Question

In: Accounting

Whispering Company sells two types of pumps. One is large and is for commercial use. The...

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.
Commercial Pumps Residential Pumps
Net realizable value (per unit) $999 $644

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 $______________

Solutions

Expert Solution

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


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