Assignment: (Statement and Note Disclosure, LCM, and Purchase commitment)
Garth Brooks Specially Company, a division of Fresh Horses Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufactures, 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 Brook's fiscal year, November, 30 2007, are show below. The inventories are stated at cost before any year-end adjustments.
Finish Goods.....................$647,000 Work in Process.................. 112,500
Raw materials.....................240,000
Factory Supplies.................. 69,000
The following information relates to Brook's inventory and operations.
1- The finish goods inventory consists of the items analyzed below.
Down tube shifter Cost Market
Standard Model $67,500 $67,000
Click adjustment model 94,500 87,000
Deluxe Model 108,000 110,000
Total Down Shifter 270,000 264,000
Bar end Shifter
Standard Model 83,000 90,050
Click adjustment model 99,000 97,550
Total bar en shifter 182,000 187,600
Head Tube Shifter
Standard model 78,000 77,650
Click adjustment model 117,000 119,300
Total head tube shifter 195,000 196,950
Total finish goods $647,000 $648,550
2- One half of the tube shifter finished goods inventor is held b 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-Brook's applies the lower of cost of market method to each of three types of shifters in finished goods inventory. For each of the other three inventory accounts. Brook's applies the lower of cost or market method to the total of each inventory account.
8- Consider all amounts presented above to be material in relation to Brook's financial statements taken as a whole.
Instructions:
A-Prepare the inventory section of Brook's 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 Brook's inventory is less than the cost. Explain how this decline would be presented in Brook's income statement for the fiscal year ended November 30, 2007.
C-Assume that Brook's 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 that the current market price. This derailleurs are to be delivered to Brook's after November 30, 2007. Discuss the impact, if any, that this purchase commitment would have on Brook's financial statement prepared for the fiscal year ended November 30, 2007