Question

X Company has 200 units of Product K on December 31, 2020, which originally cost $15. The replacement cost of Product X is $7.5. Product X sells for $12.5 has associated selling costs of $1.5, and a normal profit margin would be $2.5. X Company treats any write-downs as losses.

Suppose X Company uses a perpetual LIFO inventory system. What would the journal entry be in dec 31, 2020 to record the measurement of inventory?

Suppose X Company uses a perpetual FIFO inventory system. What would the journal entry be in dec 31, 2020 to record the measurement of inventory?

Answer 1

The market price of a good drops below the purchase price, the lower of cost or market method of valuation is recommended. This method allows declines in inventory value to be offset against income of the period. When goods are damaged or obsolete, and can only be sold for below purchase prices, they should be recorded at net realizable value. The net realizable value is the estimated selling price less any expense incurred to dispose of the good.

Here:

No of Units		200
Original Cost		15
Replacement Cost		7.5
Net realisable Value		8.5
Selling Price	12.5
Selling Cost	-1.5
Profit Margin	-2.5

Goods Valuation = $8.5 *200 units = $1700

Loss to be booked = (15*200)- 1700= $ 1300

Journal Entries in the books of X Company		Amount ($)
Date	Particulars	Debit	Credit
31-Dec-20	Loss on Inventory A/c .. Dr	1,300
	To Inventory A/c		1,300
	Being write-downs in Inventory balances considered as losses

There will be no change in both method of valuation