Question

Rowan Company has four different categories of inventory. The quantity, cost, and market value for each of the inventory categories are as follows:

Item	Quantity	Cost Per Unit			Market Value Per Unit
1	220	$	4.40		$	4.60
2	130	$	6.20		$	6.00
3	100	$	10.00		$	9.25
4	25	$	20.50		$	25.00

The company carries inventory at lower-of-cost-or-market applied to the entire stock of inventory in the aggregate. How would the implementation of the lower-of-cost-or-market rule impact the elements of the company’s financial statements?

Multiple Choice

• Increase total assets and stockholders’ equity by $55.50.

• Decrease total assets and stockholders’ equity by $101.00.

• Decrease total assets and stockholders’ equity by $79.00.

• Have no effect on total assets or stockholders’ equity.

Answer 1

								Lower of Total Cost or MV
	Item	Units	Cost	MV	Total Cost	Total MV		Valuation
	1	220	4.40	4.60	968.00	1,012.00		968.00
	2	130	6.20	6.00	806.00	780.00		780.00
	3	100	10.00	9.25	1,000.00	925.00		925.00
	4	25	20.50	25.00	512.50	625.00		512.50
					3,286.50	2,330.00		3,185.50
					Total Cost	3,286.50
					Less: Valuation	3,185.50
					Loss	101.00
	This will decrease the Total Assets & Shareholder's by 101/-