Question

Exercise 6-47 (Algorithmic) Lower of Cost or Market Meredith's Appliance Store has the following data for the items in its inventory at the end of the accounting period: Item Number of Units Historical Cost per Unit Market Value per Unit Window air conditioner 15 $194 $110 Dishwasher 34 240 380 Refrigerator 27 392 605 Microwave 19 215 180 Washer (clothing) 36 195 290 Dryer (clothing) 21 168 245 1. Compute the carrying value of Meredith's ending inventory using the lower of cost or market rule applied on an item-by-item basis. 49910 Hide Feedback Incorrect Check My Work Feedback Set up a lower of cost or market analysis. Item-by-item – lower of either cost or market goes in LCM column. Compare actual cost of inventory to LCM. If the LCM column is lower, then the inventory account is adjusted. Hide 2. Prepare the journal entry required to value the inventory at lower of cost or market. Cost of Goods Sold 18760 Inventory 18760 Reduce inventory to market value Hide Feedback Partially Correct Check My Work Feedback Set up a lower of cost or market analysis. Item-by-item – lower of either cost or market goes in LCM column. Compare actual cost of inventory to LCM. If the LCM column is lower, then the inventory account is adjusted. 3. What is the conceptual justification for valuing inventory at the lower of cost or market? The input in the box below will not be graded, but may be reviewed and considered by your instructor. blank Hide Feedback Correct Check My Work

Answer 1

Answer-1:

Item No. of units per unit 15 Window air conditioner Dishwasher Refrigerator microwave Washer (Clothing) Dryer (Clothing) Market LCM on Historical Total Total value item-by-item Basis cost per unit historical cost market value basis $ 194 $ 2,910 $ 110 $ 1,650 $ 1,650 market lower 240 8,160 380 12,920 8160 cost lower 10,314 605 16,335 10314 cost lower 215 4,085 180 3,420 3420 market lower 1951 7,020 10,440 7020 cost lower 168 3,528 245 5,145 3528 cost lower Total Valuation $ 34,092 290

Answer-2:

If LCM is applied on an item-by-item basis, ending inventory would be $ 34,092. The company would report $34,092 value for inventory in the current assets section of the balance sheet by making an adjustment to inventory for $1,925 ($36,017 inventory cost – $34,092 LCM basis):

Credit Account Cost of goods sold Inventory Debit 1,925 $ $ 1,925

Answer-3:

Rational for valuing inventory at the lower of cost or market:

(i) Prevents overstatement of the value of obsolete or damaged inventories.

(ii) To report a loss when there is a decrease in the future utility below the original cost.