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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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Chapter
Section
BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

In the application of “lower-of-cost-or-market,” market is the

  1. (a) lowest sales price.
  2. (b) highest sales price.
  3. (c) replacement cost.
  4. (d) average sales price.

To determine

Identify the term for the marker in the application of “lower-of-cost-or-market”.

Explanation

Justification for the incorrect answer:

Lowest sales price, highest sales price, and average sales price is not considered as the term of market. Hence, option (a), (b) and (d) are considered as incorrect options.

Justification for the correct answer:

Option (c)

Lower-of-cost-or-market:

The lower-of-cost-or-market (LCM) rule states that the ending merchandise inventory must be reported in the financial statement of a company, at the price of market value of the ending inventory or the cost price of the ending inventory, whichever is less.

Inventory is valued at the lower cost and net realizable value.

Example:

Inventory itemPer unit ($)

Total

($)

LCM

($)

Quantity

Cost

Market / Replacement cost

Cost

Market / Replacement cost

Individual item

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