*Problem 9-5 Cullumber Co. follows the practice of valuing its inventory at the
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*Problem 9-5 Cullumber 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, 2017 Completion & Disposal Cost/Unit Normal Profit Estimated Price/Unit $11.97 10.72 8.21 7.18 7.64 Unit Cost Replacement Cost/Unit Selling Item Quantity 1,300 1,000 1,200 1,200 1,600 Margin/Unit $8.55 9.35 6.38 4.33 7.30 $9.58 9.01 6.16 4.79 7.18 1.03 1.31 0.91 0.80 $2.05 1.37 0.68 1.71 1.14 Greg Forda is an accounting clerk in the accounting department of Cullumber 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 Calculate the lower-or-cost-or-market using the individual-item approach Lower-of-Cost-or-Market (Per unit basis) Item A Item B Item C Item D Item E Show the journal entry he will need to make in order to write down the ending inventory from cost to market. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter O for the amounts.) Account Titles and Explanation Debit CreditExplanation / Answer
1. We have to determine the maximum and minimum limits for the replacement cost. Maximum limit is (selling price - cost of completion & disposal) wheras minimum limit is (selling price -cost of completion & disposal - normal profit margin). Then we have to compare these limits with replacement cost for market value (if replacement cost falls in between these maximum and minimum limits then replacement cost will be the market value) & then will find out the lower of cost or market value.
Item Unit cost Replacement cost Maximum & minimum limits Market value Lower of cost or market value.
A 8.55 9.58 11.97-1.71 = 10.26 9.58 $8.55
11.97-1.71-2.05= 8.21
B 9.35 9.01 10.72-1.03 = 9.69 9.01 $9.01
10.72-1.03-1.37= 8.32
C 6.38 6.16 8.21-1.31 = 6.9 6.16 $6.16
8.21-1.31-0.68= 6.22
D 4.33 4.79 7.18-0.91 = 6.27 4.79 $4.33
7.18-0.91-1.71= 4.56
E 7.30 7.18 7.64-0.80= 6.84 6.84 $6.84
7.64-0.80-1.14 = 5.7
2 As we can see from the above table that only in case of items B,C & E we need to write down the inventory from cost to net realizable value, as in other cases inventory is lower on cost basis itself, so no write down on Journal entry is required for Item A & D.
Total units for item B= 1000
Total cost = 1000*$9.35= $9350
Toatl Market vaue = 1000*$9.01 = $9010
Write down required = $9350-$9010= $340
Total units for item C= 1200
Total cost = 1200*$6.38= $7656
Total Market vaue = 1200*$6.16 = $7392
Write down required = $7656-$7392= $264
Total units for item E= 1600
Total cost = 1600*$7.3= $11680
Total Market vaue = 1600*$6.84 = $10944
Write down required = $11680-$10944= $736
Total write down required for Items B,C & E is $340+$264+$736= $1340
Journal entry under cost of the goods sold method is :
Debit : Cost of the goods sold $ 1340
Credit : Inventory $1340
Journal entry under loss method is :
Debit : Inventory loss due to decline in market value $1340
Credit : Inventory $1340
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