Question

At the end of 20X4, Sherpa Lighting Ltd. has a large stock of incandescent lighting fixtures that are becoming obsolete due to a new trend to low-energy fluorescent and LED lighting fixtures. The current inventory of incandescent fixtures has a cost of $170,000. The sales manager of Sherpa estimates that the inventory can be sold through the normal course of business over the next several reporting quarters for approximately $150,000. Sales personnel are given a 10% commission on sales. In addition, Sherpa will grant an additional 5% sales commission for sales of these almost-obsolete fixtures, intended to make up for the reduced sales prices as well as an additional incentive to sell them. In early 20X5, Sherpa's production manager decided that the fixtures can be adapted to not only accept the new LED lighting but also compete quite effectively with new products coming on the market. During 2005, the fixtures are converted at a cost of $25,000. The sales manager estimates that after the conversion, the newly adapted inventory can be repriced to fetch $185,000 (before 10% sales commission) in the market. Required: Using the valuation allowance method, prepare the appropriate journal entries to record inventory adjustments at the end of each of 20X4 and 20X5.

Answer 1

Sherpa Lighting Ltd.

Journal Entries, using the valuation allowance method:

December 31, 20X4:

Debit Inventory Write-down Expense $20,000

Credit Inventory $20,000

To write down inventory because of obsolescence.

December 31, 20X5:

Debit Inventory $25,000

Credit Cash Account $25,000

To record the cost of converting the fixtures.

Step-by-step explanation:

a) Data and Calculations:

December 31, 20X4:

Cost of Inventory of incandescent fixtures = $170,000

Estimated sales value of the inventory = $150,000

Obsolete inventory Expense = $20,000 ($170,000 - $150,000)

December 31, 20X5:

Balance of Inventory of incandescent fixtures = $150,000

Add conversion cost = 25,000

Ending balance of inventory = $175,000