At the beginning of the business year, 1,300 barrels of petroleum were in the tank and measured at $77/barrel. The physical inventory (stocktaking) at year-end shows that there are 1,200 (1.200) barrels on hand (in stock) on 12/31/ X1 (31.12.20X1). This is Kurts first year with the company, and management has instructed him to learn about the financial reporting requirements associated with inventory for both U.S. and German GAAP.

Q1: What cost flow assumption options exist for measuring cost of goods sold and ending inventory under U.S. GAAP? Provide a reference to the appropriate Accounting Standards Codification (ASC), a short description of each method as would be applied to this case, and whether there is enough information to use the method.

Q2: Assume the U.S. parent company uses LIFO for the consolidated financial statements. What will the ending inventory values be according to U.S. GAAP (before any potential impairments)? Explain your calculations.

As they observed the price decreases for petroleum during the year, some of PlasTechs larger customers began to demand price concessions during quarterly price negotiation meetings. In addition, throughout the year there was a general decrease in demand for plastic materials, resulting in fierce competition within the chemical industry. Therefore, the sales department felt they had no choice but to lower prices. By year-end, the companys sales prices for their most important products had decreased by 15 percent. All of the companys products remain profitable; however, the companys profit margins are much reduced.

On January 18, Kurt met with Rosalyn about the preparation of the financial statements, which had begun on January 11.

Rosalyn: Hi Kurt. The CFO of PlasTech International, Inc. wants to know as soon as possible if we will have any unexpected expenses or losses. As we start to pull together the financial statements, I would like to get a feel for where we are with respect to impairments. Does it look like we will have any issues? I am particularly concerned about our inventory, given the implications arising from the decline in petroleum prices.

Kurt: Hello Rosalyn. I had thought about that issue but I have not had a chance to get my hands around that yet. I will sit down this afternoon and take a hard look at it. I should be able to give you a general idea of what to expect by tomorrow morning. Anything I need to know to complete this task? Do you think we are facing any overstocking or spoilage issues with respect to the petroleum inventories?

Rosalyn: Great questions Kurt. To your first question, we apply the lower of cost or market rule at the item level (i.e., to each item in inventory) and costs of completion and disposal are negligible and assumed to be $0 while required transportation costs are $2/barrel, Furthermore, if we were to sell the petroleum in the market, we would sell to other small purchasers who would pay us a 15 percent premium above the market price. Last, our normal profit margin is 17 percent. With respect to your second question, we should be able to consume all of the petroleum on hand within a normal quarters worth of production, and petroleum is not perishableat least, not over our relevant time horizon; therefore, I do not believe that we currently have any overstocking or spoilage issues.

Kurt: Okay, thanks! Ill move this project to the top of my To Do list.

Kurt immediately went back to his office to evaluate whether inventories were impaired, and if so, how much impairment loss the company would have to recognize.

Q3: Is an inventory impairment necessary according to U.S. GAAP? If so, how much impairment loss should PlasTech Germany AG recognize? Are there any indications that additional impairments may be necessary? Explain your reasoning and your calculations.

Q4: Using U.S. GAAP, what journal entries would PlasTech make to record an impairment using the direct method? The allowance method? How does an impairment affect current year net income? How does an impairment affect net income in the future? Can an impairment be reversed under U.S. GAAP?

Q5: If PlasTech International, Inc. changed its inventory cost methodology to FIFO, is an impairment necessary? If so, how much impairment should PlasTech Germany AG recognize according to U.S. GAAP? What journal entries would PlasTech make to record an impairment using the direct method? The allowance method? Explain your reasoning and your calculations.

PlasTech International, Inc. is a privately held (not listed) international chemical company based in the U.S. It prepares its consolidated financial statements in accordance with U.S. GAAP, and has a German subsidiary, PlasTech Germany AG. The subsidiary is a privately held (not listed) stock company located in Munich and specializes in the production of different kinds of plastic material for which petroleum is an important ingredient. It must prepare financial statements according to German GAAP to meet local legal and tax requirements, and must also prepare a U.S. GAAP "reporting package" so that its results can be consolidated with those of PlasTech International, Inc. Kurt Mueller recently graduated from a Master of Accounting program and accepted a position as an inventory accounting specialist with PlasTech Germany AG. He reports directly to the head of accounting, Rosalyn Robinson, and is responsible for all accounting issues associated with inventory. As part of the preparation of the financial statements, Kurt is responsible for determining PlasTech Germany AG's cost of goods sold (reflected on the income statement), and the cost of raw materials, work-in-process, and finished goods inventory on hand at the end of the year (reported on the balance sheet). In addition, Kurt must determine whether the company should recognize any impairments associated with inventory (reflected as an impairment loss on the income statement, and as a reduction in the inventory balance on the balance sheet). He must determine these amounts in accordance with both German and U.S. GAAP, so that the subsidiary's financial statements can be prepared in accordance with German GAAP, and the U.S. GAAP reporting package can be completed and sent to the parent company to assist in the preparation of the consolidated financial statements. One of PlasTech Germany AG s critical raw materials ispetroleum.Thecompanytypicallypurchasespetroleum once per quarter and stores it in a large tank. The tank is connected to the production facilities by a small pipeline, and petroleum is automatically pumped to the production facility in accordance with the company's production needs. The company defines a standard cost of petroleum for cost accounting purposes. For financial accounting purposes, the company uses a periodic inventory system, takes a physical inventory at year-end, and then recognizes the appropriate expense related to the amount of petroleum that was used during the year. The company typically maintains a substantial amount of petroleum in the tank at all times to ensure that production can take place around the clock. Historical Market Price for Petroleum Large Ouantitv Purchases The market price of petroleum decreased over the past year, and the company continued purchasing on a quarterly basis according to its regular pattern. Table 1 shows the historical quarterly market price of petroleum in both the German and U.S. presentation formats. Because the company does not purchase sufficiently large quantities, it typically pays a markup of 15 percent of the market price. The company's purchases are shown in Table 2 . TABLE 2 Purchase Prices \& Ouantities of Petroleum