Homework Answers
| 5 | |||||||
| a. | Computation of market value: | ||||||
|
Ceiling limt for market price=Selling price-Selling costs=63-5=$ 58 |
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Floor limt for market price =Ceiling limit-Normal profit margin=58-17=$ 41 |
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Designated market price=Repalcement cost subject to ceiling and floor limit=$45 subject to $58 and $41=$45 |
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| Lower of cost or market value=Lower of historical cost pr designated market price=Lower of $50 or $45=$ 45 | |||||||
| b. | Beginning balance in Allowance to reduce inventory to LCM=Inventory at cost (1/1/2011)-Inventory at market (1/1/2011)=154000-147000=$ 7000 | ||||||
| Inventory at cost (12/31/2011)=3500*50=$ 175000 | |||||||
| Inventory at market (12/31/2011)=3500*45=$ 157500 | |||||||
| Desired ending balance in Allowance to reduce inventory to LCM=Inventory at cost (12/31/2011)-Inventory at market (13/31/2011)=175000-157500=$ 17500 | |||||||
| Loss due to market decline of inventory to be recognized in 2011=Desired ending balance in Allowance to reduce inventory to LCM-Beginning balance in Allowance to reduce inventory to LCM=17500-7000=$ 10500 | |||||||
| Journal entry: | |||||||
| Date | Account titles | Debit | Credit | ||||
| 12/31/2011 | Loss due to market decline of inventory | 10500 | |||||
| Allowance to reduce inventory to LCM | 10500 | ||||||
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