Subject:Solution to Case 04-4, Three Little Pigs Inc.
Three Little Pigs Inc. inventory consists of livestock held for sale, developed, and processed (both internal and external). On September 30, 2002, the company states that even though market prices fell below the cost, Three Little Pigs Inc. is unwilling to accept impairment on their inventory due to increase revenue believed to be made up in the fourth quarter which will cover all losses from the decline. Secondly, we must determine an appropriate solution for recording their inventory.
* Inventory be evaluated for impairment under the lower of cost or market method by inventory category, such as processed pork products, live hogs for sale, and developing animals. * Inventory be evaluated for impairment under the lower of cost or market method based on end product category, such as separating inventory into two groups:
nternal live hogs & developing animals to be processed are combined with processed pork products
Developing animals and live hogs sold to third parties in another group * Inventory evaluated for impairment on some other basis not described above
A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in prices levels, or other causes, the differences shall be recognized as a loss of the current period. This is generally accomplished by stating such goods at lower level commonly designated as market (asc.fasb.org).
Due to the capture of the Big Bad Wolf which led to an increase in the supply of pork and a decline in the demand, pricing fell on the market for pork products. Also, a decline in pricing...