In: Accounting
Whispering 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: | 222 | $ | 444 | $ | 98,568 | |||||||
Purchases: | ||||||||||||
March 10 | 555 | $ | 500 | $ | 277,500 | |||||||
March 20 | 444 | $ | 527 | $ | 233,988 | |||||||
March 30 | 333 | $ | 555 | $ | 184,815 | |||||||
Sales: | ||||||||||||
March 15 | 555 | $ | 599 | $ | 332,445 | |||||||
March 25 | 444 | $ | 633 | $ | 281,052 | |||||||
Inventory at March 31: | 555 | |||||||||||
Commercial Pumps | ||||||||||||
Inventory at Feb. 28: | 666 | $ | 888 | $ | 591,408 | |||||||
Purchases: | ||||||||||||
March 3 | 666 | $ | 999 | $ | 665,334 | |||||||
March 12 | 333 | $ | 1,055 | $ | 351,315 | |||||||
March 21 | 555 | $ | 1,110 | $ | 616,050 | |||||||
Sales: | ||||||||||||
March 18 | 999 | $ | 1,199 | $ | 1,197,801 | |||||||
March 29 | 666 | $ | 1,265 | $ | 842,490 | |||||||
Inventory at March 31: |
555 |
In addition to the above
information, due to a downturn in the economy that has hit
Whispering’s commercial customers especially hard, Whispering
expects commercial pump prices from March 31 onward to be
considerably different (and lower) than at the beginning of and
during March. Whispering has developed the following additional
information.
The normal profit margin is 16.67% of cost. Whispering uses the FIFO accounting method. |
a) Determine the dollar amount that Whispering should report on its March 31 balance sheet for inventory. Assume Whispering applies lower-of-cost-or-net realizable value at the individual product level.
Total amount of inventory | $______________ |
b) Determine the dollar amount that Whispering should report on
its March 31 balance sheet for inventory. Assume Whispering applies
lower-of-cost-or-market at the major category level. Whispering
places both commercial and residential pumps into the same (and
only) category.
Total amount of inventory | $______________ |
a)
Whispering Company uses FIFO method to value its inventory
For Residential Pumps Inventory at March 31 is 555 units, since FIFO is used so the inventory of 555 units must be from the last purchase of March 30 (333 units) and from purchase of March 20 (555-333=222)
Inventory cost of Residential Pumps at March 31= (333 units * $555) + (222 units * $ 527) = $ 301,809
For Commercial Pumps Inventory at March 31 is 555 units, since FIFO is used so the inventory of 555 units must be from the last purchase of March 21
Inventory cost of Commercial Pumps at March 31= 555 units * $ 1,110 = $ 616,050
Net realizable value (per unit) for Residential Pumps at March 31= $ 644
Net realizable value for 555 units Residential Pumps at March 31= $ 644 * 555 = $ 357,420
Net realizable value (per unit) for Commercial Pumps at March 31= $ 999
Net realizable value for 555 units of Commercial Pumps at March 31= $ 999 * 555 = $ 554,445
Inventory to be valued at lower-of-cost-or-net realizable value at the individual product level so value of inventory will be;
Residential Pumps = $ 301,809 ( as cost is lower than net realizable value)
Commercial Pumps= $ 554,445 ( as net realizable values is lower than cost)
Total amount of inventory = $ 301,809 + $ 554,445 = $ 856,254
b) If Whispering places both commercial and residential pumps into the same (and only) category and applies lower-of-cost-or-market at the major category level then inventory valuation will be as under
Values for both the pumps will be combined and will then be considered
Inventory cost for Pump category at March 31= $ 301,809 + $ 616,050 = $ 917,859
Net realizable value Pump category at March 31= $ 357,420 + $ 554,445 = $ 911,865
Inventory to be valued at lower-of-cost-or-net realizable value at the category level so value of inventory for Pump category will be $ 911,865 (as net realizable values is lower than cost)
Total amount of inventory = $ 911,865