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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Lower of Cost or Net Realizable Value Rule

Blaedon Co. makes ongoing design refinements to lawnmowers that are produced for it by contractors. Blaedon stores the lawnmowers in its own warehouse and sells them at list price, directly to retailers. Blaedon uses the FIFO inventory method. Approximately two-thirds of new lawnmower sales involve trade-ins. For each used lawnmower traded in and returned to Blaedon, retailers receive a $40 allowance regardless of whether the trade-in was associated with a sale of a 2020 or 2021 model. Blaedon’s net realizable value on a used lawnmower averages $25.

At December 31, 2020, Blaedon’s inventory of new lawnmowers includes both 2020 and 2021 models. When the 2021 model was introduced in September 2020, the list price of the remaining 2020 model lawnmowers was reduced below cost. Blaedon is experiencing rising costs.

Required:

  1. 1. At December 31, 2020, how should Blaedon determine the carrying amounts assigned to its lawnmower inventory of:
    1. a. 2021 models
    2. b. 2020 models
  2. 2. Considering only the 2021 model lawn mower, explain the impact of the FIFO cost flow assumptions on Blaedon’s 2020:
    1. a. income statement amounts
    2. b. balance sheet amounts

1.

To determine

Explain how B estimates the carrying amount of inventory assigned to its lawnmower at December 31, 2020.

Explanation

a.

Company B for its 2021 lawnmowers model should include inventory carrying amounts, all the necessary and reasonable costs. These costs may include the related costs like design costs, purchase price from contractors, freight-in and the warehousing costs.

b.

The carrying amount of Company B’s 2020 lawnmowers model i...

2.

To determine

Describe the effect of the FIFO cost flow assumptions on B’s income statement and balance sheet at 2020.

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