Problem 3 (20 points, expected time 10-15 minutes) NOTE: Show all of your work f

Question

Problem 3 (20 points, expected time 10-15 minutes)

NOTE: Show all of your work for maximum partial credit!

Skittles-R-Us is trying to determine its ending inventory in accordance with Generally Accepted Accounting Principles.

At the end of the year, the ending inventory cost from the book was $64,000,000 in total for 8,000,000 bags of Skittles.

The following information is also available regarding each individual bag of Skittles:

Sales price: $15 per bag

Disposal cost: $2 per bag

Profit margin: 60% of sales price

Replacement cost: $6 per bag is the most current purchase price

Required:

(1)(15 points)

a)Determine the ending inventory value that should be reported on the balance sheet if ending inventory at the year-end were based on LIFO inventory method. Show all calculations.

b)b) Determine the ending inventory that should be reported on the balance sheet if ending inventory at the year-end were based on FIFO inventory method. Show all calculations.

(2)(5 points) Record any necessary adjusting entry in proper form. If no adjusting entry needed, state “No journal entry required”.

a)If ending inventory at the year-end were based on LIFO inventory method:

b)if ending inventory at the year-end were based on FIFO inventory method:

Explanation / Answer

As per GAAp, valuation of inventory to be made at Lower of Cost or Market value (LCM.)

Market Value is the middle value of NRV, replaceement Cost & NRV-NPM balance.

Here these are $13.00, $6.00 & $4.00, however this is subject to ceiling of NRV & Floor of NRV-NPM. As such market value is $6.00 per bag, which is replacement cost.....................(I)

As per Balance sheet, Cost of inventory is $8.00 per bag. i.e. ($64,000,000 / bag 8,000,000) = $8.00 per bag......(II)

Now as per GAAP Inventory value shall be lower of identified Market Price of $6.00 per bag or Cost of $8.00 per bag, which is lower. In this case Identified market price is lower, hence it will be value per bag of inventory. Accordingly total value of inventory = $6.00 x bag 8,000,000 = $48,000,000. The loss of $16,000,000 on account of the valuation shall be treated s below.

Balance sheet Account Inventory     

(Balance sheet Account) Allowance to Reduce inventory to LCM

(Income Statement Account) Loss fron reducing invetory to LCM

Adjustment as on Dec,31,20x5   $16,000,000       

Balance as on Dec,31,20x5 $16,000,000   

$16,000,000   Adjustment at Dec 31, 20x5

$16,000,000 Adjt. needed at Dec 31, 20x5   

Journa entry :

Dec.31,20x5 Loss from reducing inventory to LCM A/c Dr. $16,000,000

To Allowance to reduce inventory to LCM $16,000,000.

(Being reduction in inventory value is charged )

To have LIFO & FIFO method, more transactions of inventory purchases, issues, ect. may pleae be provided

Sales Price per bag $15.00 SP Less: Disposal Cost ($2.00) Net realizable Value (NRV) $13.00 NRV Less: Profit Margin (60% of Sales price) ($9.00) NPM Balance of NRV-NPM $4.00 NRV-NPM

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