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(Statement and Note Disclosure, LCM, and Purchase Commitment) Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1988, Maddox 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 Maddox’s fiscal year, November 30, 2012, 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 264,000 Factory supplies 69,000 The following information, shown on page 536, relates to Maddox’s inventory and operations. 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 89,000 Deluxe model 108,000 110,000 Total down tube shifters 270,000 266,000 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 $650,550 One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan. 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. The total market value of the work in process inventory is $108,700. 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. Maddox 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, Maddox applies the lower-of-cost-or-market method to the total of each inventory account. Consider all amounts presented above to be material in relation to Maddox’s financial statements taken as a whole. Instructions Prepare the inventory section of Maddox’s balance sheet as of November 30, 2012, including any required note(s). Without prejudice to your answer to (a), assume that the market value of Maddox’s inventories is less than cost. Explain how this decline would be presented in Maddox’s income statement for the fiscal year ended November 30, 2012. Assume that Maddox has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2012, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Maddox after November 30, 2012. Discuss the impact, if any, that this purchase commitment would have on Maddox’s financial statements prepared for the fiscal year ended November 30, 2012.

(Statement and Note Disclosure, LCM, and Purchase Commitment) Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1988, Maddox 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 Maddox’s fiscal year, November 30, 2012, 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
264,000
Factory supplies
69,000

The following information, shown on page 536, relates to Maddox’s inventory and operations.

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
89,000
Deluxe model
108,000
110,000
Total down tube shifters
270,000
266,000
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
$650,550
One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment.
Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan.
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.
The total market value of the work in process inventory is $108,700.
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.
Maddox 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, Maddox applies the lower-of-cost-or-market method to the total of each inventory account.
Consider all amounts presented above to be material in relation to Maddox’s financial statements taken as a whole.

Instructions

Prepare the inventory section of Maddox’s balance sheet as of November 30, 2012, including any required note(s).
Without prejudice to your answer to (a), assume that the market value of Maddox’s inventories is less than cost. Explain how this decline would be presented in Maddox’s income statement for the fiscal year ended November 30, 2012.
Assume that Maddox has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2012, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Maddox after November 30, 2012. Discuss the impact, if any, that this purchase commitment would have on Maddox’s financial statements prepared for the fiscal year ended November 30, 2012.

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