A. White Castle Company makes miniature circuit boards that are components of wireless phones and personal organizers.
Question:
A. White Castle Company makes miniature circuit boards that are components of wireless phones and personal organizers. The company has experienced strong growth, and you are especially interested in how well White Castle is managing its inventory balances. You have collected the following information for the current year.
Inventory at the beginning of year $ 1,026,000
Inventory at the end of year, before any adjustments 1,007,000
Total cost of goods sold, before any adjustments 11,776,000
The company values inventory at lower-of-cost (using LIFO cost fl ow assumption)-or-market; use the cost-of-goods-sold method
Required: for part A.
i. Compute White Castle’s inventory turnover before any adjustment. [3points]
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ii. Recompute the inventory turnover after adjusting White Castle’s inventory information for the following items.
a. During the year, White Castle recorded sales and costs of goods sold on $22,000 of units shipped to various wholesalers on consignment. At year-end, none of these units have been sold by wholesalers. [3points]
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b. Shipping contracts changed 2 months ago from f.o.b. shipping point to f.o.b. destination point. At the end of the year, $25,000 of products are en route to China and will not arrive until after financial statements are released. Current inventory balances do not reflect this change in policy. [3points]
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c. At the end of the year, White Castle determined that a certain section of inventory with an historical cost of $112,000 has a replacement cost of $100,800, net realizable value of $101,000 and net realizable value less a normal profit margin of $90,400. There is no need to make a lower-of-cost-or-market adjustment to other inventory [3points]
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B. Define the term “impairment loss” and describe conditions, under which it may occur, [2points]
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C. Define the term “ Cash Generating Unit” (CGU) and give examples [2points]
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D. An asset which (which has never been revalued) has a carrying amount of $100,000. The asset is being depreciated on the straight line basis, with a remaining useful life of 3 years and a residual value of 10,000. The asset is expected to generate net cash inflows of $20,000 per year for the next three years and then be sold for $10,000. Disposal costs are expected to be negligible. At present the asset could be sold for $50,000. Disposal costs would be 2,000
a. Assume a discount rate of 10% and that all cash flows occur at the end of the year concerned, determine the asset’s value in use [3points]
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b. Calculate the amount of impairment loss which has occurred (if any) and explain how this should be accounted for [3points]
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c. Calculate the amount of depreciation that should be charged in relation to the asset of each of the next three years, assuming that the straight line method will continue to be used [3points]
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Expert Answer:
