Intermediate 1 Terry Part #5: Chapter 9

To practice correcting the financial statements for the Lower of Cost or Market.

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 Items	Historical Cost	Current Sales Price	Disposal Cost	Replacement Value
TGIT	$20.00	$25.00	$7.15	$22.00
TT9G5	$25.00	$30.00	$6.90	$29.00

After talking with the Sales Department, she estimates that the normal markup on TGIT would be $8 and $12 on TT9G5. They currently have 60,000 units of TGIT and 90,000 units of TT9G5 in stock. Terrys management has opted to record the loss, if any, to COGS and directly reduce inventory.

Terrys management would like to know the effect of the sale on the Inventory Turnover (COGS / average total inventory)

Assignment:

1. Calculate the Inventory Turnover Ratio before you make any adjustments. Also calculate the average days in inventory for Terrys overall inventory (before you make any adjustments).
2. Make the appropriate journal entries, if any, to correct for the change in inventory values due to a Lower of Cost or Market adjustment (including any necessary changes to income tax expense). Hint: only COGS and Inventory will be affected. Update Income Tax Expense and Income Tax Payable to reflect the change in tax expense due to the change in COGS.
3. Make any necessary changes to the financial statements.
   • Update the Income Statement to reflect the updated COGS and income tax expense.
   • Update the Balance Sheet to reflect the updated inventory and income tax payable balances.
   • Update the operating section of the statement of cash flows so that the net increase/decrease in cash reconciles with the balance sheet.
4. Calculate the Inventory Turnover Ratio and average days in inventory after you make any adjustments.