Question

Problem 5-21A Inventory valuation based on the lower-of-cost-or-market rule LO 5-2

At the end of the year, Randy’s Parts Co. had the following items in inventory:

Item	Quantity			Unit Cost				Unit Market Value
P1		62			$	88			$	90
P2		31				63				73
P3		82				136				124
P4		43				57				65

Required
a. Determine the amount of ending inventory using the lower-of-cost-or-market rule applied to each individual inventory item.
  

b. Provide the general journal entry necessary to write down the inventory based on Requirement a. Assume that Randy’s Parts Co. uses the perpetual inventory system. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
  

c. Determine the amount of ending inventory, assuming that the lower-of-cost-or-market rule is applied to the total inventory in aggregate.
  

d. Provide the general journal entry necessary to write down the inventory based on Requirement c. Assume that Randy’s Parts Co. uses the perpetual inventory system. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

a

Items	Quantity	Unit cost	Unit market value	Total unit cost (Quantity X unit cost)	Total market value (Quantity X market value)	Lower of cost of market value
P1	62	$88	$90	$5456	$5580	$5456
P2	31	$63	$73	$1953	$2263	$1953
P3	82	$136	$124	$11152	$10168	$10168
P4	43	$57	$65	$2451	$2795	$2451
TOTAL				$21012	$20806	$20028

Amount of ending inventory (lower of cost or market value) applied to each individual item = $20028 (Ans)

b

Particulars	Debit ($)	Credit ($)
Cost of goods sold ($21012 total cost - $20028 lower of cost and market value)	984
To inventory		984

c

Amount of ending inventory (lower of cost or market value) applied to total inventory in aggregate = $20806 (Ans)

d

Particulars	Debit ($)	Credit ($)
Cost of goods sold ($21012 total cost - $20806 market value)	206
To inventory		206

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