Question

1. At 12/31/19, the end of Badger Company's first year of business, inventory was $3,400 and $3,200 at cost and at net realizable value, respectively.

The following data relates to the 12/31/20 inventory of Badger:

                                             

                              Original Cost                                        

      Item                      per Unit                                  

      A                          $ .55                                   

      B                              .45                       

C                              .90                       

      D                              .35                       

  E                              .95                              

Selling price is $1.00 per unit for all items. Disposal costs amount to 15% of selling price and a normal profit is 40% of selling price. There are 1,000 units of each item in the 12/31/20 inventory.

Required:

1. Prepare the entry at 12/31/19 necessary to implement the lower of cost or NRV procedure assuming Badger uses a contra account (Allowance) for its balance.
2. Determine the lower of cost or NRV for the inventory at 12/31/20.
3. Prepare the entries necessary at 12/31/20 based your computations.
4. How are inventory losses disclosed on the income statement for 2020?
5. Assume, instead, that Badger uses the LIFO inventory costing assumption. What would be different about your response to the questions above?

Answer 1