The December 31, 2017 inventory of Gwynn Company consisted of four products, for which the following...
The December 31, 2017 inventory of Gwynn Company consisted of four products, for which the following information is provided:
| Product | Original Cost | Replacement Cost | Estimated Disposal Cost | Expected Selling Price | Normal Profit on Sales |
| A | $25 | $22 | $6 | $37 | $7 |
| B | 42 | 40 | 12 | 48 | 14 |
| C | 120 | 115 | 25 | 160 | 48 |
| D | 16 | 15 | 3 | 22 | 2 |
In the ending inventory the following quantities existed:
Product A 1,000 units
Product B 2,000 units
Product C 500 units
Product D 1,500 units
Required: Please show all calculations
(For calculations needed to determine elements of market value,
LCM, and total inventory, you may indicate the formula you used to
make the calculations.)
- Indicate the value of inventory that will be reported on the Balance Sheet assuming lower-of-cost-or-market (LCM) is applied to individual items.
- If the balance in the Allowance to Reduce Inventory to LCM has a credit balance of $8,000, using the loss method and the results derived in question 1 above, would a loss or a gain be recorded and in what amount?
Homework Answers
Calculation of value of inventory assuming LCM is applied to individual items (Amounts in $)
| Product | Ceiling (expected selling price - estimated disposal cost) | Floor (Ceiling price - normal profit on sales) | Replacement Cost | Market Value (lower of ceiling or replacement cost but not less than floor price) | Cost | Lower of Cost or Market Value |
| A | 31 (37-6) | 24 (31-7) | 22 | 24 | 25 | 24 |
| B | 36 (48-12) | 22 (36-14) | 40 | 36 | 42 | 36 |
| C | 135 (160-25) | 87 (135-48) | 115 | 115 | 120 | 115 |
| D | 19 (22-3) | 17 (19-2) | 15 | 17 | 16 | 16 |
Calculation of Ending Inventory (Amounts in $)
| Product | Units in Ending Inventory (a) | Cost per unit (b) | Total Cost (a*b) | LCM (c) | Total value of Inventory (LCM) (a*c) |
| A | 1,000 | 25 | 25,000 | 24 | 24,000 |
| B | 2,000 | 42 | 84,000 | 36 | 72,000 |
| C | 500 | 120 | 60,000 | 115 | 57,500 |
| D | 1,500 | 16 | 24,000 | 17 | 25,500 |
| Total | 193,000 | 179,000 |
Total loss on reduction in value of inventory = Cost - Value based on LCM
= $193,000 - $179,000 = $14,000
Additional loss to be recorded = $14,000 - $8,000 = $6,000
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