Whittier Construction Co, had followed the practice of expensing all materials assigned to a construction job...

Whittier Construction Co, had followed the practice of expensing all materials assigned to a construction job without recognizing any salvage inventory. On december 31, 2012, it was determined that salvage inventory should be valued at $52,000. Of this amount, $29,000 arose during the current year. How does this information affect the financial statements to be prepared at the end of 2012?

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Expert Solution

All the salvage invnetory needs to be evalauated at the year end to show the correct valuation.

Closing inventory affects financial statements in two way:

- It increases the Income side of Income & Expenditure side which in turn increases the income.

- At the same point of time, it is reflected as partof Current Asset under Inventory head in Balance Sheet.

As per the accounting rules, Whittier Construction company will have to account for the salvage value of $52,000. It will be shown as an asset with the company as well. Out of $52,000, $29,000 has arosed this year which means $23,000 is from previous years.

Since the question states that company has not recognised salvage inventory in past and going to strt recognising from now on, it needs to be shown as change in inventotry valuation policy which will be shown as notes to Balance sheet of the whitties Construction. Monetary effect of implementation of new policy for this year and past year will also be stated.

ekkarill92 answered 1 year ago

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