Hemlo Inc. is a manufacturing company. Because of the nature of its products it can sometimes be difficult to determine their NRV. In the year ended December 31, 2017 Hemlo’s management estimated that the NRV of certain items of inventory was $245,000 while their cost was $400,000 and the inventory was written down to NRV. It turned out that this inventory didn’t have to be written down and it was sold in mid-2018 for $425,000. Hemlo’s summarized income statement for 2017 is provided below. The writedown of inventory is included in cost of sales:
Hemlo Inc.
Summarized Income Statement
For the year ended December 31, 2017
Sales............ $3,450,000
Cost of sales......... 1,207,500
Gross margin......... 2,242,500
Other expenses......... 1,897,500
Net income......... $ 345,000
Required:
a. How much writedown did Hemlo record in 2017?
b. What is the impact on gross margin, gross margin percentage, net income, and profit margin of the writedown?
c. What would the impact be on 2018’s income statement of the sale of the written-down inventory?