Question: Hessian Limited has been suffering the effects of strong price

Hessian Limited has been suffering the effects of strong price competition on a particular inventory item from an overseas company that has moved into Hessian’s Canadian market. At the end of 20X6, Hessian management decided that the carrying cost (at historical value) of its year- end inventory was not recoverable and that Hussein would have to reduce its prices drastically to meet the competitor’s prices. Management estimated that inventory currently carried at $ 20,000 ( at historical cost) will have a NRV of $ 16,000. Hessian normally priced its products at 50% above historical cost. Early in 20X7, Hessian’s competitor unexpectedly withdrew from the Canadian market because of financial difficulties in its home country. Consequently, Hessian restored the prices of its goods to full premarkdown selling price. By the end of 20X7, 60% of the inventory had been sold.

1. Prepare the journal entry for 31 December 20X6 to write down the inventory to NRV. Use the direct writedown method.
2. Prepare a summary journal entry to record the sale of the goods (and the cost of sales) in 20X7 and the writeup of remaining inventory. 3. Suppose that Hussain Limited’s net income (after the writedown) was $ 50,000 in 20X6 and $ 60,000 in 20X7. What would each year’s net income have been if Hussain Limited had not written down the inventory?

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  • CreatedFebruary 17, 2015
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