Issue 3 Inventory Included in NCEs inventory (valued using the LIFO method) are the following $105,000 (cost) of computers which manufacturers ceased producing in the middle of 2021 Although the wholesale value of these computers now is only about $50,000, the retail value (if they could all be sold today, which they cannot be) is approximately $110,000 The selling costs of these specific machines are considered negligible, and a normal profit margin is approximately 20 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 retail value of these computers is likely to decrease at an average rate of 5 percent every quarter for the next year thus, on average a computer with a retail value of $1,000 on 12 31 2021 would have an average retail value of $950 and $900 during the first two quarters of 2022, respectively Management believes that the computers will be sold within the next year as follows first quarter 40 of inventory, second quarter 35 , third quarter 20 , and fourth quarter 5 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 dropped a bit from year end, as projected Because of discontinuance of the above computers, many suppliers of parts for these computers have chosen to quit manufacturing the items with the result that shortages are occurring As a result, NCEs $60,000 inventory of parts for these machines has increased in value and would now cost $75,000 to replace (its retail value is $110,000) Historically, the normal profit margin on sales of parts is 38 of sales price In addition, management has pointed out to you that computers in inventory that do not sell could be used for parts However, management does not anticipate the need to do this Historically, NCE (and competitors) have in general separated Computers from Parts when calculating the lower of cost or market for inventory Does NCE need to record an inventory write down to reflect a lower of cost or market value (use the table below to calculate) If so, how much Inventory Item Replacement Cost Net Realizable Value Net Realizable Value Normal Profit Margin Market Value Historical Cost Lower of Cost or Market Computers Parts Combined

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 17, 2024

Issue 3: Inventory Included in NCEs inventory (valued using the LIFO method) are the following: $105,000 (cost) of computers which manufacturers ceased producing in the

Issue 3: Inventory

Included in NCEs inventory (valued using the LIFO method) are the following:

$105,000 (cost) of computers which manufacturers ceased producing in the middle of 2021. Although the wholesale value of these computers now is only about $50,000, the retail value (if they could all be sold today, which they cannot be) is approximately $110,000. The selling costs of these specific machines are considered negligible, and a normal profit margin is approximately 20% 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 retail value of these computers is likely to decrease at an average rate of 5 percent every quarter for the next year; thus, on average a computer with a retail value of $1,000 on 12/31/2021 would have an average retail value of $950 and $900 during the first two quarters of 2022, respectively. Management believes that the computers will be sold within the next year as follows--first quarter 40% of inventory, second quarter 35%, third quarter 20 %, and fourth quarter 5% 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 dropped a bit from year-end, as projected.
Because of discontinuance of the above computers, many suppliers of parts for these computers have chosen to quit manufacturing the items with the result that shortages are occurring. As a result, NCEs $60,000 inventory of parts for these machines has increased in value and would now cost $75,000 to replace (its retail value is $110,000). Historically, the normal profit margin on sales of parts is 38% of sales price. In addition, management has pointed out to you that computers in inventory that do not sell could be used for parts. However, management does not anticipate the need to do this.
Historically, NCE (and competitors) have in general separated Computers from Parts when calculating the lower of cost or market for inventory.

Does NCE need to record an inventory write-down to reflect a lower of cost or market value (use the table below to calculate)? If so, how much?

Inventory Item	Replacement Cost	Net Realizable Value	Net Realizable Value - Normal Profit Margin	Market Value	Historical Cost	Lower of Cost or Market
Computers
Parts
Combined