1 You find the following disclosure in the balance sheet of a major company Inve

Question

1 You find the following disclosure in the balance sheet of a major company

Inventory at Cost $459,000

Less:Allowance to Reduce Inventory to LCM ( 9,000)

Inventory at LCM 450,000

(a)The net income for the current year was reduced $9000 by applying the LCM method

(b)The market value of inventory is $450,000

(c)total losses to date on inventory write downs equal $9000

(d)All of the above

(2)A company computes the lower of cost or market on its inventory on an item by item basis.The following information relates to the 2X2 inventor

The Company has 500 units of item 101, and 1000 each of items 102 and 103. what amount should be reported for inventory on the 20X2 balance sheet.

Item Cost Estimated Selling
Price Normal Profit Selling costs Replace Cost 101 $ 24 $32 4 6 15 102 16 24 2 3 16 103 24 40 4 10 32

Explanation / Answer

1. Option (b)The market value of inventory is $450,000 is correct.

Here, LCM means Lower of cost or Market value
This is a valuation account for the asset Inventory. A credit balance should be reported in the allowance account for the amount that the market value of inventory is less than the cost reported in the Inventory account. The credit entered into the Allowance for Reduction of Cost to Market will mean a debit is entered into the income statement account Loss from Reducing Inventory to LCM.

(2) Computation of Company's inventory on an item by item basis:

Determining inventory value under the LCM rule: rule for setting "Market" value for the LCM comparison with a "Cost" figure.
That is when replacement cost is between the market floor and market ceiling, market value is taken as replacement cost.

Howerver, we reported inventory value under lower cost or market.

Inventory Data Item 101 Item 102 Item 103 Units 500 1,000 1,000 COST FOR LCM COMPARISON 1. The cost (Historical cost) 500*24 = 12,000 1000*16 = 16,000 1000*24 = 24,000 FACTORS DETERMINING THE MARKET 2. Replacement cost 500*15 = 7,500 1000*16 = 16,000 1000*32 = 32,000 3. Selling price in the market 500*32 = 16,000 1000*24 = 24,000 1000*40 = 40,000 4. Cost to sell or dispose 500*6 = 3,000 1000*3 = 3,000 1000*10 =10,000 5. Normal profit 500*4 = 2,000 1000*2 = 2,000 1000*4 = 4,000 6. Market ceil: Net realizable value (NRV)
       Row 3 – Row 4 13,000 21,000 30,000 7. Market floor: NRV – Normal profit
           Row 6 – Row 5 11,000 19,000 26,000 MARKET FOR LCM COMPARISON 8. The Market $13,000
Row 6 $21,000
Row 6 $30,000
Row 6 RESULT 9. LCM Reported inventory $12,000
Cost $16,000
Cost $24,000
Cost

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