The December 31, 2014 inventory of Risen Company consisted of four products, for

Question

The December 31, 2014 inventory of Risen Company consisted of four products, for which certain information is provided below. Original Replacement Estimated Expected Normal Profit Product Qty Cost Cost Disposal Cost Selling Price on Sales A 1 $25.00 $22.00 $6.50 $40.00 $8.00 B 1 $42.00 $40.00 $12.00 $48.00 $12.00 C 1 $120.00 $115.00 $25.00 $190.00 $57.00 D 1 $18.00 $15.80 $3.00 $30.00 $2.60 Prepare the journal entry needed to record Risen's inventory at the lower-of-cost-or-market. Assume that Risen uses the loss method and an allowance account. The allowance account had a zero balance as of January 1, 2014.

Explanation / Answer

Journal Entry:

Dec 31    Loss from reducing inventory to LCM Dr            $11

                     To Allowance to reduce Inventory to LCM             $11

Workings:

LCM = Lower of Cost or Market Amount

Market Amount is dertermined by arriving at the Ceiling (NRV), Floor (NRV - Normal profit) and comparing these with the replacement cost. If Replacement cost is less than ceiling but greater than, then replacement cost is considered as the market value. If replacement cost is more than ceiling, ceiling is the market amount. If replacement cost is more than floor, floor is the market amount. The market amount is then compared with the cost to arrive at lower of cost or market amount.

Product Qty Original Cost (1) Replacement Cost (2) Estimated Disposal cost (3) Normal selling price (4) Normal Profit on sales (5) NRV (4-3) NRV - Normal Profit A 1 25 22 6.5 40 8 33.5 25.5 B 1 42 40 12 48 12 36 24 C 1 120 115 25 190 57 165 108 D 1 18 15.8 3 30 2.6 27 24.4 Product Qty Original Cost (1) NRV Replacement Cost (2) NRV - Normal Profit Market Amount Lower of Cost or Market Loss from Reducing Inventory to LCM A 1 25 33.5 22 25.5 25.5 25 0 B 1 42 36 40 24 36 36 6 C 1 120 165 115 108 115 115 5 D 1 18 27 15.8 24.4 24.4 18 0 11

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