Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

***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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Crime Investigation And Control

Authors: K. H. Spencer Pickett, Jennifer M. Pickett

1st Edition

0471203351, 9780471203353

More Books

Students also viewed these Accounting questions

Question

What does stickiest refer to in regard to social media

Answered: 1 week ago