Question

Second case #1:

CRV Corp manufactures small plastic fittings for plumbing applications. They have accepted a new contract to provide a wide range of custom plastic fittings. To service the contract, CRV purchases a new, highly complex plastic injection molding machine. CRV’s fiscal year coincides with the calendar year. The machine is installed and operational as of July 1, 2015.

CRV provides the following data:

1. Purchase price of machine: $275,000

2. Shipping and installation: $ 45,000

3. Training costs: $ 15,000

4. Useful life: 5 years

5. Estimated salvage: $ 12,500

Required:

1. Prepare a depreciation schedule showing Net Book value (beginning and ending), depreciation expense, and accumulated depreciation for the asset. Hint: pay attention to dates of acquisition and fiscal year.

Prepare one schedule for each method:

a. Straight-line

b. Double-declining balance

Excel Format

Year

NBV beg

Factor

Depreciation expense

Accumulated depreciation

NBV ending

2. Qualitative analysis:

CRV Company receives an offer of $159,000 for the machine in December, 2018.

a. What factors should CRV Company consider in determining whether to sell or keep the machine?

b. Evaluate the implication on taxable income under each deprecation method assuming CRV sells the machine at the end of December 2018.

Use $ values to support your support your written narrative.

#2: Inventory valuation:

The operations manager for CRV has asked you to provide a quantitative and qualitative inventory analysis using a sample of purchases as shown below.

The manager has asked for the following:

			Units	Unit cost	Total cost
Beginning inventory	a		1,750	$3.95	$6,913
Purchases	b		2,100	$3.75	$7,875
	c		1,600	$4.10	$6,560
			850	$4.20	$3,570
Sales			4,100 units sold

1. Calculate the $ ending inventory and $ cost of goods sold using each of the following inventory methods:

a. FIFO

b. LIFO

c. Average cost

2. Which inventory method would you recommend for reporting for income tax purposes to minimize taxable income? Why?

3. The company is operating in an inflationary environment. Which method should the company use to maximize inventory valuation? Why?

4. Looking at the purchasing volume versus demand, what guidance would you offer to the operations manager regarding inventory management and cash flow?

All calculations must be indicated via Excel formulas.

Answer 1

(1) Netbook value= Purchase price of machine: + Shipping and installation + Training costs

=$275,000+$45,000+$15,000 =$3,35,000

Useful life: 5 years Estimated salvage: $ 12,500

Depreciation under Straight line method= Book value -scrap value/life of asset

= 335,000-12,500/5 = $64500

Rate of depreciation =(64500/322500)*100 = 20%

Year	NBV beg	Factor	Depreciation expense	Accumulated depreciation	NBV ending
2015	3,35,000	6months	32,250	32,250	3,02,750
2016	3,02,750	yearly	64500	96,750	2,38,250
2017	2,38,250	yearly	64500	1,61,250	1,73,750
2018	173750	yearly	64500	2,25,750	1,09,250
2019	109250	yearly	64500	2,90,250	44,750

Double declining balance

Rate of depreciation = 40%

Year	NBV beg	Factor	Depreciation expense	Accumulated depreciation	NBV ending
2015	3,35,000	6months	67,000	67,000	2,68,000
2016	2,68,000	yearly	107200	1,74,200	1,60,800
2017	1,60,800	yearly	64320	2,38,520	96,480
2018	96,480	yearly	38592	2,77,112	57,888
2019	57,888	yearly	23155.2	3,00,267	34,733

CRV Company receives an offer of $159,000 for the machine in December, 2018.

a.factors should CRV Company consider in determining whether to sell or keep the machine

In 2018 Book value as per straight-line method and double declining, method is less than the amount offered to the company so its better for the company to sell the machine at the offered price

b. Evaluate the implication on taxable income under each deprecation method assuming CRV sells the machine at the end of December 2018.

Taxable income

	Straight line method	Double declining method
Sale price of Machine	$159,000	$159,000
-Book value	$109,250	$57,888
Taxable Income	$49,750	101,112

(2)

	FIFO	LIFO	Average cost
COGS	1750*3.95+2100*3.75+250*4.10=$15,813	850*4.20+1600*4.10+1650*3.75=$16317.5	4100*3.96=$16,236
Closing stock	1350*4.10+850*4.20 = $9,105	450*3.37+1750*3.95=$8429	$24,918-16,236=$8,682

Average cost= total cost /total units = 24918/6300 =3.96

(2)  Inventory method recommend for reporting for income tax purposes to minimize taxable income

In LIFO method cost of goods sold is high, businesses can lower their reported profit levels and minimize income tax income but it is it is strictly banned according to standards of financial reporting as per income tax law of many countries.

.(3) The company is operating in an inflationary environment. Which method should the company use to maximize inventory valuation

During the inflation environment, the cost of goods is higher whereas remaining inventory balance in lower. So thought LIFO method we can report lower profits, which in turn, allows businesses to pay less tax.

4. Looking at the purchasing volume versus demand, what guidance would you offer to the operations manager regarding inventory management and cash flow

Looking at the purchasing volume it seen that purchasing manager purchase small quantity order at a high price, as a result, cost is high for the company. If the company have sufficient working capital recommend to purchase the units in bulk quantity as per Economic order quantity method so that company can enjoy cheaper cost and higher profit.