Question

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

Item	Quantity			Unit Cost				Unit Market Value
P1		60			$	85			$	90
P2		40				70				72
P3		80				130				120
P4		70				125				130

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.
  

Answer 1

a. The computation of the amount of ending inventory using the lower-of-cost-or-market rule applied to each individual inventory item but before it, we need to follow some steps which are shown below:-

Step 1:

Cost of inventory.

Step 2:

Market value

and finally

Ending inventory

Note: We have taken the lower cost of inventory or market value for determining the ending inventory.

b. The Journal entry is shown below:-

Cost of goods sold Dr, $800

To Inventory $800

(Being decline in cost of merchandise sold is recorded)

Working note:-

Decline in value = Total cost of inventory - LCM value

= $27,050 - $26,250

= $800

c. The computation of the amount of ending inventory, assuming that the lower-of-cost-or-market rule is applied to the total inventory in aggregate is shown below:-