Jack McDowell, the controller for McDowell Lumber Corporation, has recently hired you as assistant controller.
He wishes to determine your expertise in the area of inventory accounting and therefore asks you to answer the following unrelated questions.
Inst ructions
Write a memo to him that answers each of his questions.
(a) A company is involved in the wholesaling and retailing of automobile tires for foreign cars. Most of the inventory is imported, and it is valued on the company's records at the actual inventory cost plus freight-in. At year end, the warehousing costs are prorated over cost of goods sold and ending inventory. Are warehousing costs considered a product cost or a period cost?
(b) A certain portion of a company's inventory consists of obsolete items. Should obsolete items that are not currently consumed in the production of goods or services to be available for sale be classified as part of inventory?
(c) A company purchases airplanes for sale to others. However, until they are sold, the company charters and services the planes. What is the proper way to report these airplanes in the company's financial statements?
(d) A company wants to buy coal deposits but does not want the financing for the purchase to be reported on its financial statements. The company therefore establishes a trust to acquire the coal deposits. T he company agrees to buy the coal over a certain period of time at specified prices. The trust is able to finance the coal purchase and then pay off the loan when it is paid by the company for the minerals. How should this transaction be reported?