. $$

Step $5$: Effect of Net Markdowns

$4.$ How does Hudson$$s treatment of net markdowns affect the cost$-$to$-$retail percentage?

Answer:

$-$ Excluding net markdowns increases the cost$-$to$-$retail percentage.

$-$ Reason: It results in a higher estimated cost of ending inventory.

Final Answer:

$-$ Warehousing Costs: Reported as COGS or operating expense.

$-$ Lower of Cost or Market: Conservatism Principle.

$-$ Wholesale Inventories: Report at lower of cost or market.

$-$ Freight$-$in: Include in cost$.$

$-$ Net Markups: Include in retail.

$-$ Net Markdowns: Exclude from retail.

$-$ Effect of Net Markdowns: Increases cost$-$to$-$retail percentage.