Question: Sier Specialty Corp., a division of FH
Sier Specialty Corp., a division of FH Inc., manufactures three models of bicycle gearshift components that are sold to bicycle manufacturers, retailers, and catalogue outlets. Since beginning operations in 1969, Sier has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. Except for overhead, manufacturing costs are accumulated using actual costs. Overhead is applied to production using predetermined overhead rates. The balances of the inventory accounts at the end of Sier's fiscal year, September 30, 2020, follow. The inventories are stated at cost before any year-end adjustments.
The following information relates to Sier's inventory and operations:
1. The finished goods inventory consists of these items:
2. Half of the finished goods inventory of head tube shifters is at catalogue outlets on consignment.
3. Three quarters of the finished goods inventory of bar end shifters has been pledged as collateral for a bank Joan.
4. Half of the raw materials balance is for derailleurs acquired at a contracted price that is 20% above the current market price. The net realizable value of the rest of the raw materials is $135,500.
5. The total net realizable value of the work-in-process inventory is $105,500.
6. Included in the cost of factory supplies are obsolete items with a historical cost of $4,200. The net realizable value of the remaining factory supplies is $65,900.
7. Sier applies the lower of cost and net realizable value method to each of the three types of shifters in finished goods inventory. For each of the other three inventory accounts, Sier applies the lower of cost and net realizable value method to the total of each inventory account.
8. Consider all of the amounts presented above as being material amounts in relation to Sier's financial statements as a whole.
Instructions
a. Assuming that ASPE is followed, prepare the inventory section of Sier's statement of financial position as at September 30, 2020, including any required note(s).
b. Regardless of your answer to part (a), assume that the net realizable value of Sier's inventories is less than cost. Explain how this decline would be presented in Sier's income statement for the fiscal year ended September 30, 2020, under ASPE.
c. Assume that Sier has a firm purchase commitment for the same type of derailleur that is included in the raw materials inventory as at September 30, 2020, and that the purchase commitment is at a contracted price that is 15% higher than the current market price. These derailleurs are to be delivered to Sier after September 30, 2020. Discuss the impact, if any, that this purchase commitment would have on Sier's financial statements prepared for the fiscal year ended September 30, 2020, under ASPE.
d. How would your response to part (c) change under IFRS?
e. Explain and compare the disclosure requirements under ASPE and IFRS.
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