P9-10 (Lower-of-Cost-or-Market) Fortner Co. follows the practice of valuing its

Question

P9-10 (Lower-of-Cost-or-Market) Fortner Co. follows the practice of valuing its inventory at the
lower-of-cost-or-market. The following information is available from the company’s inventory records
as of December 31, 2006.

Item  Quantity Unit Cost Repl. Cost/Unit Est. Selling Price/unit Completion&Disp./unit  Norm Pft Marg/unit

A         1,100         $7.50            $8.40                     $10.50                       $1.50                      $1.80

B            800           8.20              8.00                        9.40                           .90                       1.20

C         1,000           5.60              5.40                        7.20                         1.10                         .60

D         1,000           3.80              4.20                        6.30                           .80                       1.50

E         1,400           6.40              6.30                        6.80                           .70                       1.00

Finn Berge is an accounting clerk in the accounting department of Fortner Co., and he cannot understand
why the market value keeps changing from replacement cost to net realizable value to something that he
cannot even figure out. Finn is very confused, and he is the one who records inventory purchases and
calculates ending inventory. You are the manager of the department and an accountant.
(a) Calculate the lower-of-cost-or-market using the “individual item” approach.
(b) Show the journal entry he will need to make in order to write down the ending inventory from
cost to market.
(c) Then write a memo to Finn explaining what designated market value is as well as how it is computed.
Use your calculations to aid in your explanation.

Explanation / Answer

Item A Cost=1100*$7.50=8250 Replacement cost=1100*$8.40=9240Sales=1100*$10.5=11550 B 6560 6400 7520 C 5600 5400 7520 D 3800 4200 6300 E 8960 8820 9520 Total Cost 33170 NRV=Sales - Completion and disposal Complition and disposal NRV Profit Margin A 1100*$1.50=$1650 $11550-$1650=9900 1100*$1.80=$1980 B 800*$.90=$720 7520-720=6800 960 C 1000*$1.10=$1100 7200-1100=6100 600 D 1000*$.80=$800 6300-800=5500 1500 E 14000*$.70=$980 9520-980=8540 1400 NRV-Profit Margin A 9900-1980=7920 B 6800-960=5840 c 6100-600=5500 D 5500-1500=4000 E 8540-1400=7140 Designated Market Values calculated by comparing Replacement Cost to NRV and Profit margin. Replacement cost has to be not more than NRV and less than NRV-Profit margin. Designated Market Values A 9240 B 6400 C 5500 D 4200 E 8540 NRV value is choosed because Replacement cost is higher than NRV LCM is calculated by comparing Cost with Designated market value, whichever is lower. A 8250 B 6400 C 5500 D 3800 E 8540 Total LCM 32490 B. Ending Inventory -Cost $33170

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