Late in the year, Software City begancarrying WordCrafter, a new word processing software program. AtDecember 31, Software City’s perpetual inventory records includedthe following cost layers in its inventory of WordCrafterprograms:
a. At December 31,Software City takes a physical inventory and finds that all 28units of Word- Crafter are on hand. However, the currentreplacement cost (wholesale price) of this product is only $250 perunit. Prepare the entries to record:
1. This write-down ofthe inventory to the lower-of-cost-or-market at December 31.(Company policy is to charge LCM adjustments of less than $2,000 toCost of Goods Sold and larger amounts to a separate lossaccount.)
2. The cash sale of 15WordCrafter programs on January 9, at a retail price of $350 each.Assume that Software City uses the FIFO flow assumption.
b. Now assume thatthe current replacement cost of the WordCrafter programs is $405each. A physical inventory finds only 25 of these programs on handat December 31. (For this part, return to the original informationand ignore what you did in part a.)
1. Prepare the journalentry to record the shrinkage loss assuming that Software City usesthe FIFO flow assumption.
2. Prepare the journalentry to record the shrinkage loss assuming that Software City usesthe LIFO flow assumption.
3. Which cost flowassumption (FIFO or LIFO) results in the lowest net income for theperiod? Would using this assumption really mean that the company’soperations are less efficient? Explain.