Question

How to calculate the cost of inventory using the lower of cost or market (LCM) inventory valuation method?

How to record the adjustment to write-down inventory under the LCM inventory valuation method?

Answer 1

Under LCM, inventory items are written down to market value when the market value is less than the cost of the items. For example, assume that the market value of the inventory is $39,600 and its cost is $40,000. Then, the company would record a $ 400 loss because the inventory has lost some of its revenue-generating ability. The company must recognize the loss in the period the loss occurred.   The journal entry would be:

Account	Debit           Credit	Credit
Cost of goods sold	$400
Inventory	$400	$400

On the other hand, if ending inventory has a market value of $ 45,000 and a cost of $ 40,000, the company would not recognize this increase in value and no adjusting entry would be required.

LCM applied A company may apply LCM to each inventory item (such as Monopoly), each inventory class (such as games or toys), or total inventory (as seen in the above examples).

Adjustment to write down the inventory under the LCM Inventory Valuation method

If you use lower of cost or market, or LCM, costing, you can create an “allowance to reduce inventory to LCM” account separate from your general inventory reserve account for inventory write down. Credit this allowance account and debit either COGS or a “loss from reducing inventory to LCM” income statement account. You cannot use the LCM method if you use the last-in, first-out inventory method.