Question

Forester Company has five products in its inventory. Information about the December 31, 2021, inventory follows.

Product		Quantity		Unit Cost				Unit Replacement Cost				Unit Selling Price
A		600		$	30			$	32			$	36
B		1,000			35				31				38
C		900			23				22				28
D		800			27				24				26
E		700			34				32				33

The cost to sell for each product consists of a 10 percent sales commission. The normal profit for each product is 25 percent of the selling price.

Required:
1. Determine the carrying value of inventory at December 31, 2021, assuming the lower of cost or market (LCM) rule is applied to individual products.
2. Determine the carrying value of inventory at December 31, 2021, assuming the LCM rule is applied to the entire inventory.
3. Assuming inventory write-downs are common for Forester, record any necessary year-end adjusting entry based on the amount calculated in requirement 2.

Answer 1

1. calculation of carrying value of each inventory at December 31, 2021

Carrying Cost = Capital + Taxes + Insurance + Warehoucost + (Scrap-Recovery Cost) + ((Obsolescence costs- Recovery cost)/Average Annual Inventory Cost)

in the above given question online capital (purchase cost) is given hence

Product	Quanity X Unit Cost $	Replacement Cost $	Carrying Cost (Lower of Cost Market) $
A	600 X 30 = 18000	600 X 32 = 19200	18000
B	1000 X 35 = 35000	1000 X 31 = 31000	31000
C	900 X 23 = 20700	900 X 23 = 19800	19800
D	800 X 27 = 21600	800 X 27 = 19200	19200
E	700 X 34 = 23800	700 X 34 = 22400	22400
Total	119100	111600	110400

2. calculation of carrying cost at Decmeber 31st 2021 for entire invetory

total inventory cost =  $ 119100

total inventory replacement cost = $ 111600

carrying cost(Lower of cost or market) = $ 111600

3. cakculation of written down value of inventory and adjustment entries

Product A :

Purchase Cost = 600X30 =18000

Replacement Cost = 600 X32= 19200

Selling price = 600X36 =21600

Sales Commission = 21600X10% = 2160

Profit = 21600X 25% = 5400

Net Realisable Value = 21600-2160 = 19440

NRV- Profit = 19440-5400 = 14040

for product A, replacement cost is above net realizable value. Therefore, the replacement cost used is $19200. Comparing the amount to the purchase cost of $18000, a 0 write-down is necessary.

Product B:

Purchase Cost = 1000X35 =35000

Replacement Cost = 1000 X32= 31000

Selling price = 1000X38 =38000

Sales Commission = 38000X10% = 3800

Profit = 38000X 25% = 9500

Net Realisable Value = 38000-3800 = 34200

NRV - Profit = 34200-9500 = 24700

for product B, replacement cost is above net realizable value. Therefore, the replacement cost used is $31000. Comparing the amount to the purchase cost of $35000, a 4000(35000-31000) write-down is necessary.

Loss from the decline in inventory value	Dr. 4000
Inventory	Cr. 4000

Product C:

Purchase Cost = 900X23 =20700

Replacement Cost = 900 X22= 19800

Selling price = 900X28 =25200

Sales Commission = 25200X10% = 2520

Profit = 25200X 25% = 6300

Net Realisable Value = 25200-2520 = 22680

NRV - Profit = 22680-6300 = 16380

for product C, replacement cost is above net realizable value. Therefore, the replacement cost used is $19800. Comparing the amount to the purchase cost of $20700, a 900(20700-19800) write-down is necessary.

Loss from the decline in inventory value	Dr. 900
Inventory	Cr. 900

Product D:

Purchase Cost = 800X27 =21600

Replacement Cost = 800 X24= 19200

Selling price = 800X26=20800

Sales Commission = 20800X10% = 2080

Profit = 20800X 25% = 5200

Net Realisable Value = 20800-2080 = 18720

NRV - Profit = 18720-5200 = 13520

for product D, replacement cost is above net realizable value. Therefore, the replacement cost used is $19200. Comparing the amount to the purchase cost of $21600, a 2400 (21600-19200) write-down is necessary.

Loss from the decline in inventory value	Dr.2400
Inventory	Cr. 2400

Product E:

Purchase Cost = 700X34 =23800

Replacement Cost = 700 X32= 22400

Selling price = 700X33=23100

Sales Commission = 23100X10% = 2310

Profit = 23100X 25% = 5775

Net Realisable Value = 23100-2310 = 20790

NRV - Profit = 20790-5775 = 15015

for product E, replacement cost is above net realizable value. Therefore, the replacement cost used is $22400. Comparing the amount to the purchase cost of $23800, a 1400 (23800-22400) write-down is necessary.

Loss from the decline in inventory value	Dr. 1400
Inventory	Cr. 1400