Question

Now that operations for outdoor clinics and TEAM events are running smoothly, Suzie thinks of another area for business expansion. She notices that a few clinic participants wear multiuse (MU) watches. Beyond the normal timekeeping features of most watches, MU watches are able to report temperature, altitude, and barometric pressure. MU watches are waterproof, so moisture from kayaking, rain, fishing, or even diving up to 100 feet won’t damage them. Suzie decides to have MU watches available for sale at the start of each clinic. The following transactions relate to purchases and sales of watches during the second half of 2022. All watches are sold for $498 each.

Jul.		17		Purchased 48 watches for $7,104 ($148 per watch) on account.
Jul.		31		Sold 38 watches for $18,924 cash.
Aug.		12		Purchased 38 watches for $6,004 ($158 per watch) cash.
Aug.		22		Sold 28 watches for $13,944 on account.
Sep.		19		Paid for watches purchased on July 17.
Sep.		27		Receive cash of $16,200 for watches sold on account on August 22.
Oct.		27		Purchased 78 watches for $13,104 ($168 per watch) cash.
Nov.		20		Sold 88 watches for $43,824 cash.
Dec.		4		Purchased 116 watches for $20,648 ($178 per watch) on account.
Dec.		8		Sold 38 watches for $18,924 on account.

Required:

1-a. Calculate sales revenue, cost of goods sold, and ending inventory as of December 31, 2022, assuming Suzie uses FIFO to account for inventory.

1-b. Prepare the gross profit section of a partial income statement for transactions related to MU watches.

2. Late in December, the next generation of multiuse (MU II) watches is released. In addition to all of the features of the MU watch, the MU II watches are equipped with a global positioning system (GPS) and have the ability to download and play songs and videos off the Internet. The demand for the original MU watches is greatly reduced. As of December 31, the estimated net realizable value of MU watches is only $98 per watch.

a. Record any necessary adjustment on December 31, 2022, related to this information

Answer 1

Answer to 2a.

Net Realizable Value (NRV) of MU watch is $ 98. Also the inventory contains the MU watch costing $ 178 from its latest purchases. Following the rule of LCNRV (Lower of cost or NRV) closing stock of MU watches needs to be bring down to the NRV i.e $ 98 per unit.

Therefore new valuation of closing stock is $ 8,624 ($ 98 x 88 units)

Reduction of Closing inventory can be recorded in two ways:-

	Debit	Credit
1. COGS Method
COGS	$ 7,040	-
Inventory	-	$ 7,040
2. Loss Method
Loss due to decline of inventory to net realizable value	$ 7,040	-
Inventory	-	$ 7,040

From the above methods, Loss method presentation is preferable because it clearly discloses the loss resulting from a decline in inventory net realizable values.

Also, instead of crediting the Inventory account, companies generally uses allowance account as "Allowance to Reduce Inventory to Net Realizable Value".

Use of the allowance account results in reporting both the cost and the net realizable value of the inventory.

The use of the allowance under the COGS or Loss method permits both the income statement and the statement of financial position to reflect inventory measured at $15,664, although the statement of financial position shows a net amount of $8,624.