Question

Brooks Company carries three inventory items. The following information pertains to the ending inventory:

Item	Quantity			Unit Cost				Unit Market Value
A		195			$	10			$	9
F		255				12				11
K		173				5				8

Required
a. Determine the ending inventory that Brooks will report on the balance sheet, assuming that it applies the lower-of-cost-or-market rule to individual inventory items.

b. Prepare the necessary journal entry, assuming the decline in value was immaterial. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
  

Answer 1

Answer:

a.

Ending Inventory

5,425

b.

No	General Journal	Debit	Credit
1	Cost of goods sold	450
	Merchandise Inventory		450
	To record the cost of goods sold

Calculation:

Here we need to calculate the ending inventory that Brooks will report on the balance sheet, assuming that it applies the lower-of-cost-or-market rule to individual inventory items.

For that we need to take the quantities provided and then multiply it with the lower of the cost or the maket value provided. Then we need to take the sum of that.

The calculation is done below:

Item (a)	Quantity (b)	Cost per unit (c)	Mkt. Value per unit (d)	Unit Lower Cost/Mkt. (e)	Total Cost (f) =(b x c)	Total Lower Cost/Mkt (g) = (b x e)
A	195	10	9	9	1,950	1,755
F	255	12	11	11	3,060	2,805
K	173	5	8	5	865	865
Totals					5,875	5,425

Then to repare the necessary journal entry for the cost of goods sold, assuming the decline in value was immaterial, we need to the difference of the total cost and the total of lower of cost or market value.

That is:

Cost of goods sold (Inventory loss) = $5,875 - $5,425 = $450

So here we need to debit the Cost of goods sold and credit the Merchandise Inventory