Cost Replacement

Magic Carpets Inc. sells a full line of area rugs, from top quality to bargain basement. Economic conditions have hit the textile industry, and Magic Carpets accountant is concerned that its rug inventory may not worth the amount Magic paid for it. Information about three lines of rugs is found below:

Cost Replacement Cost Sales Price Cost to Sell Number in inventory

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High Flyers $230 $240 $350 $40 80

Midflight 150 120 220 25 125

Under the Radar 100 100 110 20 165

a. Determine market value for each type of rug.

b. Determine lower-of-cost-or-market for each type of rug.

c. Determine if Magic Carpets has suffered a loss of value on its inventory, and if so, what the amount of loss is.

Costello Corporation uses a perpetual inventory system. At the end of the year, the inventory balance reported by its system is $45,270. Costello performs an inventory count and determines that the actual ending inventory is $39,780.

a. Discuss why a company that uses a perpetual inventory system would perform a physica

inventory count.

b. Why might the ending balance in inventory differ between the perpetual inventory system and physical inventory count?

c. Assume that Costello determines that the difference is due to a part of its inventory being damaged when a warehouse worker backed into a shelf with his forklift. What journal entry should Costello make?

d. Assume that Costello believes the difference is due to errors made by its accounting staff. The staff failed to transfer inventory to cost of goods sold when sales were made. Record the journal entry Costello should make in this case.