Question

Sanchez Company was formed on January 1 of the current year and is preparing the annual financial statements dated December 31, current year. Ending inventory information about the four major items stocked for regular sale follows: ENDING INVENTORY, CURRENT YEAR Net Realizable Unit Cost When Value (Market) Acquired (FIFO) at Year-End $ 20 $ 25 54 Quantity on Hand 30 Item 65 42 Required: 1. Compute the valuation that should be used for the current year ending inventory using lower of cost or net realizable value applied on an item-by-item basis. 2. What will be the effect of the write-down of inventory to lower of cost or net realizable value on cost of goods sold for the year ended December 31, current year? Complete this question by entering your answers in the tabs below. Required 1 Required 2 What will be the effect of the write-down of inventory to lower of cost or net realizable value on cost of goods The write-down to lower of cost or net realizable value will cost of goods sold expense by the amoun < Required 1 Required 2 >

Answer 1

1. Valuation of inventory:-

Value of item A - 30* $20 = $600 (FIFO)

Value of item B - 65* $50 = $3,250 (FIFO)

Value of item C - 45* $65 = $2,925 (Net Realizable Value)

Value of item D - 20* $37 = $740 (FIFO)

Value of inventory = $(600+3,250+2,925+740) = $7,515 (Answer)

2. The write-down to lower of cost or net realizable value will increase cost of goods sold expenses by the amount