Question

17. 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		$	19.00

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?

	a.	Decrease total liabilities and stockholders’ equity by $94.50.
	b.	Increase total assets and stockholders’ equity by $94.50.
	c.	Decrease total assets and stockholders’ equity by $94.50.
	d.	Have no effect on total assets or stockholders’ equity.

Answer 1

Correct answer--------(C) Decrease total assets and stockholders’ equity by $94.50.

Working

There will be a loss of $94.50 due to decrease in value of Inventory

Item	Quantity	Cost per unit	Total cost	Market value per unit	Total market value	Lower of cost or Market
1	220	$    4.40	$      968.00	$                    4.60	$   1,012.00
2	130	$    6.20	$      806.00	$                    6.00	$      780.00
3	100	$ 10.00	$ 1,000.00	$                    9.25	$      925.00
4	25	$ 20.50	$      512.50	$                  19.00	$      475.00
			$ 3,286.50		$   3,192.00	$ 3,192.00

.

Inventory at cost	$ 3,286.50
Inventory as per lower of cost or market	$ 3,192.00
Decrease in Inventory	$       94.50

.