The West Company Uses the Perpetual Inventory System and Has

question 38

Short Answer

The West Company uses the perpetual inventory system and has computed the cost of its inventory to be $6,400 as follows: 200 units of Product A at a unit cost of $10; 300 units of Product B at a unit cost of $12; and 100 units of Product C at a unit cost of $8. The current replacement cost of each of the above items is $12.50, $11 and $7, respectively. West's accountant is not sure yet whether to apply the lower-of-cost-or-market rule by individual items or by the entire stock in aggregate. Indicate whether each of the following statements pertaining to the West Company is true or false.
_____ a) When referring to Product B, the "cost" totals $3,300.
_____ b) If West selects to apply the lower-of-cost-or-market rule by individual items, Product A would be listed at $12.50 per unit.
_____ c) West would record a write-down of inventory if is uses the individual items approach, but would not if it uses the aggregate approach.
_____ d) If West uses the individual items approach, $6,000 will be reported for inventory on the balance sheet.
_____ e) For Product C, the lower of cost or market is $800.

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Definitions:

Consolidation

The process of combining the financial statements of a parent company with those of its subsidiaries to present as if the group of companies was a single economic entity.

Amortization

The gradual reduction of a debt or the cost of an intangible asset over a specified period of time.