***I ALREADY GOT AN ANSWER FOR THIS & IT IS CORRECT BUT I NEED TO KNOW WHERE A FEW NUMBERS CAME FROM! SEE ANSWER TYPED BELOW***

1) I don't understand where they get the 97.5%, 92.5%, 87.5% & 82.5% when calculating each quarter's depreciation. 2) I also don't understand where they got the 25,300 for the Normal Profit Margin

Included in KCNs inventory are the following: $100,000 (cost) of computers which suppliers ceased producing in the middle of 20X3. Although the wholesale value of these computers is only about $30,000, the retail value (if they could all be sold today, which they cant be) is approximately $110,000. The selling costs of these specific machines are considered negligible, and a normal profit margin is approximately 25% of sales price. The retail market is thin and it will take some time to sell the computers. Management intends to sell all of these computers at retail and believes that the value (retail and wholesale) of these computers is likely to decrease at a rate of approximately 10-15 percent every six months for the next couple of years. Management believes that the computers will be sold within the next year as follows--first quarter 35% of inventory, second quarter 30%, third quarter 25 %, and fourth quarter 10 % at market values at the time of sale. These projections seem reasonable. It is currently February 15 and you note that sales are right on schedule and that retail prices have not yet dropped from year-end. Management has pointed out to you that computers in inventory that dont sell could be used for parts. But they dont anticipate the need to do this. Because of discontinuance of the above microcomputers, many suppliers of parts for these computers have chosen to quit manufacturing the items with the result that shortages are occurring. As a result, KCNs $50,000 inventory of parts for these machines has increased in value to $75,000 wholesale, and $130,000 retail. The average profit margin on sales of parts is 50% of sales price. Also, management has pointed out to you that computers in inventory that dont sell could be used for parts. But they dont anticipate the need to do this. Does KCN need to record an inventory writedown to reflect a lower of cost or market value? If so, how much?

ANSWER: Since mgmt intent is to sell the computers at retail & since mgmt believes the the market value of the computers will decrease 10-15% every six months, it is possible that a write down to lower of cost or market is needed. The following table is used to compute the lower of cost or market:

Inventory Item	Historical Cost	Market Value	Lower of Cost	Replacement Cost	Net Realizable	Net Realizable Value
			Or Market		Value	Normal Profit Margin
Computers	100,000	75,900	75,900	30,000	101,200**	75,900*
Parts	50,000	75,000	50,000	75,000	130,000	75,000***
Combined	150,000	150,900	125,000	105,000	231,200	173,400
*Net Realizable Value = Current Sales Price X Percentage sold in Quarter X Quarter's Average Price

The above calculation assumed that sales occur evenly throughout each question

**If a 50% profit margin is assumed, the computation becomes 130,000 - (.5 x 130,000) = 97,500

The appropriate invneotry valuation depends upon whether an individual believes that the computers and parts should be treated in combintation or sepeartely. If treated in combo, no entry is made since the "market value" of 150,900 exceeds teh cost of 150,000. But combining the inventories may be questioned since parts & final product are not typically considered a "category" as referred to FASB ASC 330-10-35. If treated seperately, the following entry writing inventory down to cost is appropriate to write the computers down from 100,000 to 75,900 is:

Holding Loss from Inventory 24,100 Allowance to Reduce Inv to Market 24,100