Question

ABC Company sells two types of air conditioner systems – one for commercial use and one for residential use. The following inventory data was collected by the staff in the office of the controller for the first month of the company’s fiscal year.

Commercial Air Conditioner Systems:
			Qty	Unit Cost	Total Cost	Unit Selling Price	Total Selling Price
	12/31/2017	Balance	600	800	480,000
	1/3/2018	Purchase	600	900	540,000
	1/12/2018	Purchase	300	950	285,000
	1/18/2018	Sale	(900)			1,080	972,000
	1/21/2018	Purchase	500	1,000	500,000
	1/29/2018	Sale	(600)			1,140	684,000
	1/31/2018		500		1,805,000		1,656,000
Residential Air Conditioner Systems:
			Qty	Unit Cost	Total Cost	Unit Selling Price	Total Selling Price
	12/31/2017	Balance	200	400	80,000
	1/10/2018	Purchase	500	450	225,000
	1/15/2018	Sale	(500)			540	270,000
	1/20/2018	Purchase	400	475	190,000
	1/25/2018	Sale	(400)			570	228,000
	1/30/2018	Purchase	300	500	150,000
			500		645,000		498,000

The controller expects that the market for the commercial air conditioner systems market will decline in upcoming months, putting a downward pressure on future sales and the unit selling price as well.

The controller’s staff developed the following estimates:

Commercial Air Conditioner Systems, Net Realizable Value (per unit) $900

Residential Air Conditioner Systems, Net Realizable Value (per unit)                   $580

The normal profit margin is 16.67% of cost.

The company accounts for inventory using the FIFO cost allocation method and the perpetual system.

Commercial Air Conditioner Systems:

Based on the beginning balance, purchases and sales:

Calculate the ending inventory value at 1/30/18:

Calculate the COGS for the month ended 1/30/18:

        Note: BI + P – COGS = EI is the algebraic framework that can be used to calculate COGS.

Residential Air Conditioner Systems:

Based on the beginning balance, purchases and sales:

Calculate the ending inventory value at 1/30/18:

Calculate the COGS for the month ended 1/30/18:

        Note: BI + P – COGS = EI is the algebraic framework that can be used to calculate COGS.

Determine the dollar amount that management should report on the 1/31/18 balance sheet, after the lower of cost or net realizable value has been applied at the individual product level:

Determine the dollar amount that management should report on the 1/31/18 balance sheet, after the lower of cost or net realizable value has been applied at the major categories level, that is, commercial and residential air conditioning systems are aggregated into a single group:

Using the attached T-account template, prepare the entry or entries required to recognize a write-down of inventory.

Answer 1

Commecrial Airconditioners

		Units	Value
Ending Inventory		500	500000
Cost of goods sold		1500	1305000

Working:

		Units	unit cost	Value
Beginning Inventory		600	800	480000
Purchases
	1/3/2018	600	900	540000
	1/12/2018	300	950	285000
	1/21/2018	500	1000	500000
Total Purchase		1400		1325000
Total Inventory		2000		1805000
Sales
	1/18/2018	900
	1/29/2018	600
Total Sales		1500
Ending Inventory		500	1000	500000
Cost of goods sold		1500		1305000

Residential Air Conditioners

		Units	Value
Ending Inventory		500	245000
Cost of goods sold		900	400000

Working:

		Units	unit cost	Value
Beginning Inventory		200	400	80000
Purchases
	1/10/2018	500	450	225000
	1/20/2018	400	475	190000
	1/30/2018	300	500	150000
Total Purchase		1200		565000
Total Inventory		1400		645000
Sales
	1/15/2018	500
	1/25/2018	400
Total Sales		900
Ending Inventory		300	500	150000
		200	475	95000
		500		245000
Cost of goods sold		900		400000

LCNRV:

Commercial Airconditioers			450000
Residential Airconditioners			245000

Working:

			Cost			Net realisable Value			LCNRV
			Units	Unit cost	Value	Units	Unit cost	Value
Commercial Airconditioers			500		500000	500	900	450000	450000
Residential Airconditioners			500		245000	500	580	290000	245000

Air Conditioners as a group:

		Cost	NRV	LCNRV
Air conditioners		745000	740000	740000