Tatum Company has four products in its inventory. Information about the december 31, 2009, inventory is as follows:
product total total total Net
cost replacement realizable
cost Value
101 $120,000 110,000 100,000
102 90,000 85,000 110,000
103 60,000 40,000 50,000
104 30,000 28,000 50,000
The normal gross profit percentage is 25% of cost.
Determine the balance sheet inventory carrying value at december 31,2009, assuming the LCM rule is applied to individual products.
Assuming that Tatum recognizes an inventory write-down as a separate income statement item, determine the amount of the loss.
To determine the balance sheet inventory carrying value at December 31, 2009, using the LCM (lower of cost or market) rule for individual products, you need to compare the total cost and the net realizable value of each product and choose the lower value for each.
Here's how you can calculate the balance sheet inventory carrying value for each product:
1. Calculate the cost to compare with the net realizable value for each product.
- For Product 101:
The cost is $120,000.
- For Product 102:
The cost is $90,000.
- For Product 103:
The cost is $60,000.
- For Product 104:
The cost is $30,000.
2. Calculate the net realizable value to compare with the cost for each product.
- For Product 101:
The net realizable value is $100,000.
- For Product 102:
The net realizable value is $110,000.
- For Product 103:
The net realizable value is $50,000.
- For Product 104:
The net realizable value is $50,000.
3. Compare the cost and net realizable value for each product and choose the lower value.
- For Product 101:
The lower value between $120,000 (cost) and $100,000 (net realizable value) is $100,000.
- For Product 102:
The lower value between $90,000 (cost) and $110,000 (net realizable value) is $90,000.
- For Product 103:
The lower value between $60,000 (cost) and $50,000 (net realizable value) is $50,000.
- For Product 104:
The lower value between $30,000 (cost) and $50,000 (net realizable value) is $30,000.
4. Calculate the inventory carrying value by summing up the lower values for each product.
Inventory Carrying Value = $100,000 + $90,000 + $50,000 + $30,000 = $270,000
Therefore, the balance sheet inventory carrying value at December 31, 2009, assuming the LCM rule is applied to individual products, is $270,000.
To determine the amount of the loss, you need to calculate the difference between the total cost of the products and the inventory carrying value.
Total Cost of Products = $120,000 + $90,000 + $60,000 + $30,000 = $300,000
Loss = Total Cost of Products - Inventory Carrying Value = $300,000 - $270,000 = $30,000
Therefore, the amount of the loss for Tatum Company is $30,000.