Question

At the end of the year, Randy’s Parts Co. had the following items in inventory:

Item	Quantity			Unit Cost				Unit Market Value
P1		60			$	85			$	90
P2		40				70				72
P3		80				130				120
P4		70				125				130

a. Determine the amount of ending inventory using the lower-of-cost-or-market rule applied to each individual inventory item.


b. Provide the adjustment necessary to write down the inventory based on Requirement a. Assume that Randy’s Parts Co. uses the perpetual inventory system.

c. Determine the amount of ending inventory, assuming that the lower-of-cost-or-market rule is applied to the total inventory in aggregate.

d. Provide the adjustment necessary to write down the inventory based on Requirement c. Assume that Randy’s Parts Co. uses the perpetual inventory system.

Answer 1

a.
Calculate the amount of ending inventory
Item	Quantity	Total costs	Total market value	Lower of cost or market value
P1	60	$5,100	$5,400	$5,100
P2	40	$2,800	$2,880	$2,800
P3	80	$10,400	$9,600	$9,600
P4	70	$8,750	$9,100	$8,750
Total		$27,050	$26,980	$26,250
Thus, amount of ending inventory is $26,250
b.
Journal entry for inventory write down
General Journal	Debit	Credit
Cost of goods sold (27050-26250)	$800
Merchandise inventory		$800
(To record inventory write down)
c.
If the rule applies in aggregate then value of ending inventory would be $26,980 lower of costs (27,050) and market value ($26,980)
d.
Journal entry for inventory write down
General Journal	Debit	Credit
Cost of goods sold (27050-26980)	$70
Merchandise inventory		$70
(To record inventory write down)