On December 1, 2015, Athabasca Building Supplies Ltd. (ABS) purchased Dunbar Doors Inc. (DDI) from Kevin Osepchuk. This is the first time that ABS has operated in the door business and the company welcomed the opportunity to sell doors to existing customers. When DDI was acquired, ABS also agreed to take over a DDI loan with the Royal Dominion Bank. The loan has a limit equal to 80% of the Merchandise Inventory account balance at year end pertaining to doors. The loan has been held with that bank for a number of years and is currently at $200,000. The bank requires verification of the inventory balance at the end of every year. As part of the deal to acquire DDI, Kevin agreed to serve as the new manager of ABS's Door Division and to receive a bonus equal to 10% of the operating profit of that division.

You are a student who is helping ABS prepare its year-end financial statements. At the inventory count on December 31, you noticed that the employees counting the inventory at that time found that there were 800 doors on hand. ABS uses the perpetual average cost method.

In looking at the company's inventory records, you discover that 2,600 doors were purchased from DDI on December 1 at a cost of $310 each. Later in the month, 800 doors were purchased from a U.S. supplier at CAD$240 each and shortly after, 600 doors were purchased from China at CAD$190 each. Finally, on the last day of the year, 100 more doors were purchased at CAD$200 but these were in transit on December 31 with terms FOB destination. The only sale for the month occurred when 3,200 doors were sold at $400 each to a contractor developing the largest condominium project in the area. All sales occurred after the purchase of the doors from China. Kevin supervised the count and determined the cost of the ending inventory. He calculated the ending inventory to be 900 doors at $310 each. He added 100 doors to the amount counted because of the doors in transit. Kevin earned a bonus of $16,700 in December.

Instructions

(a) Determine the cost of goods available for sale in December.

(b) Determine the cost of ending inventory at December 31.

(c) Based on the above, should there be an adjustment to Kevin's bonus?

(d) Does this adjustment have any other implications?

(e) What do you think about Kevin's actions?

(f) Assume that the decrease in the cost of doors from China is indicative of future trends in the industry and that the cost savings will be passed along to customers through price reductions that will decrease the selling price of a door to $240. Will that have any impact on the December financial statements?