Question

Forester Company has five products in its inventory. Information about the December 31, 2018, inventory follows.

Product		Quantity		Unit Cost				Unit Replacement Cost				Unit Selling Price
A		1,000		$	26			$	28			$	32
B		500			31				27				34
C		900			19				18				24
D		900			23				20				22
E		800			30				28				29

The cost to sell for each product consists of a 10 percent sales commission. The normal profit percentage for each product is 35 percent of the selling price.

Required:
1. Determine the carrying value of inventory at December 31, 2018, assuming the lower of cost or market (LCM) rule is applied to individual products.
2a. Determine the carrying value of inventory at December 31, 2018, assuming the LCM rule is applied to the entire inventory.
2b. Assuming inventory write-downs are usual business practice for Forester, record any necessary year-end adjusting entry.

Answer 1

1	Calculate carrying value of inventory assuming LCM rule is applied to individual products as follows
	Product	Units	Replacement Cost	Ceiling NRV	Floor NRV- Net Profit	Designated Market Value -D	Cost	Inventory Value
			A	B	C	(Middle value of A,B and C	E	Lower of D and E
	A	1000	28*1000=28000	32*90%*1000=28800	28.8-11.2*1000=17600	28000	1000*26=26000	26000
	B	500	27*500=13500	34*90%*500=15300	30.6-11.9*500=9350	13500	500*31=15500	13500
	C	900	18*900=16200	24*90%*900=19440	21.6-8.4*900=11880	16200	900*19=17100	16200
	D	900	20*900=18000	22*90%*900=17820	19.8-7.7*900=10890	17820	900*23=20700	17820
	E	800	28*800=22400	29*90%*800=20880	26.1-10.15*800=12760	20880	800*30=24000	20880
				Total		96400	103300	94400
2-a	Inventory carrying value when the LCM rule is applied to entire inventory is lower of cost and market value
	which is 103300 and 96400 respectively.Therefore the inventory carrying value will be $96400
b	Prepare the adjusting entry
	Date	Account Title	Debit-$	Credit-$
		Cost of Goods Sold-103300-96400	6900
		Inventory		6900