(Statement and Note Disclosure, LCM and Purchase Commitment. Garth
Brooks Specialty Company, a division of Fresh Horses Inc., manufactures
three models of gear shift components for bicycles that are sold to
bicycle manufactures, retailers, and catalog outlets. Since beginning
operations in 1972, Brooks has used normal absorption costing and has
assumed a first-in, first-out cost flow in its perpetual inventory
system. Except for overhead, manufacturing costs are accumulated using
actual costs. Overhead is applied to production using predetermined
overhead rates. The balances of the inventory accounts at the end of
Brook’s fiscal year, November 30, 2004 are shown below. The
inventories are stated at cost before any year-end adjustments.
Finished goods $647,000
Work-in-process 112,500
Raw material 240,000
Factory supplies 69,000
The following information relates to Brook’s inventory and operations.
The finished goods inventory consists of the items analyzed below:
Cost Market
Down tube shifter
Standard model 67,500 67,000
Click adjustment model 94,500 87,000
Deluxe model 108,000 110,000
Total down tube shifters 270,000 264,000
Bar end shifter
Standard model 83,000 90,050
Click adjustment model 99,000 97,550
Total bar end shifters 182,000 187,600
Head tube shifter
Standard model 78,000 77,650
Click adjustment model 117,000 119,300
Total head tube shifters 195,000 196,950
Total finished goods 647,000 648,550
One-half of the head tube shifter finished goods inventory is held by
catalog outlets on consignment.
Three-quarters of the bar end shifter finished goods inventory has been
pledged as collateral for a bank loan.
One-half of the raw material balance represents derailleurs acquired at
a contracted price 20 percent above the current market price. The market
value of the rest of the raw material is $127,400.
The total market value of the work-in-process inventory is $108,700.
Included in the cost of factory supplies are obsolete items with an
historical cost of $4,200. The market value of the remaining factory
supplies is $65,900.
Brooks applies the lower of cost or market method to each of the three
types of shifters in finished or market method to the total of each
inventory account.
Consider all amounts presented above to be material in relation to
Brook’s financial statements taken as a whole.
Instructions:
Prepare the inventory section of Brooks’ statement of financial
position as of November 30, 2004, including any required note(s).
Without prejudice to your answer to (a), assume that the market value of
Brooks’ inventories is less than cost. Explain how this decline would
be presented in Brooks’ income statement for the fiscal year ended
November 30, 2004.
Assume that Brooks has a firm purchase commitment for the same type of
derailleur included in the raw materials inventory as of November 30,
2004 and that the purchase commitment is at a contracted price 15%
greater than the current market price. These derailleurs are to be
delivered to Brooks after November 30, 2004. Discuss the impact, if any,
that this purchase commitment would have on Brooks’ financial
statements prepared for the fiscal year ended November 30, 2004.
Business Homework Solutions
#80515
Statement and Note Disclosure, LCM and Purchase Commitment - Inventories Valuation issues
Garth Brooks Specialty Company, a division of Fresh Horses Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufactures, retailers, and catalog outlets. Since beginning operations in 1972, Brooks has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. Except for overhead, manufacturing costs are accumulated using actual costs. Overhead is applied to production using predetermined overhead rates. The balances of the inventory accounts at the end of Brook's fiscal year, November 30, 2004 are shown below. The inventories are stated at cost before any year-end adjustments.
Finished goods $647,000
Work-in-process 112,500
Raw material 240,000
Factory supplies 69,000
The following information relates to Brook's inventory and operations.
1. The finished goods inventory consists of the items analyzed below:
Cost Market
Down tube shifter
Standard model 67,500 67,000
Click adjustment model 94,500 87,000
Deluxe model 108,000 110,000
Total down tube shifters 270,000 264,000
Bar end shifter
Standard model 83,000 90,050
Click adjustment model 99,000 97,550
Total bar end shifters 182,000 187,600
Head tube shifter
Standard model 78,000 77,650
Click adjustment model 117,000 119,300
Total head tube shifters 195,000 196,950
Total finished goods 647,000 648,550
2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment.
3. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan.
4. One-half of the raw material balance represents derailleurs acquired at a contracted price 20 percent above the current market price. The market value of the rest of the raw material 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 items with an historical cost of $4,200. The market value of the remaining factory supplies is $65,900.
7. Brooks applies the lower of cost or market method to each of the three types of shifters in finished or market method to the total of each inventory account.
8. Consider all amounts presented above to be material in relation to Brook's financial statements taken as a whole.
Instructions:
(a) Prepare the inventory section of Brooks' statement of financial position as of November 30, 2004, including any required note(s).
(b) Without prejudice to your answer to (a), assume that the market value of Brooks' inventories is less than cost. Explain how this decline would be presented in Brooks' income statement for the fiscal year ended November 30, 2004.
(c) Assume that Brooks has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2004 and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Brooks after November 30, 2004. Discuss the impact, if any, that this purchase commitment would have on Brooks' financial statements prepared for the fiscal year ended November 30, 2004.
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This post explains how to present the inventory sections in the financial statements of the company. To explain this an actual problem in the book is solved. The process considers various concepts such as normal absorption costing, FIFO, perpetual inventory system, overhead allocation etc.
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By OTA - Overall OTA Rating
Rohtas Kumar, MBA - 4.9/5
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$2.19 CAD (was ~$59.85)
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