Question

Shaw Systems sells a limited line of specially made products, using television advertising campaigns in large cities. At year end, Shaw has the following data for its inventory: Item Number of Units Historical Cost per Unit Selling Price per Unit Disposal Costs Phone 625 $24 $25 $5 Stereo 180 177 200 10 Electric shaver 215 30 31 3 MP3 alarm clock 450 26 27 2 Handheld game system 570 40 45 3 Required: 1. Compute the carrying value of the ending inventory using the lower of cost or market rule applied on an item-by-item basis. 2. Prepare the journal entry required to value the inventory at lower of cost or market.

Answer 1

Solution 1:

Item	Nos of units	Unit Cost	Selling Price per unit	Disposal cost per unit	NRV per unit	Total Cost	Total NRV	Carrying value of inventory (Lower of Cost or Market value)
Phone	625	$24.00	$25.00	$5.00	$20.00	$15,000.00	$12,500.00	$12,500.00
Stereo	180	$177.00	$200.00	$10.00	$190.00	$31,860.00	$34,200.00	$31,860.00
Electric Shaver	215	$30.00	$31.00	$3.00	$28.00	$6,450.00	$6,020.00	$6,020.00
MP3 Alarm Clock	450	$26.00	$27.00	$2.00	$25.00	$11,700.00	$11,250.00	$11,250.00
Handheld Game System	570	$40.00	$45.00	$3.00	$42.00	$22,800.00	$23,940.00	$22,800.00
Total						$87,810.00	$87,910.00	$84,430.00

Solution 2:

Journal Entries
Period	Particulars	Debit	Credit
1	Cost of goods sold Dr ($87,810 - $84,430)	$3,380.00
	To Inventory		$3,380.00
	(To record reduction in value of inventory)