Problem 9–18 (concluded)
Requirement 3
a. $11.50
If market price on purchase date has not declined from year-end price, the
purchase is recorded at the year-end market price.
b. $10.00
If market price on purchase date declines from year-end price, the purchase is
recorded at market price.
Purchases ($10.00 × 20,000 units)………………………………… 200,000
Loss on purchase commitment
Judgment Case 9–1
1. Hudson should account for the warehousing costs related to its wholesale
inventories as part of inventory. All reasonable and necessary costs of preparing
2. a. The lower of cost or market (LCM) rule produces a more realistic
estimate of future cash flows to be realized from assets, which is consistent with
CASES
b. Hudson’s wholesale inventories should be reported in the balance sheet
at market.
3. Hudson’s freight-in costs should be included only in the cost amounts to
determine the cost-to-retail percentage. Hudson’s net markups should be included
4. By not deducting net markdowns from the retail amounts to determine the
Communication Case 9–2
Arguments for the lower of cost or net realizable (LCNRV) approach versus
historical cost should focus on the loss of utility concept. A departure from cost is
warranted when the utility of an asset (its probable future economic benefits) is no
A difference between the LCNRV approach and a market value approach is
that a market value approach would recognize income as market value increases
It is important that each student actively participate in the process of arriving
at a solution. Domination by one or two individuals should be discouraged.
Integrating Case 9–3
Requirement 1
YORK CO.
Schedule of Cost of Goods Sold
For the Year Ended December 31, 2018
Beginning inventory $ 53,900
Add: Purchases 380,600
YORK CO.
Supporting Schedule of Ending Inventory
December 31, 2018
Inventory at cost (FIFO):
Cost Total
Units per unit cost
Purchases, quarter ended, June 30, 2,000$7.90 $ 15,800
Inventory at net realizable value:
Requirement 2
Inventory should be valued at the lower of cost or net realizable value.
In this situation, because inventory valued at net realizable value ($176,000) is
Judgment Case 9–4
1. a. The advantages of using the dollar-value LIFO method are to reduce the
b. The application of dollar-value LIFO is based on dollars of inventory,
2. a. Huddell’s net markups should be included only in the retail amounts
b. By not deducting net markdowns from the retail amounts to determine
the cost-to-retail percentage, Huddell produces a lower cost-to-retail percentage
Communication Case 9–5
Suggested Grading Concepts and Grading Scheme:
Content (70%)
_______ 30 Describes the method.
______ Determining ending inventory at retail.
Multiply ending inventory at retail by the cost
percentage.
______ Markups and markdowns.
_______ 10 Discusses the conditions that may distort results.
______ Possible inaccurate cost percentage.
Does not explicitly consider theft, breakage, etc.
Writing (30%)
_______ 6 Terminology and tone appropriate to the audience of a
company
president.
_______ 12 Organization permits ease of understanding.
______ Introduction that states purpose.
______ Paragraphs that separate main points.
______
_______ 30 points
Analysis Case 9–6
For changes not involving LIFO or changes from the LIFO method to another,
the event is accounted for as a normal change in accounting principle. In general,
we report voluntary changes in accounting principles retrospectively. This means
revising all previous periods’ financial statements as if the new method were used
in those periods. In other words, for each year in the comparative statements
The advantage of retrospective application is to enhance comparability of the
Consistency and comparability suggest that accounting choices once made
should be consistently followed from year to year. So, any change requires that the
new method be justified as clearly more appropriate. In the first set of financial
When a company changes to the LIFO inventory method from any other
method, it usually is impracticable to calculate the cumulative effect of the change.
Revising balances in prior years would require knowing what those balances
Real World Case 9–7
We report most voluntary changes in accounting principles retrospectively.
This means recasting all previous periods’ financial statements as if the new
GAAP require retrospective application to enhance comparability of the