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Hi!

Can you explain how to calculate and do the journal entry for this assignment? I added the previous Income Statement, Balance sheet, and the old ratios (inventory turnover ratio, Current ratio, and ROA) as additional information. Thank you very much in advance.

Information: Terry's internal auditor is afraid that some inventory has become obsolete. She has gathered the following information about the inventory items she is worried about: Inventory Historical Current Disposal Replacement Items Cost Sales Price Cost Value TGIT $20.00 $25.00 $7.15 $22.00 TT9G5 $25.00 $30.00 $7.00 $29.00 After talking with the Sales department, she estimates that the normal markup on TGIT would be $8 and $12 on TT965. They currently have 60,000 units of TGIT and 48,000 units of TT965 in stock. Terry's management has opted to record the loss, if any, to COGS and directly to inventory. Terry's management would like to know the effect of the sale on the following ratios: Inventory Turnover (COGS / average total inventory) . Current Ratio ROA Assignment: Calculations 1. Calculate each of the three (3) ratios before you make any adjustments. 2. Make the appropriate journal entries, if any, to correct for the change in inventory values due to a LCM adjustment (including any necessary changes to income tax expense). 3. Make any necessary changes to the financial statements. 4. Calculate the three (3) ratios after you make any adjustments. Critical Thinking 5. What do you think investors' reaction will be to the write down of inventory (if any)? In other words, based on your changes to the financial statements and the change in the ratios, do you think investors will be happy with management's handling of inventory? Why or why not? 6. Does Terry have to make this write down (if any)? What other options does management have for dealing with this older inventory? What potential consequences (good or bad) might result from these options? Provide at least two (2) alternative options. Balance Sheet As of December 31 2019 2018 $16,200,000 Assets Multi-Step Income Statement For Year Ended December 31, 2019 i Sales Revenue Sales Revenue - Less: Sales Discounts $194,400 Sales Retums $769,500 Net Sales Revenue D 1 Cost of Goods Sold 2 Cost of Goods Sold 3 Gross Profit $963,900 $15,236,100 $810,000 $1,377,000 ($405,000) $1,729,890 $364,500 ($25,515) $21,870 1,954,400 $184,000 $ $ 8,838,032 $6,398,068 $2,268,000 $243,000 Current Assets Cash A/R Allowance for Bad Debts Due from Factor First National Inventory Prepaid Insurance Prepaid Rent Total Current Assets Long-term Investments Loans to other businesses Expansion Fund Total Long-term Investments PPE Land $202,500 $4,431,645 $162,000 $4,455,000 $648,000 $486,000 $1,134,000 $648,000 $486,000 $1,134,000 $1,782,000 $1,296,000 Building Equipment Accumulated Depreciation Total PPE Intangible Assets Patents, net Total Assets $4,536,000 ($2,592,000) $5,022,000 $1,134,000 $1,296,000 $2,106,000 ($1,620,000) $2,916,000 4 5 Operating Activities 6 Selling Expenses 7 Advertising Expense $303,750 B Bad Debt Expense $21,060 9 Miscellaneous Selling Expenses $78,975 D Sales Force Salaries Expense $222,750 1 Selling Commissions Expense $810,000 2 Shipping Expense $132,638 3 $1,569,173 4 Administrative Expenses 5 Executive Salaries Expense $708,750 6 Depreciation Expense $972,000 7 Insurance Expense $314,725 B Miscellaneous Admin. Expenses $7,999 9 Office Supplies Expense $62,775 D Consulting and Legal Fees $10,125 1 Utilities Expense $121,500 2 Total Administrative Expenses $2,197,874 3 Income from Operations 4 5 Other Gains and Losses 6 Rent Revenue $50,625 7 Loss on factoring ($21,870) B Interest Expense ($103,275) 9 Income from Continuing Operations before Taxes D Income Tax Expense 1 Net Income $243,000 $10,830,645 $243,000 $8,748,000 $3,767,047 $2,631,021 $972,000 $162,000 $243,000 $202,500 $81,000 $1,660,500 ($74,520) $2,556,501 (766,950) $1,789,551 $ Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $344,394 Income Tax Payable $253,125 Uneamed Revenue $405,000 Wages Payable $194,400 Recourse Liability $54,675 Current Portion of Loan Payable $81,000 Total Current Liabilities $1,332,594 Long-term Debt Loan Payable $405,000 Notes Payable $2,268,000 Total Long-term Debt $2,673,000 Total Liabilities $4,005,594 Stockholders' Equity Common Stock $1,900,000 ($1 par, 5,000,000 authorized, 1,900,000 outstanding) Additional Paid-In Capital $486,000 Retained Earings $4,439,051 Total Stockholders' Equity $6,825,051 Total Liabilities and Stockholder's Equity $10,830,645 $486,000 $1,296,000 $1,782,000 $3,442,500 EPS $0.94 $1,900,000 2 3 4 5 6 7 B 9 D $486,000 $2,919,500 $5,305,500 $8,748,000 Inventory Turnover Ratio 4.186 Current Ratio 3.326 ROA 0.183 Information: Terry's internal auditor is afraid that some inventory has become obsolete. She has gathered the following information about the inventory items she is worried about: Inventory Historical Current Disposal Replacement Items Cost Sales Price Cost Value TGIT $20.00 $25.00 $7.15 $22.00 TT9G5 $25.00 $30.00 $7.00 $29.00 After talking with the Sales department, she estimates that the normal markup on TGIT would be $8 and $12 on TT965. They currently have 60,000 units of TGIT and 48,000 units of TT965 in stock. Terry's management has opted to record the loss, if any, to COGS and directly to inventory. Terry's management would like to know the effect of the sale on the following ratios: Inventory Turnover (COGS / average total inventory) . Current Ratio ROA Assignment: Calculations 1. Calculate each of the three (3) ratios before you make any adjustments. 2. Make the appropriate journal entries, if any, to correct for the change in inventory values due to a LCM adjustment (including any necessary changes to income tax expense). 3. Make any necessary changes to the financial statements. 4. Calculate the three (3) ratios after you make any adjustments. Critical Thinking 5. What do you think investors' reaction will be to the write down of inventory (if any)? In other words, based on your changes to the financial statements and the change in the ratios, do you think investors will be happy with management's handling of inventory? Why or why not? 6. Does Terry have to make this write down (if any)? What other options does management have for dealing with this older inventory? What potential consequences (good or bad) might result from these options? Provide at least two (2) alternative options. Balance Sheet As of December 31 2019 2018 $16,200,000 Assets Multi-Step Income Statement For Year Ended December 31, 2019 i Sales Revenue Sales Revenue - Less: Sales Discounts $194,400 Sales Retums $769,500 Net Sales Revenue D 1 Cost of Goods Sold 2 Cost of Goods Sold 3 Gross Profit $963,900 $15,236,100 $810,000 $1,377,000 ($405,000) $1,729,890 $364,500 ($25,515) $21,870 1,954,400 $184,000 $ $ 8,838,032 $6,398,068 $2,268,000 $243,000 Current Assets Cash A/R Allowance for Bad Debts Due from Factor First National Inventory Prepaid Insurance Prepaid Rent Total Current Assets Long-term Investments Loans to other businesses Expansion Fund Total Long-term Investments PPE Land $202,500 $4,431,645 $162,000 $4,455,000 $648,000 $486,000 $1,134,000 $648,000 $486,000 $1,134,000 $1,782,000 $1,296,000 Building Equipment Accumulated Depreciation Total PPE Intangible Assets Patents, net Total Assets $4,536,000 ($2,592,000) $5,022,000 $1,134,000 $1,296,000 $2,106,000 ($1,620,000) $2,916,000 4 5 Operating Activities 6 Selling Expenses 7 Advertising Expense $303,750 B Bad Debt Expense $21,060 9 Miscellaneous Selling Expenses $78,975 D Sales Force Salaries Expense $222,750 1 Selling Commissions Expense $810,000 2 Shipping Expense $132,638 3 $1,569,173 4 Administrative Expenses 5 Executive Salaries Expense $708,750 6 Depreciation Expense $972,000 7 Insurance Expense $314,725 B Miscellaneous Admin. Expenses $7,999 9 Office Supplies Expense $62,775 D Consulting and Legal Fees $10,125 1 Utilities Expense $121,500 2 Total Administrative Expenses $2,197,874 3 Income from Operations 4 5 Other Gains and Losses 6 Rent Revenue $50,625 7 Loss on factoring ($21,870) B Interest Expense ($103,275) 9 Income from Continuing Operations before Taxes D Income Tax Expense 1 Net Income $243,000 $10,830,645 $243,000 $8,748,000 $3,767,047 $2,631,021 $972,000 $162,000 $243,000 $202,500 $81,000 $1,660,500 ($74,520) $2,556,501 (766,950) $1,789,551 $ Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $344,394 Income Tax Payable $253,125 Uneamed Revenue $405,000 Wages Payable $194,400 Recourse Liability $54,675 Current Portion of Loan Payable $81,000 Total Current Liabilities $1,332,594 Long-term Debt Loan Payable $405,000 Notes Payable $2,268,000 Total Long-term Debt $2,673,000 Total Liabilities $4,005,594 Stockholders' Equity Common Stock $1,900,000 ($1 par, 5,000,000 authorized, 1,900,000 outstanding) Additional Paid-In Capital $486,000 Retained Earings $4,439,051 Total Stockholders' Equity $6,825,051 Total Liabilities and Stockholder's Equity $10,830,645 $486,000 $1,296,000 $1,782,000 $3,442,500 EPS $0.94 $1,900,000 2 3 4 5 6 7 B 9 D $486,000 $2,919,500 $5,305,500 $8,748,000 Inventory Turnover Ratio 4.186 Current Ratio 3.326 ROA 0.183