Reference no: EM133136390

Question - Year-End Adjustments; Shrinkage Losses and LCM - Mary's Nursery uses a perpetual inventory system. At December 31, the perpetual inventory records indicate the following quantities of a particular blue spruce tree.

	Quantity	Unit Cost	Total Cost
First purchase (oldest)	130	$25.00	$3,250
Second purchase	120	28.50	3,420
Third purchase	100	39.00	3,900
Total	350		$10,570

A year-end physical inventory, however, shows only 310 of these trees on hand. In its financial statements, Mary's Nursery 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.)

Required -

1. Prepare the journal entries required to adjust the inventory records at year-end, assuming that Mary's Nursery uses (1) Average cost, (2) Last-in, first-out.

b. Prepare the journal entries required to adjust the inventory records at year-end, assuming that Mary's Nursery 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].