The Red Hen Company produces, processes, and sells fresh eggs. The company is in

Question

The Red Hen Company produces, processes, and sells fresh eggs. The company is in the process of preparing financial statements at the end of its first year of operations and has asked for your help in determining the appropriate treatment of the cost of its egg-laying flock. The estimated life of a laying hen is approximately two years, after which they are sold to soup companies. The controller considers the company’s operating cycle to be two years and wants to present the cost of the egg-producing flock as inventory in the current asset section of the balance sheet. He feels that the hens are “goods awaiting sale.” The chief financial officer does not agree with this treatment. He thinks that the cost of the flock should be classified as property, plant, and equipment because the hens are used in the production of product—the eggs. The focus of this case is the appropriate balance sheet presentation of the cost of the egg-producing flock.

1. What are the definitions of (1) inventory and (2) property, plant, and equipment? Cite the appropriate Codification topic number(s) in your discussion (e.g., [FASB ASC 220-25-45]).

2. What is the definition of a current asset? Would the hens be considered “current assets”? Cite the Codification topic number(s) relevant to classifying an item as a current asset.

3. How would you recommend the presentation of the cost of the egg-producing flock in the balance sheet? Discuss in details the following two scenarios and give your recommendation:

a. If you believe that the hens should be presented as “inventory,” what are your reasons? When should Red Hen Company recognize “cost of goods sold” and of what amount? What other disclosures in financial statements are required?

b. If you believe that the hens should be initially recognized as “property, plant, and equipment,” what are your justifications? What are the “useful life” and the expected salvage value of the egg-producing flock?

Explanation / Answer

1) Definition of inventory ( FASB ASC topic 330)

Invetory is the balance of costs of goods in hand at any given date. these are goos which remain in hand after the cost of goods ahve been absorbed to its matching revnue.

(2) PP&E ( ASC 360)

This note provides that PP&E includes land and land components , building , machinery and equipment and furniture and fixtures ,It deals with the PP&E and accumulated depreciation .thus it is the vlaue of these assets and accumulated depreciation . these are the assets held to run business.

3) though it is not wrong to treat is as current asset but i go with PP&E since it is held to run business . The useful life is 2 years abd expected salavage value will be the the net value of stock after depreciation

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.