Accouting Question

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jamespucyk

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Widgi-DotCom Corporation sells widgets online. It's inventory consists exclusively of units bought at $28. Due to technological absolecence the market value of Widgets has decreased to $21 in the previous fiscal year Dec 31st (2004). However a shortage in the Widget market during 2005 has cause the price of widgets to rise rapidly to $35 a unit.

How much should Widgi-DotCom report on it's income statement in each of these two years respectively (per unit):

A) $7 Loss in 2004 and a $14 gain in 2005
B) No gain or Loss in 2004 and no gain or loss in 2005
C) $7 Loss in 2005 and a $7 gain in 2005
D) 7$ Loss in 2005 and no gain in 2005
E) No Loss in 2005 and a gain of $7 in 2005
 
hmm..

well if price doesn't change until dec 21st, then year 2004 is not effected by it. So there won't be any loss in 2005. However, that $21 will be effect in 2005, but then it says market price will rise rapidly in 2005. So, I don't understand that price = $21 in Dec 31st 2004, and price = $35 in 2005, but when in 2005.

If i had to guess, I would say E?
 
OK, I thought I forgot something, the price changed Jan 1st 2004 and 2005 respectively and stayed there until December 31st
 
hehe :)

actually, its good, because this makes us think more.

Well, i would say C.
 
I think that are just talking about writing down the inventory (seeming that sales are not mentioned)

In 2004 you would write down by $7/unit because that is the FMV. and the 2005 income statement would not be effected by this inventory valuation (although if they gave sales numbers for 2005 and asked for CGS or gross profit your cost of inventory would now be $21 not the oriiginal $28 due to the write-down in 2004)

The only that would make sense is A
assuming your talking about the net effect/unit. Assuming you can only get $21/unit in the market.
 
It's not wrtiten as well as I hoped, I know I left out a few details, the answer I was getting at was C and it was a LCM question, thanks for ruining it :P
 
Yes C is right, but the time frames were off. The point is LCM, the inventory is written down to the market price for a loss then written off the the historical original cost and no more for a gain and no more.
 
Why isn't it D. I thought you couldn't write inventory back up after you already take a loss on it.
 
You actually can... the concept here it's lower of cost or market. Cost here $28 and market was $21 (thus lower of Cost or market, it was $21 in 2004). But in '05 when the market rose to $35, cost was lower thus it was written up to $28 (LCM), and for accounting purposes that's a gain.
 
Oh OK. Thanks for the good explanation. I will try to remember that in 27 days!
 
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