Inventory Write-Down and Recovery
Cub Company, a calendar-year entity, had 2,100 geothermal heating pumps in its beginning inventory for 20X1. On December 31, 20X0, the heating pumps had been adjusted down to $850 per unit from an actual cost of $920 per unit. It was the lower of cost or market. No additional units were purchased during 20X1. The following additional information is provided for 20X1:
Quarter | Date | Inventory (units) | Unit Market Value |
1 | March 31, 20X1 | 1,700 | $845 |
2 | June 30, 20X1 | 1,400 | 860 |
3 | September 30, 20X1 | 1,300 | 830 |
4 | December 31, 20X1 | 900 | 840 |
Required
Please respond to the following two independent scenarios as requested.
a. Case 1: The company does not have sufficient experience with the seasonal market for geothermal pumps and assumes that any reductions in market value during the year will be permanent.
(1) Determine the cost of goods sold for each quarter.
(2) Verify the total cost of goods sold by computing annual cost of goods sold on a lower-of-cost-or- market basis.
b. Case 2: The company has prior experience with the seasonal market for geothermal pumps and expects that any reductions in market value during the year will be only temporary and will recover by year-end.
(1) Determine the cost of goods sold for each quarter.
(2) Verify the total cost of goods sold by computing annual cost of goods sold on a lower-of- cost-or-market basis.
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