Please help and solve the last sentence? JK manufactures high-technology consumer electronics and has a December 31
Question:
Please help and solve the last sentence?
JK manufactures high-technology consumer electronics and has a December 31 year-end. JK generally closes its year-end books by early February. JK began manufacturing BOX A, its first version of a computer tablet, in the first quarter of 2017. Early in the third quarter of 2018, JK introduced BOX B, its newest computer tablet, with several enhanced features over BOX A. Production of BOX A was halted after the second quarter of 2018 and replaced by production of BOX B. The sales of BOX B have been very strong since its introduction; however, this has resulted in a reduced demand for the remaining units of BOX A. JK has two competitors with products similar, but not identical, to Box A, in terms of functionality. JK has historically been the product leader in this industry and has been able to command a higher sales price than its competitors, generally ranging from 10% to 15%. The CFO believes that there is an impairment issue related to the BOX A inventory. The CFO believes bonuses may still be earned in 2018 if the write-down of the BOX A product line is minimal. Historically, JK has applied the lower of cost or market rule directly to each item of inventory. The normal profit margin has been 20% of the selling price. In early February 2019, as directed by the CFO, the controller of JK began the process to value the BOX A units in inventory at December 31, 2018. Available information regarding this inventory follows: Fiscal 2017 and 2018 data Fiscal 2017 financial information was audited and a clean opinion was issued. There have been no significant changes in systems and controls. All inventories use the LIFO costing method. The cost for each unit of BOX A produced in 2017 was $100. Due to reduction in the number of units produced, the cost for each unit of BOX A produced in 2018 was $110. This $110 cost would continue if Box A was produced again in the future. At December 31, 2017 and 2018, BOX A inventory represented 30% and 15% of total assets, respectively. Sales of BOX A represented 40% of JK's revenue in 2017 and 15% in 2018. The last quarter of the year has historically been the best sales quarter, largely due to holiday-related sales. The average selling price of BOX A in 2017 was $144. In 2018, the average selling price began to drop when a competitor introduced a technology-enhanced computer tablet late in the first quarter and the decline continued when BOX B was introduced in the third quarter. The average selling price per unit for BOX A was $140 in the first quarter, $120 in the second quarter and $100 in the third quarter. In response to the falling demand for BOX A, starting in the fourth quarter of 2018, JK reduced the selling price by 20%, to $80. Early 2019 data Despite the reduced selling price, JK's two largest customers, Better Buyer and Pad Warehouse, which account for 70% of JK's sales volume, have refused to purchase any more units of BOX A. In their view, the technology of BOX A is outdated and unsalable. A long- time discount chain customer, Slash, honored their outstanding agreement (contract) and in January 2019 took possession of 10,000 units of Box A at $110 per unit. The sales incentive cost on Box A doubled to $10 per unit beginning in 2019. A popular industry magazine published an article outlining the shortcomings of BOX A and recommending consumers don't purchase this product and, instead, purchase BOX B. In its history of sales of other technology products, JK has observed that there is a market of customers who shop low price points despite newer, available technology; however, the time lag of this interest, about 18 months, continues to shorten.According to the VP of Sales, the current selling price of the remaining 40,000 units of Box A inventory (after considering the Slash transaction) in 2019 is $60 per unit. This represents an additional, and anticipated, $20 markdown from the fourth quarter 2018 price. The following is a brief summary of the BOX A inventory quantities since its introduction. Note the inventory quantity at December 31, 2018 is 50,000 items. This total includes 40,000 from 2017 and 10,000 from 2018. The cost to produce the items is $100 in 2017 and $110 in 2018. Quantity Quantity Quantity In Quarter ended produced sold inventory March 31, 2017 60,000 50,000 10,000 June 30, 2017 70,000 60,000 20,000 September 30, 2017 90,000 75,000 35,000 December 31, 2017 75,000 70,000 40,000 March 31, 2018 90,000 35,000 95,000 June 30, 2018 10,000 30,000 75,000 September 30, 2018 15,000 60,000 December 31, 2018 10,000 50,000 Required Use support from FASB the ASC, to recommend the appropriate inventory write-down and value at December 31, 2018 for the BOX A inventory. The current CFO has not worked through the process of an inventory write-down in past years. Please share the inventory write down and value at December 31, 2018 with computations?
Could you just determine the appropriate inventory write-down and value for the box A inventory on 12/31/18 and show calculations?
Financial Accounting Tools for Business Decision Making
ISBN: 978-1119368458
7th Canadian edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, Barbara Trenholm, Wayne Irvine