Question

In the fall of 2020, Trio Green Groceries, a privately held company that follows ASPE, purchased several pallets of pumpkins from a local farmer for $200. Trio also paid $30 to have the pallets delivered to its store. Two sizes of pumpkins are included in the delivery. The two types and the estimated selling price for each are as follows:

                                 Number of                Estimated Selling

Type                         Pumpkins               Price per Pumpkins

Large                             150                                   $3.00

Small                             350                                    2.00

Trio estimates that the costs to sell this inventory are not significant. During the month, Trio sells all of the large pumpkins and 325 of the small at the prices as estimated above. Late on October 31, the remaining pumpkins were marked down to $0.50 each. All were expected to be sold at this price.

Instructions

a)    What is the total cost of the pumpkins remaining in inventory at the end of October, using the relative sales value method?   Do not over round in your calculations: Only round to the penny when calculating your final answer.

(b)  What is the net realizable value of the pumpkins remaining in inventory?

(c)   Prepare the appropriate journal entry to adjust inventory to the value to be reported on the October 31, 2020 year-end statement of financial position, assuming the lower of cost and NRV is applied on an individual item basis and Trio uses a perpetual inventory system.

(d) If the entry in (c) had not been recorded, would net income for the year ended October 31, 2020 have been overstated, understated, or not effected.

(e) If the entry in (c) had not been recorded, would net income for following year ended October 31, 2021 have been overstated, understated, or not effected.

(f)   Which inventory costing method, FIFO, Weighted Average or Specific Identification would be the most appropriate to use with pumpkins.   Explain your choice with a one sentence rational.

(g) Which inventory costing method, FIFO, Weighted Average or Specific Identification, is most likely to require a subsequent write-down if market value decreases.

Answer 1

a) 150*3 + 350*2 = 1150 ,

350*2/ 1150 = 0.6086

relative cost is 0.6086

valu of remaining material is 25*0.6086 = $15.215

b) net realizable value menas , cost or market price which ever is lower

in the given case value of small size pumpinks reduced by $0.50.

therefore net realisable value of remining pumpkins is 25*$1.50 = $34.50

c) loss of market value a/c dr 12.5

closing stock a/c dr 37.5

to trading a/c 50

being closing stock adjusted after c

considering market value.

d) net income of th company would be overstated. because closing stock should be valued lower of cost or net realisable which ever is lower.

e) next year profit would be under stated . because opening inventory of next year will be higher value leading to lower profit.

f) for pumpkins FIFO method will be more appropriate. because pumpkins will spoile.g)

g) in that case also FIFO method will be more usefull.