Question

Accounting, Analysis, and Principles Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residential swimming pools. The following inventory data is available for the month of March. Units Price per Unit Total Residential Pumps Inventory at Feb. 28: 200 \( 400 \) 80,000 Purchases: March 10 500 \( 450 \)225,000 March 20 400 \( 475 \)190,000 March 30 300 \( 500 \)150,000 Sales: March 15 500 \( 540 \)270,000 March 25 400 \( 570 \)228,000 Inventory at March 31: 500 Commercial Pumps Inventory at Feb. 28: 600 \( 800 \)480,000 Purchases: March 3 600 \( 900 \)540,000 March 12 300 \( 950 \)285,000 March 21 500 \(1,000 \)500,000 Sales: March 18 900 \(1,080 \)972,000 March 29 600 \(1,140 \)684,000 Inventory at March 31: 500 In addition to the above information, due to a downturn in the economy that has hit Englehart’s commercial customers especially hard, Englehart expects commercial pump prices from March 31 onward to be considerably different (and lower) than at the beginning of and during March. Englehart has developed the following additional information. Commercial Pumps Residential Pumps Net realizable value (per unit) \(900 \)580 The normal profit margin is 16.67% of cost. Englehart uses the FIFO accounting method. Accounting (a) Determine the dollar amount that Englehart should report on its March 31 balance sheet for inventory. Assume Englehart applies lower-of-cost-or-net realizable value at the individual product level. (b) Repeat part (a) but assume Englehart applies lower-of-cost-or-net realizable value at the major categories level. Englehart places both commercial and residential pumps into the same (and only) category. Analysis Which of the two approaches above (individual product level or major categories) for applying LCNRV do you think gives the financial statement reader better information? Principles Assume that during April, the net realizable value of commercial pumps rebounds to $1,050. (a) Briefly describe how Englehart will report in its April financial statements the inventory remaining from March 31. (b) Briefly describe the conceptual trade-offs inherent in the accounting in part (a).

Short answer

All the requirements are mentioned in the following steps.

Step-by-step solution

Calculation of LCNRV on individual basis (Accounting)

(a) LCNRV on an individual basis is calculated as follows:

	Units	NRV per unit	Total Cost calculation	Total cost	Total NRV	LCNRV
Commercial pumps	500	$900	(500 x $1,000)	$500,000	$450,000	$450,000
Residential pumps	500	580	(300 x$500)+(200 x $475)	$245,000	$290,000	$245,000
Total						$695,000

Calculation of LCNRV on category basis (Accounting)

(b) LCNRV on a category basis is calculated as follows:

	Units	NRV per unit	Total Cost calculation	Total cost	Total NRV	LCNRV
Commercial pumps	500	$900	(500 x $1,000)	$500,000	$450,000
Residential pumps	500	580	(300 x$500)+(200 x $475)	$245,000	$290,000
Total				$745,000	$740,000	$740,000

Identifying a better method (Analysis)

The individual method should convey better information to the stakeholders, as there are only certain types of products in the portfolio. The category method will be beneficial if there are more products in the portfolio.

Reporting of commercial pumps (Principles)

(a) The value of commercial pumps iscalculated as follows:

	Units	NRV per unit	Total Cost calculation	Total cost	Total NRV	LCNRV
Commercial pumps	500	$1,050	(500 x $1,000)	$500,000	$525,000	$500,000

The commercial pump will be reported at $500,000.

(b) In the given case, the net realizable value of the commercial pump is $525,000, and its cost equals $500,000. Per the lower-of-cost-or-net realizable value, it will be reported at $500,000 only, as it is the lowest between the two.