Question

Question 4

Snow International Inc. is founded on October 1 and is preparing inventory worksheet for auditor’s review. Due to bad weather conditions, Snow is forced to close down as of October 17, 20x9, and bad weather continues till November 2, 20x9. Therefore, the last day of Snow operation is October 16, 20x9.   Since Snow is selling a new innovative product and there is no market data, thus Snow can assume that there is no inventory valuation impairment in October. Snow accountant prepares some data below:

20x9 Inventory data (Units in thousands)

Sales data:

	Sale
Month	Date	Units	Sale per unit
October	3	300	15.00
October	5	200	15.50
October	12	400	14.00
October	15	400	14.50

Purchase data:

	Purchases
Month	Date	Units	Unit cost
October	2	500	5.20
October	6	100	5.40
October	8	500	7.00
October	10	800	7.50

Required:

1. Assuming that perpetual records are kept in dollars, compute the inventory at October 31, using FIFO and LIFO on perpetual system.                                
2. After the bad weather, Snow has to repair major damages in the building, and repair work is completed in December 1, 20x9, and Snow does not operate for the month of November. When the accountant prepares inventory for November 20x9 closing, she finds out that the net realizable value of the single product now was $6.00 per unit, replacement cost is $7.70 per unit, cost and profit per unit together was $0.45. Does Snow report impairment under LIFO and FIFO in November 20x9? Please show calculations.     

Answer 1

1.

FIFO (Perpetual):

Date	Receipts			Issues			Balance
	Qty	Rate	Amt	Qty	Rate	Amt	Qty	Rate	Amt
2-Oct	500	5.2	2600				500	5.2	2600
3-Oct				300	5.2	1560	200	5.2	1040
5-Oct				200	5.2	1040	-	-	-
6-Oct	100	5.4	540				100	5.4	540
8-Oct	500	7	3500				100	5.4	540
							500	7	3500
10-Oct	800	7.5	6000				100	5.4	540
							500	7	3500
							800	7.5	6000
12-Oct				100	5.4	540	200	7	1400
				300	7	2100	800	7.5	6000
15-Oct				200	7	1400	600	7.5	4500
				200	7.5	1500

LIFO (Perpetual):

Date	Receipts			Issues			Balance
	Qty	Rate	Amt	Qty	Rate	Amt	Qty	Rate	Amt
2-Oct	500	5.2	2600				500	5.2	2600
3-Oct				300	5.2	1560	200	5.2	1040
5-Oct				200	5.2	1040	-	-	-
6-Oct	100	5.4	540				100	5.4	540
8-Oct	500	7	3500				100	5.4	540
							500	7	3500
10-Oct	800	7.5	6000				100	5.4	540
							500	7	3500
							800	7.5	6000
12-Oct				400	7.5	3000	100	5.4	540
							500	7	3500
							400	7.5	3000
15-Oct				400	7.5	3000	100	5.4	540
							500	7	3500

2.

FIFO: Inventory shall be recorded at Lower of COST or NRV (asper GAAP). Accorindly NRV = 6.00 per unit (given). So,

Inventory before write down:-

Qty	Rate	Amt
600	7.5	4500

This is at cost which is higher than the NRV. So write down will be 7.5 - 6 = 1.5 per unit. The journal entry is:

Loss on inventory write down a/c Dr (1.5 * 600)	900
To Inventory a/c		900

LIFO: Inventory shall be recorded at Lower of COST or NRV (asper GAAP). Accoringly NRV = 6.00 per unit (given). So,

Inventory before write down:-

Qty	Rate	Amt
100	5.4	540
500	7	3500

This is at cost which in case of 500 units is higher than the NRV. So write down will be 7.00 - 6 = 1.00 per unit for 500 units. The journal entry is:

Loss on inventory write down a/c Dr (1 * 500)	500
To Inventory a/c		500

(Please comment in case of any query regarding the solution.)