P9-9 (Statement and Note Disclosure, LCM, and Purchase Commitment) Garth Brooks Specialty

Company, a division of Fresh Horses Inc., manufactures three models of gear shift components for bicycles

that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations

in 1975, Brooks has used normal absorption costing and has assumed a first-in, first-out cost flow in

its perpetual inventory system. The balances of the inventory accounts at the end of Brookss fiscal

year, November 30, 2007, are shown below. The inventories are stated at cost before any year-end

adjustments.

Finished goods $647,000

Work-in-process 112,500

Raw materials 240,000

Factory supplies 69,000

The following information relates to Brookss inventory and operations.

1. The finished goods inventory consists of the items analyzed below.

Cost Market

Down tube shifter

Standard model $ 67,500 $ 67,000

Click adjustment model 94,500 87,000

Deluxe model 108,000 110,000

Total down tube shifters 270,000 264,000

Bar end shifter

Standard model 83,000 90,050

Click adjustment model 99,000 97,550

Total bar end shifters 182,000 187,600

Head tube shifter

Standard model 78,000 77,650

Click adjustment model 117,000 119,300

Total head tube shifters 195,000 196,950

Total finished goods $647,000 $648,550

2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment.

3. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for

a bank loan.

4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20 percent

above the current market price. The market value of the rest of the raw materials is $127,400.

5. The total market value of the work-in-process inventory is $108,700.

6. Included in the cost of factory supplies are obsolete items with an historical cost of $4,200. The

market value of the remaining factory supplies is $65,900.

7. Brooks applies the lower-of-cost-or-market method to each of the three types of shifters in finished

goods inventory. For each of the other three inventory accounts, Brooks applies the lower-of-costor-

market method to the total of each inventory account.

8. Consider all amounts presented above to be material in relation to Brooks financial statements

taken as a whole.

Instructions

(a) Prepare the inventory section of Brookss balance sheet as of November 30, 2007, including any

required note(s).

(b) Without prejudice to your answer to (a), assume that the market value of Brooks inventories is

less than cost. Explain how this decline would be presented in Brooks income statement for the

fiscal year ended November 30, 2007.

(c) Assume that Brooks has a firm purchase commitment for the same type of derailleur included in

the raw materials inventory as of November 30, 2007, and that the purchase commitment is at a

contracted price 15% greater than the current market price. These derailleurs are to be delivered

to Brooks after November 30, 2007. Discuss the impact, if any, that this purchase commitment

would have on Brookss financial statements prepared for the fiscal year ended November 30,

2007.