Ivanhoe Co. follows the practice of valuing its inventory at the lower-of-cost-or-market. The following information is available from the company’s inventory records as of December 31, 2017. Item Quantity Unit Cost Replacement Cost/Unit Estimated Selling Price/Unit Completion & Disposal Cost/Unit Normal Profit Margin/Unit A 1,900 $9.23 $10.33 $12.92 $1.85 $2.21 B 1,600 10.09 9.72 11.56 1.11 1.48 C 1,800 6.89 6.64 8.86 1.41 0.74 D 1,800 4.67 5.17 7.75 0.98 1.85 E 2,200 7.87 7.75 8.24 0.86 1.23 Greg Forda is an accounting clerk in the accounting department of Ivanhoe Co., and he cannot understand why the market value keeps changing from replacement cost to net realizable value to something that he cannot even figure out. Greg is very confused, and he is the one who records inventory purchases and calculates ending inventory. You are the manager of the department and an accountant. Calculate the lower-of-cost-or-market using the individual-item approach. Lower-of-Cost-or-Market (Per unit basis) Item A $ 8.86 Item B $ 8.97 Item C $ 6.64 Item D $ 4.92 Item E $ 6.15 SHOW LIST OF ACCOUNTS LINK TO TEXT Show the journal entry he will need to make in order to write down the ending inventory from cost to market.
Answer | ||||||||||
Now, for the first part we need to know what the market values are. | ||||||||||
For which we need to calculate two more columns: NRV (Net Realizable Value) and (NRV – Normal Profit Margin) | ||||||||||
Item | Quantity | Unit Cost | Replacement Cost / unit | Estimated Selling price / unit | Completion & Disposal cost / unit | Normal Profit Margin | NRV | NRV-MARGIN | Market | Lower Of Cost or Market |
A | 1,900 | 9.23 | 10.33 | 12.92 | 1.85 | 2.21 | 11.07 | 8.86 | 8.86 | 8.86 |
B | 1,600 | 10.09 | 9.72 | 11.56 | 1.11 | 1.48 | 10.45 | 8.97 | 8.97 | 8.97 |
C | 1,800 | 6.89 | 6.64 | 8.86 | 1.41 | 0.74 | 7.45 | 6.71 | 6.64 | 6.64 |
D | 1,800 | 4.67 | 5.17 | 7.75 | 0.98 | 1.85 | 6.77 | 4.92 | 4.92 | 4.67 |
E | 2,200 | 7.87 | 7.75 | 8.24 | 0.86 | 1.23 | 7.38 | 6.15 | 6.15 | 6.15 |
Where Market is calculated by comparing Replacement Cost / unit, NRV and NRV – Profit Margin. The value which is between the other two is taken as the market. | ||||||||||
For the Lower cost or market, the value is the lowest between market and the unit cost. | ||||||||||
Prepare the journal entry required to write down the ending inventory from cost to market as follows: | ||||||||||
Account Titles and Explanation | Debit | Credit | ||||||||
Cost of Goods Sold Method: | ||||||||||
Cost of goods sold | 6729 | |||||||||
Inventory | 6729 | |||||||||
The Loss Method: | ||||||||||
Loss from reducing inventory to LCM | 6729 | |||||||||
Allowance to reduce inventory to LCM | 6729 | |||||||||
Working Notes | ||||||||||
Item | Quantity | Unit Cost | Inventory Cost | Lower Of Cost or Market | Ending Inventory | |||||
A | 1,900 | 9.23 | 17,537 | 8.86 | 16,834 | |||||
B | 1,600 | 10.09 | 16,144 | 8.97 | 14,352 | |||||
C | 1,800 | 6.89 | 12,402 | 6.64 | 11,952 | |||||
D | 1,800 | 4.67 | 8,406 | 4.67 | 8,406 | |||||
E | 2,200 | 7.87 | 17,314 | 6.15 | 13,530 | |||||
Total | 71,803 | 65,074 | ||||||||
71803-65074=6729 | ||||||||||
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