Inglewood Corporation (IC) specializes in micro-circuitry products and uses the perpetual system and the cost formula...
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Inglewood Corporation (IC) specializes in micro-circuitry products and uses the perpetual system and the cost formula of specific identification for its inventories. IC is listed on the TSX and has a December 31 year end. In February 20X1, IC experienced an unusual amount of inventory buildup due to delays in inventory shipments to a number of major customers. The excess inventory was more than what IC's own warehouses could handle. As a result, IC had to incur an additional $25,000 in storage costs to secure outside facilities for the storage of the excess inventory. IC has a revolving line of credit with a major Canadian bank and has been accessing the available funds to meet short-term financing needs. Total interest paid during 20X1 by IC on the line of credit was $275,000. Company records show that IC incurred total selling costs of $214,000 during the year 20X1. Of this amount, $156,000 was directly related to the initial promotion of a new product that was introduced in July 20X1. Company records also show that IC incurred total administrative overhead costs of $120,000 during 20X1. At December 31, 20X1, IC has outstanding non-cancellable purchase commitments for 67,000 kilograms of raw materials at $35.50 per kilogram. The material will be used in IC's manufacturing process. Required: (i) Describe carefully the condition(s) under which storage costs are included in the cost of inventories. Comment briefly on what you think in terms of whether or not the $25,000 storage costs should be included in the cost of inventories for IC. (ii) Describe carefully the condition(s) under which borrowing costs are included in the cost of inventories. Comment briefly on what you think in terms of whether or not the $275,000 interest charges should be included in the cost of inventories for IC. (iii) Describe carefully the condition(s) under which selling costs are included in the cost of inventories. Comment briefly on what you think in terms of whether or not the $214,000 selling costs (or any portion thereof) should be included in the cost of inventories for IC. (iv) Describe carefully the condition(s) under which administrative overhead costs are included in the cost of inventories. Comment briefly on what you think in terms of whether or not the $120,000 administrative overhead costs should be included in the cost of inventories for IC. (v) Describe carefully the condition(s) under which the cost formula of specific identification is used in inventory costing. Comment briefly on what you think in terms of whether or not IC should use the cost formula of specific identification. (vi) Describe carefully the condition(s) under which the effects of purchase commitments are recognized. Comment briefly on what you think in terms of whether or not IC should recognize the effects of the $2,378,500 purchase commitment ($35.50 x 67,000). Inglewood Corporation (IC) specializes in micro-circuitry products and uses the perpetual system and the cost formula of specific identification for its inventories. IC is listed on the TSX and has a December 31 year end. In February 20X1, IC experienced an unusual amount of inventory buildup due to delays in inventory shipments to a number of major customers. The excess inventory was more than what IC's own warehouses could handle. As a result, IC had to incur an additional $25,000 in storage costs to secure outside facilities for the storage of the excess inventory. IC has a revolving line of credit with a major Canadian bank and has been accessing the available funds to meet short-term financing needs. Total interest paid during 20X1 by IC on the line of credit was $275,000. Company records show that IC incurred total selling costs of $214,000 during the year 20X1. Of this amount, $156,000 was directly related to the initial promotion of a new product that was introduced in July 20X1. Company records also show that IC incurred total administrative overhead costs of $120,000 during 20X1. At December 31, 20X1, IC has outstanding non-cancellable purchase commitments for 67,000 kilograms of raw materials at $35.50 per kilogram. The material will be used in IC's manufacturing process. Required: (i) Describe carefully the condition(s) under which storage costs are included in the cost of inventories. Comment briefly on what you think in terms of whether or not the $25,000 storage costs should be included in the cost of inventories for IC. (ii) Describe carefully the condition(s) under which borrowing costs are included in the cost of inventories. Comment briefly on what you think in terms of whether or not the $275,000 interest charges should be included in the cost of inventories for IC. (iii) Describe carefully the condition(s) under which selling costs are included in the cost of inventories. Comment briefly on what you think in terms of whether or not the $214,000 selling costs (or any portion thereof) should be included in the cost of inventories for IC. (iv) Describe carefully the condition(s) under which administrative overhead costs are included in the cost of inventories. Comment briefly on what you think in terms of whether or not the $120,000 administrative overhead costs should be included in the cost of inventories for IC. (v) Describe carefully the condition(s) under which the cost formula of specific identification is used in inventory costing. Comment briefly on what you think in terms of whether or not IC should use the cost formula of specific identification. (vi) Describe carefully the condition(s) under which the effects of purchase commitments are recognized. Comment briefly on what you think in terms of whether or not IC should recognize the effects of the $2,378,500 purchase commitment ($35.50 x 67,000).
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1 In order for storage costs to be included in the cost of inventories the costs must be necessary and incurred as a result of holding the inventory The 25000 storage costs incurred by IC appear to me... View the full answer
Related Book For
Cornerstones of Financial and Managerial Accounting
ISBN: 978-0324787351
1st Edition
Authors: Rich Jones, Mowen, Hansen, Heitger
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