Question

2. At 12/31/20, the end of Jenner Company's first year of business, inventory was $6,100 and $5,100 at cost and at market, respectively. Following is data relative to the 12/31/21 inventory of Jenner: Original Net Net Realizable Appropriate Cost Replacement Realizable Value Less Inventory Item Per Unit Value Normal Profit Value $.65 $.45 .45 .70 .75 .75 .65 .90 Cost .40 Selling price is $1.00/unit for all items. Disposal costs amount to 10% of selling price and a "normal" profit is 30% of selling price. There are 1,500 units of each item in the 12/31/21 inventory (10 points) Instructions la Prepare the entry at 12/31/20 necessary to implement the lower-of-cost-or-market procedure assuming Jenner uses a contra account for its balance sheet. (b) Complete the last three columns in the 12/31/21 schedule above based upon the lower-of cost-or-market rules. (c) Prepare the entry(ies) necessary at 12/31/21 based on the data above. (d) How are inventory losses disclosed on the income statement?

Answer 1

a	Loss Due to decline of inventory to Market	$1000
	Allowance to Reduce Inventory to Market		$1000
b	Items	Original cost per unit	Replacement cost	Net Realizable value	Net realizable value less normal profit	Appropriate Inventory
	A	$.65	$.45	$.90	$.60	$.60
	B	$.45	$.40	$.90	$.60	$.45
	C	$.70	$.75	$.90	$.60	$.70
	D	$.75	$.65	$.90	$.60	$.65
	E	$.90	$.85	$.90	$.60	$.85
		$3.45				$3.25
	*$3.25*1500 = $4875
c	Allowance to reduce inventory to market	$1000
	Cost of good sold		$1000
	Loss due to decline of inventory to market	$300
	Allowance to reduce inventory to market		$300
	(cost of inventory at 12/31/21 = $4875)
d	Inventory losses can be disclosed seprately (below gross profit in operating expense) or it shown as part of cost of good sold.