Inventories and Lower-of-Cost-or-Net-Realizable-Value
Merlin Company uses the periodic inventory system and weighted average method. The firm has properly determined on December 31, Year 1, the ending inventory using periodic weighted average is $24,000. There are 2,000 units in the ending inventory all having been purchased at $12 per unit weighted average. The firm properly uses lower-of-cost-or-net-realizable-value to evaluate whether a ‘write down' of inventory is required.
The sales price of its ending units is $20 per unit. The selling costs include shipping costs averaging $6 per unit. [The firm sells all of its goods on an FOB destination basis.] Sales personnel receive a commission of 20% of the retail value of the units sold.
Merlin averages a normal profit on units sold of $2. The units in ending inventory could be replaced at a cost of $11 per unit.
Required:
What is the ‘net realizable' value of each unit when implementing lower-of-cost-or-net-realizable-value procedures?
What is the ‘cost' of each unit when implementing lower-of-cost-or-net-realizable-value procedures?
What value per unit represents the ‘lower -of-cost-or-net-realizable' value when implementing lower-of-cost-or-net-realizable-value procedures?
Larger or smaller? Without prejudice to your answers above, for the current year if the lower-of-cost-or-net-realizable-value is not cost and the ending inventory has to be ‘written down', will the net income for the current year be made larger or smaller? Please circle the correct answer.
Larger or smaller? Without prejudice to your answers above, for the current year if the lower-of-cost-or-net-realizable-value is not cost and the ending inventory has to be ‘written down', will the net income for the subsequent year be made larger or smaller? Please circle the correct answer.
Inventories and Lower-of-Cost-or-Market:
Without regard to the answers to all the above requirements, assume now the firm uses periodic LIFO for inventory and uses the lower-of-cost-or-market.
What is the ‘market' value of each unit when implementing lower-of-cost-or-market procedures?
What is the ‘cost' of each unit when implementing lower-of-cost-or-market procedures?
What value per unit represents the ‘lower -of-cost-or-market' value when implementing lower-of-cost-or-market' procedures?