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Acct 2210 Zeigler: E5-11A – Pg 291
Applying the “Lower of Cost or Market” (LCM) rule to inventory
See pg 278 discussion:
1) This assign is similar to the posted Canvas H/W assign.
2) The term “Market” is defined as “Replacement cost”.
3) Three approaches are available when applying LCM rules.
|a. |b. |c. |d. |e. |f. |g. |
| | |Cost Per Unit |Market Value Per Unit |Unit Lower of Cost/Mkt. |Total Cost |Total Lower of Cost/Mkt. |
|Item |Quantity | | | | | |
| | | | | | | |
| | | | | |(b * c) |(b * e) |
|A |400 |$20 |$18 |$18 |$8,000 |$7,200 |
|B |500 |25 |24 |24 |12,500 |12,000 |
|C |300 |10 |12 |10 |3,000 |3,000 |
| | | | | | | |
|Totals | | | | |$23,500 |$22,200 |
| | | | | | | |
Conclude: The inventory should be carried at $22,200, if LCM is “applied to individual inventory items”. Accordingly, the inventory “write-down” entry:
b.
|Account Title |Debit |Credit |
|COGS (OR Inv Loss “if material”) |*1,300 | |
| Merchandise Inventory | |1,300 |
*$23,500 ( $22,200 = $1,300
Note: Is this a “material” amount”?
Addn Question:
Would this analysis differ if we applied the LCM rule to the entire stock of inventory (i.e. in aggregate)?
Answer: Yes. The inventory write-down amount would be $700 as discussed in class. See me with any questions.
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