P9-9B (Statement and Note Disclosure, LCM, and Purchase Commitment) Captive Style

| March 31, 2017

Question
P9-9B (Statement and Note Disclosure, LCM, and Purchase Commitment) Captive Style, a division of Sanibel Inc., manufactures three models of boat seat components that are sold to speed boat manufacturers, retailers, and catalog outlets. Since beginning operations in 1978, Captiva 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 Captiva’s fiscal year, April 30, 2014, are shown below. The inventories are stated at cost before any year-end adjustments. Finished goods $262,000 Work in process 86,500 Raw materials 310,500 Factory supplies 46,000 The following information relates to Captiva’s inventory and operations.

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

Cost Market

Seat cushion

Standard model $37,500 $50,000

Deluxe model $50,500 $78,000

Limited model $46,000 $86,000

Total seat cushions $134,000 $ 214,000

Arm rests

Standard model $37,000 $29,600

Deluxe model $30,000 $34,400

Total arm rests $67,000 $64,000

Lumbar support

Standard model $42,000 $68,100

Deluxe model $19,000 $36,400

Total lumbar supports $61,000 $104,500

Total finished goods $262,000 $422,500

2. Three-quarters of the seat cushion finished goods inventory is held by catalog outlets on consignment.

3. One-half of lumbar support finished goods inventory has been pledged as collateral for a bank loan.

4. Sixty percent of the raw materials balance represents electronic control units acquired at a contracted price 40 percent above the current market price. The market value of the rest of the raw materials is $110,800.

5. The total market value of the work in process inventory is $84,700.

6. Included in the cost of factory supplies are obsolete items with an historical cost of $6,800. The market value of the remaining factory supplies is $40,100.

7. Captiva applies the lower-of-cost-or-market method to each of the three types of seat components in finished goods inventory. For each of the other three inventory accounts, Captiva 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 Captiva’s financial statements taken as a whole.

Instructions:

(a) Prepare the inventory section of Captiva’s balance sheet as of April 30, 2014, including any required note(s).

(b) Without prejudice to your answer to (a), assume that the market value of Captiva’s inventories is less than cost. Explain how this decline would be presented in Captiva’s income statement for the fiscal year ended April 30, 2014.

(c) Assume that Captiva has a firm purchase commitment for the same type of electronic control units included in the raw materials inventory as of April 30, 2014, and that the purchase commitment is at a contracted price 10% greater than the current market price. These electronic control units are to be delivered to Captiva after April 30, 2014. Discuss the impact, if any, that this purchase commitment would have on Captiva’s financial statements prepared for the fiscal year ended April 30, 2014.

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