In October 2013, Harvest Moon Produce entered into a contract with Boblaws Distribution to sell them 100,000 cases of oranges during the coming year.Harvest Moon grows their oranges on approximately 100 acres of prime land for orange trees.At the time of the contract, the fair value of oranges was $25 per case.The weather had been unusually warm and Harvest Moon expects to harvest approximately 130,000 cases.The additional 30,000 cases will have a selling cost of $2 per case.
Unfortunately, by the end of the year, the excess supply of oranges has driven the market price down to $20 per case.In their December 31 financial statements, Harvest Moon should value their agricultural inventory at:
A)the amount of costs they have invested that year.
B)$2,540,000
C)$3,040,000
D)$2,500,000

Question

Quizplus · Accepted Answer

The correct valuation for Harvest Moon's agricultural inventory at year-end, considering the market price has fallen to $20 per case, would be based on the lower of cost or market value. Since the contract was for 100,000 cases at $25 per case, but the market value has dropped to $20 per case, the inventory should be valued at the current market value. The calculation for the 100,000 cases would be 100,000 cases * $20 = $2,000,000. The additional 30,000 cases, intended for sale at the market price, would also be valued at $20 per case, adding $600,000 (30,000 cases * $20). However, these additional cases have a selling cost of $2 per case, which reduces their net value to $18 per case, or $540,000 (30,000 cases * $18). Therefore, the total valuation of the inventory is $2,000,000 (for the original contract) + $540,000 (for the additional cases) = $2,540,000.

In October 2013, Harvest Moon Produce Entered into a Contract