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Lower of Cost or Market
Shaw Systems sells a limited line of specially made products, using television advertising campaigns in large cities. At year end, Shaw has the following data for its inventory:
Required:
1. Compute the carrying value of the ending inventory using the lower of cost or market rule applied on an item-by-item basis.
2. Prepare the journal entry required to value the inventory at lower of cost or market.
3. CONCEPTUAL CONNECTION What is the impact of applying the lower of cost or market rule on the financial statements of the current period? What is the impact on the financial statements of a subsequent period in which the inventory is sold?
Concept introduction:
Lower of Cost or market value method is applied to find the cost of ending inventory to be recorded in the book of account. According to this method the cost is compared with the market value and inventory is recorded with the lower amount of cost or market value.
Requirement 1:
To calculate:
The carrying value of inventory applying the Lower of Cost or market value method on item by item basis.
The carrying value of inventory applying the Lower of Cost or market value method on item by item basis is calculated as follows:
| Item | Number of Units | Cost per unit | Selling Price per unit | Disposal Costs | Market Value | LCM | Carrying value |
| A | B | C | D | E =C-D | F =(Lower of B or E) | = A*F | |
| Phone | 625 | $ 24 | $25 | $ 5 |
Concept introduction:
Lower of Cost or market value method is applied to find the cost of ending inventory to be recorded in the book of account. According to this method the cost is compared with the market value and inventory is recorded with the lower amount of cost or market value.
Requirement 2:
To prepare:
The journal entry to value the inventory on Lower of Cost or market value method.
Concept introduction:
Lower of Cost or market value method is applied to find the cost of ending inventory to be recorded in the book of account. According to this method the cost is compared with the market value and inventory is recorded with the lower amount of cost or market value.
Requirement 3:
To discuss:
The justification to value the inventory on Lower of Cost or market value method.
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