Exercise 8.6 (Algo) Inventory Write-Downs (LO8-3)

Late in the year, Software City began carrying WordCrafter, a new word processing software program. At December 31, Software Citys perpetual inventory records included the following cost layers in its inventory of WordCrafter programs:

Purchase Date	Quantity	Unit Cost	Total Cost
November 14	14	$ 420	$ 5,880
December 12	26	320	8,320
Total available for sale at December 31	40		$ 14,200

Required:

1. At December 31, Software City takes a physical inventory and finds that all 40 units of WordCrafter are on hand. However, the current replacement cost (wholesale price) of this product is only $250 per unit.
   1. Prepare the entries to record the write-down of this inventory to the lower-of-cost-or-market at December 31. (Company policy is to charge LCM adjustments of less than $2,000 to Cost of Goods Sold and larger amounts to a separate loss account.)
   2. Prepare the entries to record the cash sale of 34 WordCrafter programs on January 9, at a retail price of $310 each. Assume that Software City uses the FIFO flow assumption.
2. Now assume that the current replacement cost of the WordCrafter programs is $380 each. A physical inventory finds only 35 of these programs on hand at December 31. (For this part, return to the original information and ignore what you did in part a.)
   1. Prepare the journal entry to record the shrinkage loss assuming that Software City uses the FIFO flow assumption.
   2. Prepare the journal entry to record the shrinkage loss assuming that Software City uses the LIFO flow assumption.