Reference no: EM13481794
Company models three models of gear shiftcomponents for bycycles that are sold to cicycle mfr, retailers and catalog outlets. Company since 1975 has used normal absorption costing and has assumed a FIFO cost flow in itsperpetual inventory system. Below is the balance of inventory at fiscal year end November 30, 2007. inventories are stated at costbefore any year end adjustments.
Finished goods $647,000
Work-in-process 112,500
Raw materials 240,000
Factory supplies 69,000
1.
Below is the inventory and operations on finished goods whichare analyzed below.
Cost Market
Down tube shifter
standardmodel $67,500 $67,000
Click adj model 94,500 87,000
Deluxemodel 108,000 110,000
Total tubeshifter 270,000 264,000
Bar end shifter
Standardmodel $83,000 90,500
Click adj model 99,000 97,550
Total bar endshfter 182,000 187,600
Head tube shifter
Standardmodel 78,000 77,650
Click adjmodel 117,000 119,300
Total head tubeshft 195,000 196,950
Total finishedgoods $647,000 $648,550
2. One half of the head tube shifter finished goods inventoryis held by catalog outlets on consignment.
3. Three quarters of the bar end shifter finished goodsinventory 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 rawmaterials 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 itemswith an historical cost of $4,200. The market value of theremaining factory supplies is $65,900.
7. Company applies the lower of cost or market method to eachof the three types of shifters in finished goods inventory. Foreach of the other three inventory accounts, company applies thelower of cost or market method to the total of each inventoryaccount.
8. Consider all amounts presented above to be material inrelation to the Company's financial statements taken as awhole.
INSTRUCTIONS:
A. Prepare the inventory section of the company's balancesheet as of November 30, 2007 including any required notes.
B. Without prejudice to your answer (a) assume that the marketvalue of the inventories is less than cost. Explain how the declinewould be presented on the company's invome statement for the fiscalyear end November 30, 2007.
C. Assume the company has a firm purchase commitment for thesame type of derailleur included in the raw materials inventory asof November 30, 2007 and that the purchase commitment is at acontracted price 15% greater than the current market price. Thesederailleurs are to be delivered to the company after November 30,2007. Discuss the impact, if any, that this purchase commitmentwould have on the company's financial statements prepared for thefiscal year ended November 30, 2007.