In: Accounting
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 | 900 | $ | 24 | $ | 26 | $ | 30 | ||||||||||
B | 500 | 29 | 25 | 32 | |||||||||||||
C | 600 | 17 | 16 | 22 | |||||||||||||
D | 1,000 | 21 | 18 | 20 | |||||||||||||
E | 900 | 28 | 26 | 27 | |||||||||||||
The cost to sell for each product consists of a 15 percent sales
commission. The normal profit percentage for each product is 25
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.
Determine the carrying value of inventory at December 31, 2018, assuming the lower of cost or market (LCM) rule is applied to individual products. (Do not round intermediate calculations.)
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Solution:-
Determine the carrying value of inventory at December 31, 2018, assuming the lower of cost or market (LCM) rule is applied to individual products. (Do not round intermediate calculations.)
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2-a-Inventory carrying value when LCM rule is applied to entire inventory is lower of cost and market value which is $92,500 and $82,705 respectively. Therefore inventory carrying value will be $82,705.
2-b- Preparing adjusting entry as follows:-
Account Title and Explanation | Debit | Credit |
Cost of goods sold | 9795 | |
Inventory | 9795 |