Question

Forester Company has five products in its inventory. Information about the December 31, 2021, inventory follows. Unit Unit Unit Selling Replacement Price Product Quantity Cost Cost $ 11 $13 $17 900 A 500 16 12 19 В 900 3 9 С 600 8 7 D 700 15 13 14 Е The cost to sell for each product consists of a 20 percent sales commission. The normal profit for each product is 30 percent of the selling price. Required: 1. Determine the carrying value of inventory at December 31, 2021, assuming the lower of cost or market (LCM) rule is applied to individual products. 2. Determine the carrying value of inventory at December 31, 2021, assuming the LCM rule is applied to the entire inventory. 3. Assuming inventory write-downs are common for Forester, record any necessary year-end adjusting entry based on the amount calculated in requirement 2.

Answer 1

Carrying value of inventory at December 31,2021 using Lower of cost or market (LCM) rule

Product (quantity)	Replacement cost	NRV	NRV-NP	Market	Cost	Inventory
A(900)	11,700	12,240	7,650	11,700	9,900	9,900
B(500)	6,000	7,600	4,750	6,000	8,000	6,000
C(900)	2,700	6,480	4,050	4,050	3,600	3,600
D(600)	3,000	3,360	2,100	3,000	4,800	3,000
E(700)	9,100	7,840	4,900	7,840	10,500	7,840
				32,590	36,800	30,340

Calculation of NRV, NRV-NP

Selling price less cost to sell. Cost to sell = 20% of selling price

NRV less normal profit margin: Profit =30% of the selling price

Product	selling price	NRV per unit	NRV-NP
A	17	17-(20%×17) =13.6	13.6-(30%×17)=8.5
B	19	19-(20%×19)= 15.2	15.2-(30%×19)=9.5
C	9	9-(20%×9)=7.2	7.2-(30%×9)=4.5
D	7	7-(20%×7)=5.6	5.6-(30%×7)=3.5
E	14	14-(20%×14)=11.2	11.2-(30%×14)=7

Market= middle value of RC,NRV& NRV-NP

Inventory value = Lower of cost or market.

2.

Carrying value of inventory at December 31,2021 assuming the LCM rule is applied to the entire Inventory

Inventory carrying value= $32,590.

3.

Inventory carryingvalue would be 32,590. The lower of aggregate inventory cost (36,800) and aggregate inventory market (32,590). The amount of loss from the inventory write down is $4,210(36,800-32,590).

Adjusting journal entry would be

1	Cost of goods sold	4,210
	Inventory		4,210

_____×____

All the best