Chapter 13, Problem 13.4E

LIFO Liquidation During July, Laesch Company, which uses a perpetual inventory system, sold 1,240 units from its LIFO− based inventory,which had originally cost $18 per unit. The replacement cost is expected tobe $27 per unit.

Required
Respond to ¡he following two independent scenarios as requested.

1. Case 1: In July, the company is planning to reduce its inventory and expects to replace only 900 of these units by December 31, the end of its fiscal year.

(1) Prepare the entry in July to record the sale of the 1,240 units.
(2) Discuss the proper financial statement presentation of the valuation account related tothe 1,240 units sold.
(3) Prepare the entry for the replacement of the 900 units in September at an actual costof $31 per unit.
b. Case 2: In July, the company is planning to reduce its inventory and expects to replace only 300 of its units by December 31, the end of its fiscal year.
(1) Prepare the entry in July to record the sale of ¡he 1,240 units.
(2) In December, the company decided not to replace any of the 1,240 units, Prepare the entry required on December 31 to eliminate any valuation accounts related to theinventory that will not he replaced.

To determine

Introduction: The cost of goods sold is the largest single expense on the interim income statement. ASC 270 and ASC 740 permit the following modification to the general rule of direct allocation.

1. Estimated gross profit rates can be used to compute the interim cost of goods sold.
2. When a company sells the most recently acquired inventory first is termed as LIFO liquidations .
3. Lower-of-cost-or market valuations use lower of the cost or market value for valuation.
4. Standard cost system a standard cost is determined at the end of the year and inventory is valued using it.

The entry to record sales of 1,240 units, financial statement presentation and replacement of 900 units in September at actual cost.

Explanation of Solution

Particulars	Debit $	Credit $
Entry for sale of 1,240 units of inventory in July
Cost of goods sold	30,420
Inventory		22,320
Excess of replacement cost over LIFO cost of inventory liquidated		8,100
(Sale of 1,240 units of inventory in July recorded)
Entry for the replacement of the 900 units at an actual cost of $31
Inventory	16,200
Excess of replacement cost over LIFO cost of inventory	81,00
Cost of goods sold	3,600
Accounts payable		27,900
(Replacement of the 900 units recorded)

1. Sale of inventory for recorded

$\$22,320=1,240units\times \$18LIFOCOST$

Inventory replacement cost $\$8,100=900units\times 9$ replacement cost is $27 - $18

2. The account, excess of replacement cost over LIFO cost of inventory liquidation is often reported on the quarterly balance sheets as a current liability. Some companies report this as a reduction of inventory. The account is not reported in annual balance sheet because the LIFO inventory at the year-end is based on the actual units remaining in inventory at the year end.
3. Replacement of 900 units recorded

$\$16,200=900units\times \$18$

$3,600=900units\times \$4\text{}$ Difference between $31 actual and $27 estimated replacement cost

Cost of replacement $\$27,900=900units\times \$31$

To determine

Introduction:The cost of goods sold is the largest single expense on the interim income statement. ASC 270 and ASC 740 permit the following modification to the general rule of direct allocation.

1. Estimated gross profit rates can be used to compute the interim cost of goods sold.
2. When a company sells the most recently acquired inventory first is termed as LIFO liquidations .
3. Lower-of-cost-or market valuations use lower of the cost or market value for valuation.
4. Standard cost system a standard cost is determined at the end of the year and inventory is valued using it.

theeffect if company is planning to reduce its inventory and expects to replace only 300 units by December 31, the end of fiscal year.

Explanation of Solution

Particulars	Debit $	Credit $
Entry for sale of 1,240 units of inventory in July
Cost of goods sold	25,020
Inventory		22,320
Excess of replacement cost over LIFO cost of inventory Liquidated		2,700
(Sale of 1,240 units in July recorded)
Entry for the elimination of valuation related to inventory replacement previously
Excess of replacement cost over LIFO cost of inventory liquidation	2,700
Cost of goods sold		2,700
(Elimination of valuation related to inventory replacement)

1. Sale of inventory recorded in the month of July

$\$22,320=1,240units\times \$18$

$\$2,700=300units\times \$9$ ($27 expected replacement cost less $18 LIFO cost)

2. Elimination of remaining balance in LIFO account because company did not replace LIFO inventory sold in July.