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Intermediate Accounting (Kieso)
Found in: Page 474

Short Answer

Question: In some instances, accounting principles require a departure from valuing inventories at cost alone. Determine the proper unit inventory price in the following cases, under the lower-of-cost-or-market rule. Cases 1 2 3 4 5 Cost $15.90 $16.10 $15.90 $15.90 $15.90 Net realizable value 14.50 19.20 15.20 10.40 16.40 Net realizable value less normal profit 12.80 17.60 13.75 8.80 14.80 Market (replacement cost) 14.80 17.20 12.80 9.70 16.80

The inventory price for Case 1 equals $14.50, Case 2 equals $16.10, Case 3 equals $13.75, case 4 equals $9.70, and Case 5 equals $15.90.

See the step by step solution

Step by Step Solution

Step-by-step-solutionStep1

The designated market value of the inventory is determined as follows:

Cases

Net realizable value

Net realizable value less normal profit

Replacement cost

Designated market value

Case 1

$14.50

$12.80

$14.80

$14.50

Case 2

19.20

17.60

17.20

17.60

Case 3

15.20

13.75

12.80

13.75

Case 4

10.40

8.80

9.70

9.70

Case 5

$16.40

$14.80

$16.80

$16.40

Step 2:

The inventory price as per the lower-of-cost-or-market-value method is determined as follows:

Cases

Cost

Designated market value

Lower-of-cost-or-market-value

Case 1

$15.90

$14.50

$14.50

Case 2

16.10

17.60

16.10

Case 3

15.90

13.75

13.75

Case 4

15.90

9.70

9.70

Case 5

$15.90

$16.40

$15.90

Most popular questions for Business-studies Textbooks

Accounting, Analysis, and Principles Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residential swimming pools. The following inventory data is available for the month of March. Units Price per Unit Total Residential Pumps Inventory at Feb. 28: 200 $ 400 $ 80,000 Purchases: March 10 500 $ 450 $225,000 March 20 400 $ 475 $190,000 March 30 300 $ 500 $150,000 Sales: March 15 500 $ 540 $270,000 March 25 400 $ 570 $228,000 Inventory at March 31: 500 Commercial Pumps Inventory at Feb. 28: 600 $ 800 $480,000 Purchases: March 3 600 $ 900 $540,000 March 12 300 $ 950 $285,000 March 21 500 $1,000 $500,000 Sales: March 18 900 $1,080 $972,000 March 29 600 $1,140 $684,000 Inventory at March 31: 500 In addition to the above information, due to a downturn in the economy that has hit Englehart’s commercial customers especially hard, Englehart expects commercial pump prices from March 31 onward to be considerably different (and lower) than at the beginning of and during March. Englehart has developed the following additional information. Commercial Pumps Residential Pumps Net realizable value (per unit) $900 $580 The normal profit margin is 16.67% of cost. Englehart uses the FIFO accounting method. Accounting (a) Determine the dollar amount that Englehart should report on its March 31 balance sheet for inventory. Assume Englehart applies lower-of-cost-or-net realizable value at the individual product level. (b) Repeat part (a) but assume Englehart applies lower-of-cost-or-net realizable value at the major categories level. Englehart places both commercial and residential pumps into the same (and only) category. Analysis Which of the two approaches above (individual product level or major categories) for applying LCNRV do you think gives the financial statement reader better information? Principles Assume that during April, the net realizable value of commercial pumps rebounds to $1,050. (a) Briefly describe how Englehart will report in its April financial statements the inventory remaining from March 31. (b) Briefly describe the conceptual trade-offs inherent in the accounting in part (a).

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