Fiedler Co. follows the practice of valuing its inventory at the lower-of-cost-o
ID: 2476289 • Letter: F
Question
Fiedler 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, 2014.
Item
Quantity
Unit Cost
Replacement
Cost/Unit
Estimated Selling Price/Unit
Completion & Disposal Cost/Unit
Normal Profit Margin/Unit
Greg Forda is an accounting clerk in the accounting department of Fiedler 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. Greg 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.
Lower-of-Cost-or-Market
(Per unit basis)
B: Show the journal entry he will need to make in order to write down the ending inventory from cost to market.
Account Titles and Explanation
Debit
Credit
Item
Quantity
Unit Cost
Replacement
Cost/Unit
Estimated Selling Price/Unit
Completion & Disposal Cost/Unit
Normal Profit Margin/Unit
A 1,900 $16.58 $18.56 $23.21 $3.32 $3.98 B 1,600 18.12 17.46 20.77 1.99 2.65 C 1,800 12.38 11.93 15.91 2.54 1.33 D 1,800 8.40 9.28 13.92 1.77 3.32 E 2,200 14.14 13.92 14.81 1.55 2.21Explanation / Answer
Item Quantity Unit Cost Replacement Estimated Selling Price/Unit Completion & Disposal Cost/Unit Normal Profit Margin/Unit Net Realizable value Net Realizable value less Normal profit Margin Cost/Unit A 1,900 $16.58 $18.56 $23.21 $3.32 $3.98 $19.89 $15.91 B 1,600 18.12 17.46 20.77 1.99 2.65 $18.78 $16.13 C 1,800 12.38 11.93 15.91 2.54 1.33 $13.37 $12.04 D 1,800 8.4 9.28 13.92 1.77 3.32 $12.15 $8.83 E 2,200 14.14 13.92 14.81 1.55 2.21 $13.26 $11.05 Lower-of-Cost-or-Market A Amt $ per unit Units Total Amt Lower of Cost /Market value Unit cost Inventory value Amt to be written Off Item A $ 16.58 1,900 31,502 16.58 31,502 - Item B $ 17.46 1,600 27,936 18.12 28,992 1,056 Item C $ $12.04 1,800 21,672 12.38 22,284 612 Item D $ 8.40 1,800 15,120 8.40 15,120 - Item E $ $13.26 2,200 29,172 14.14 31,108 1,936 Total 3,604 Journal Entry COGS method B Account Title Dr $ Cr $ COGS 3,604 Inventory 3,604 Journal Entry Loss method Account Title Dr $ Cr $ Loss due to Market Decline 3,604 Allowance to reduce Inventory To Lower of Cost or Market 3,604
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