Question

Sanchez Company was formed on January 1 of the current year and is preparing the annual financial statements dated December 31, current year. Ending inventory information about the four major items stocked for regular sale follows: ENDING INVENTORY, CURRENT YEAR Item Quantity on Hand Unit Cost When Acquired (FIFO) Net Realizable Value (Market) at Year-End A 30 $ 20 $ 15 B 55 40 44 C 35 52 55 D 15 27 32 Required: 1. Compute the valuation that should be used for the current year ending inventory using lower of cost or net realizable value applied on an item-by-item basis. 2. What will be the effect of the write-down of inventory to lower of cost or net realizable value on cost of goods sold for the year ended December 31, current year

Answer 1

Answer:

Sanchez Company

1. The valuation that should be used for the current year ending inventory using lower of cost or net realizable value applied on an item-by-item basis is:

= $4,875.

2. The amount of the write-down is $150.  It will increase the cost of goods sold for the year ended December 31 by $150.

Explanation:

a) Data and Calculations:

ENDING INVENTORY, CURRENT YEAR

Item   Quantity on Hand     Unit Cost When     Net Realizable

                                            Acquired (FIFO)     Value (Market)     LCNRV

                                                                           at Year-End

A                      30                      $ 20                       $ 15          $450 ($15*30)

B                      55                         40                          44         2,200 ($40*55)

C                      35                        52                          55          1,820 ($52*35)

D                      15                         27                          32            405 ($27*15)

Total              135                 $5,025                  $5,275       $4,875

Inventory value based on acquisition cost = $5,025 (30*$20 + 55*$40 + 35*$52 + 15*$27)

Inventory value based on NRV = $5,275 (30*$15 + 55*$44 + 35*$55 + 15*$32)

Inventory write-down = Acquisition costs minus Net realizable values

= $150 ($5,025 - $4,875)