Lower-of-cost-or-market: At 12/31/10, the end of Jenner Company\'s first year of

ID: 2358924 • Letter: L

Question

Lower-of-cost-or-market: At 12/31/10, the end of Jenner Company's first year of business, inventory was $4,100 and $2,800 at cost and at market, respectively. Following is data relative to the 12/31/11 inventory of Jenner: Original Net Net Realizable Appropriate Cost Replacement Realizable Value Less Inventory Item Per Unit Cost Value Normal Profit Value A $ .65 $ .45 B .45 .40 C .70 .75 D .75 .65 E .90 .85 Selling price is $1.00/unit for all items. Disposal costs amount to 10% of selling price and a "normal" profit is 30% of selling price. There are 1,000 units of each item in the 12/31/11 inventory. Instructions (a) Prepare the entry at 12/31/10 necessary to implement the lower-of-cost-or-market procedure assuming Jenner uses a contra account for its balance sheet. (b) Complete the last three columns in the 12/31/11 schedule above based upon the lower-of-cost-or-market rules. (c) Prepare the entry(ies) necessary at 12/31/11 based on the data above. (d) How are inventory losses disclosed on the income statement?

Explanation / Answer

Loss due to market decline of inventory---------1300

Allowance to reduce inventory to market ------------------1300

==========================

item

Cost per unit

Replacement cost

Releaised value

Less normal profit

Inventory value

.65

.45

.90

.60

.45

.40

.90

.60

.45

.70

.75

.90

.60

.70

.75

.65

.90

.60

.65

.90

.85

.90

.60

.853.25

3.45

3.25 X1000= 3250

===================================

Allowance to reduce inventory to marjet

1300

Cost of goods sold

1300

LOSS DUE TO MARKET DECLINE OF INVENTORY

200

Allowance TO MARKET INVENTORY

200

=======================

Inventory losses can be disclosed separately or they can be shown as part of goods sold