Lower of Cost or Market Method
Response to the following problem:
Blaedon Co. makes ongoing design refinements to lawnmowers that are produced for it by contractors. Blaedon stores the lawnmowers in its own warehouse and sells them at list price, directly to retailers. Blaedon uses the FIFO inventory method. Approximately two-thirds of new lawnmower sales involve trade-ins. For each used lawnmower traded in and returned to Blaedon, retailers receive a $40 allowance regardless of whether the trade-in was associated with a sale of a 2010 or 2011 model. Blaedon's net realizable value on a used lawnmower averages $25.
At December 31, 2010, Blaedon's inventory of new lawnmowers includes both 2010 and 2011 models. When the 2011 model was introduced in September 2010, the list price of the remaining 2010 model lawnmowers was reduced below cost. Blaedon is experiencing rising costs.
Required
1. At December 31, 2010, how should Blaedon determine the carrying amounts assigned to its lawnmower inventory of
a. 2011 models?
b. 2010 models?
2. Considering only the 2011 model lawnmower, explain the impact of the FIFO cost flow assumptions on Blaedon's 2010
a. Income statement amounts.
b. Balance sheet amounts.