Ribbitt is a small company that operates in Florida by marketing grow-a-frog kits to large toy stores and discount retailers. Each grow-a-frog kit contains a small plastic aquarium tank, gravel, a plastic plant, and a coupon redeemable for one live tadpole. A large inventory of tadpoles are kept on had at all times. To ensure a ready supply of tadpoles, one thousand adult frogs are kept on hand. The reproductive life of an adult frog is about nine months. At that time, the frogs are harvested and sold to J. Lafittes Fine Froglegs. Both the adult frogs and tadpoles were classified as inventory on Ribbitts financial statements. Recently, through selective breeding, the reproductive life of the adult frogs has been extended to three years.

Assumptions: Financial statements are prepared according to GAAP.

Problems:

The problems in this exercise that are mostly valuation problems:

1.How should the coupons be accounted for?

Does the company record a liability for one tadpole each time a sale is made?

Does the company estimate a liability at year end for tadpoles not yet claimed?

2.How is the large inventory of tadpoles valued?

What is the cost of producing the tadpoles?

3.How is the inventory of frogs valued?

Are the frogs purchased or raised from the tadpoles?

What is the cost of raising the frogs from tadpoles?

Is there a need to value the frogs at year end if the life cycle is nine months?