Garth Brooks Specialty Company, a division of Fresh Horses Inc., manufactures three models of gear shift components for bicycles

P9-9 (Statement and Note Disclosure, LCM, and Purchase Commitment) Garth Brooks Specialty Company, a division of Fresh Horses Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1975, Brooks has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Brooks’s fiscal year, November 30, 2007, are shown below. The inventories are stated at cost before any year-end adjustments.

Finished goods $647,000

Work-in-process 112,500

Raw materials 240,000

Factory supplies 69,000

The following information relates to Brooks’s inventory and operations.

1. The finished goods inventory consists of the items analyzed below.

Cost Market

Down tube shifter

Standard model $ 67,500 $ 67,000

Click adjustment model 94,500 87,000

Deluxe model 108,000 110,000

Total down tube shifters 270,000 264,000

Bar end shifter

Standard model 83,000 90,050

Click adjustment model 99,000 97,550

Total bar end shifters 182,000 187,600

Head tube shifter

Standard model 78,000 77,650

Click adjustment model 117,000 119,300

Total head tube shifters 195,000 196,950

Total finished goods $647,000 $648,550

2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment.

3. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan.

4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20 percent above the current market price. The market value of the rest of the raw materials is $127,400.

5. The total market value of the work-in-process inventory is $108,700.

6. Included in the cost of factory supplies are obsolete items with an historical cost of $4,200. The market value of the remaining factory supplies is $65,900.

7. Brooks applies the lower-of-cost-or-market method to each of the three types of shifters in finished goods inventory. For each of the other three inventory accounts, Brooks applies the lower-of-cost-or-market method to the total of each inventory account.

8. Consider all amounts presented above to be material in relation to Brooks’ financial statements taken as a whole.

Instructions
(a) Prepare the inventory section of Brooks’s balance sheet as of November 30, 2007, including any required note(s).
(b) Without prejudice to your answer to (a), assume that the market value of Brooks’ inventories is less than cost. Explain how this decline would be presented in Brooks’ income statement for the fiscal year ended November 30, 2007.
(c) Assume that Brooks has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2007, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Brooks after November 30, 2007. Discuss the impact, if any, that this purchase commitment would have on Brooks’s financial statements prepared for the fiscal year ended November 30, 2007.


Click here for the solution: Garth Brooks Specialty Company, a division of Fresh Horses Inc., manufactures three models of gear shift components for bicycles

(Accounting Principles-Comprehensive) Presented below are a number of business transactions that occurred during the current year for Fresh Horses, Inc

Exercise 2-7 (E2-7) Accounting Principles-Comprehensive. Presented below are a number of business transactions that occurred during the current year for Fresh Horses, Inc.

Instructions
In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.
(a) The president of Fresh Horses, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made.
Miscellaneous Expense 29,000
Cash 29,000
(b) Merchandise inventory that cost $620,000 is reported on the balance sheet at $690,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value.
Merchandise Inventory 70,000
Revenue 70,000
(c) The company is being sued for $500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry.
Loss from Lawsuit 500,000
Liability for Lawsuit 500,000
(d) Because the general level of prices increased during the current year, Fresh Horses, Inc. determined that there was a $16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made.
Depreciation Expense 16,000
Accumulated Depreciation 16,000
(e) Fresh Horses, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at $800,000 was written off as follows.
Retained Earnings 800,000
Goodwill 800,000
(f) Because of a “fire sale,” equipment obviously worth $200,000 was acquired at a cost of $155,000. The following entry was made.
Equipment 200,000
Cash 155,000
Revenue 45,000

Click here for the solution: (Accounting Principles-Comprehensive) Presented below are a number of business transactions that occurred during the current year for Fresh Horses, Inc