At year-end, Ryman considered whether product XYZ needed a writedown. The product was original bought for...
- At year-end, Ryman considered whether product XYZ needed a writedown. The product was original bought for $8,000. The product could be replaced for $7,200 and sells for $10,000. The company typically pays a 10% commission on the sale of the product and pays $200 to deliver it. The normal profit margin for the product is 30% of the selling price. Make the journal entry, if necessary, to writedown the inventory.
Homework Answers
Journal Entry:
| Account title and explanation | Debit | Credit |
| Cost of goods sold | $800 | |
| Inventory | $800 | |
| [To written down the inventory] |
Calculations:
| Inventory-Sales value | $10,000 | ||
| Less: Estimated cost of completion and disposal | |||
| Commission [10,000 x 10%] | $1,000 | ||
| Delivery charges | $200 | ($1,200) | |
| Net realizable value | $8,800 | Ceiling | |
| Less: Normal profit margin (30% of sales) | ($3,000) | ||
| Net realizable value less a normal profit margin | $5,800 | Floor |
Replacement cost is in between Ceiling and Floor. Hence Replacement cost is the 'Market' value.
| Ending inventory (cost) | $8,000 |
| Ending inventory (market) | ($7,200) |
| Adjustment to Lower-of-Cost-or-Market | $800 |
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