Concept explainers
Inventory Write-Down and Recovery
Cub Company, a calendar−year entity, had 2,100 geothermal healing pumps in its beginning inventory for 20X1. On December 31, 20X0, the heating pumps had been adjusted down to $850 per unit from an actual cost of $920 per unit. It was the lower of cost or market. Cub purchased no additional units during 20X1. The following additional information is provided for 20X1:
Required
Respond to the following two independent as requested.
- Case 1: The company does not have sufficient experience with the seasonal market for geo thermal pumps and assumes that any reductions in market value during the year will he permanent.( (1) Determine the cost of goods sold for each quarter.
(2) Verify the total cost of goods sold by computing annual cost of goods sold on a lower-of-cost-or-market bush.
b. Case 2: The company has prior experience with the seasonal market for geothermal pumps and expects that any reductions in market value during the year will be only temporary andwill recover by year end.
(1) Determine the cost of goods sold for each quarter.
(2) Verily the total cost of goods sold by computing annual cost of goods sold on a lower-of-cost-or-market basic.
a
Introduction: The losses in inventory due to a decrease in market value is recognized in the period of decline, and recoveries in the subsequent period must also be recognized as recoveries of losses in the prior period of the fiscal year, any gain in market value is not recognized. In addition to that, the temporary decline in market price which is expected to be recovered is also not recognized.
The cost of goods sold in each quarter and verify total cost of goods sold by computation of annual cost of goods sold on a lower of cost or market value basis when company does not have prior experience with seasonal market.
Answer to Problem 13.5E
Cost of goods sold quarterly
- $348,500
- $246,500
- $111,000
- $323,000
Annual basis $1,029,000
Explanation of Solution
Case 1 Market reduction
Qtr. | Cost of units sold | Adjustment +/(-) | Cost of goods sold |
1 | Write down to $840 | $348,500 | |
2 | Recovery to $850 | $246,500 | |
3 | Write down to $830 | $111,000 | |
4 | Recovery to $840 | $323,000 | |
Total | $1,029,000 | ||
Annual basis | Write down to $840 | $1,029,000 |
b
Introduction: The losses in inventory due to a decrease in market value is recognized in the period of decline, and recoveries in the subsequent period must also be recognized as recoveries of losses in the prior period of the fiscal year, any gain in market value is not recognized. In addition to that, the temporary decline in market price which is expected to be recovered is also not recognized.
The cost of goods sold in each quarter and verify total cost of goods sold by computation of annual cost of goods sold on a lower of cost or market value basis when company have prior experience with seasonal market.
Answer to Problem 13.5E
Cost of goods sold quarterly
1. $340,000
2. $255,000
3. $85,000
4. $340,000
Annual basis $1,029,000
Explanation of Solution
Case 2 Market reduction
Qtr. | Cost of units sold | Adjustment +/(-) | Cost of goods sold |
1 | $340,000 | ||
2 | $255,000 | ||
3 | $85,000 | ||
4 | Write down to $840 | $340,000 | |
Total | $1,020,000 | ||
Annual basis | Write down to $840
| $1,029,000 |
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Chapter 13 Solutions
Advanced Financial Accounting
- Inventory Costing Methods On June 1, Welding Products Company had a beginning inventory of 210 cases of welding rods that had been purchased for S88 per case. Welding Products purchased 1,150 cases at a cost of $95 per case on June 3. On June 19, the company purchased another 950 cases at a cost of $112 per case. Sales data for the welding rods are: Welding Products uses a perpetual inventory system, and the sales price of the welding rods was $130 per case. Required: 1. Compute the cost of ending inventory and cost of goods sold using the FIFO method. 2. Compute the cost of ending inventory and cost of goods sold using the LIFO method. 3. Compute the cost of ending inventory and cost of goods sold using the average cost method. ( Note: Use four decimal places for per-unit calculations and round all other numbers to the nearest dollar.) 4. CONCEPTUAL CONNECTION Assume that operating expenses are $21,600 and Welding Products has a 30% tax rate. How much will the cash paid for income taxes differ among the three inventory methods? 5. CONCEPTUAL CONNECTION Compute Welding Products' gross profit ratio (rounded to two decimal places) and inventory turnover ratio (rounded to three decimal places) under each of the three inventory costing methods. How would the choice of inventory costing method affect these ratios?arrow_forwardLower of Cost or Market Garcia Company uses FIFO, and its inventory at the end of the year was recorded in the accounting records at $17,800. Due to technological changes in the market, Garcia would be able to replace its inventory for $16,500. Required: 1. Using the lower of cost or market method, what amount should Garcia report for inventory on its balance sheet at the end of the year? 2. Prepare the journal entry required to value the inventory at the lower of cost or market.arrow_forwardShaquille Corporation began the current year with inventory of 50,000. During the year, its purchases totaled 110,000. Shaquille paid freight charges of 8,500 for those purchases. At the end of the year, Shaquille had inventory of 47,800. Prepare a schedule to determine Shaquille's cost of goods sold for the current year.arrow_forward
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