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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Lower of Cost or Market

Kevin Spears, the accountant of Tyler Electronics Inc. has prepared the following information for the company’s inventory at the end of 2019:

Chapter 6, Problem 69BPSB, Lower of Cost or Market Kevin Spears, the accountant of Tyler Electronics Inc. has prepared the

Required:

1. Determine the carrying amount of the inventory using lower of cost or market 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?

To determine

(a)

Introduction:

The lower of cost or market rule follows the historical cost method as per Generally Accepted Accounting Principles accounting framework. The method states that the cost of inventory must be taken as the original cost or its current market price whichever cost is less as the inventory might have become obsolete, damaged or its value might have declined.

To find:

The amount of the inventory using lower cost or market applied on an item-by-item basis.

Explanation

Kevin spears prepared the following analysis of inventory at the end of 2019

Product Cost
$
Market (net realizable value)
$
Lower of cost or market
$
RSQ535
JKY942
LLM112
KZG428
3,000 (30×100)
7,280 (52×140)
To determine

(b)

Introduction:

The lower of cost or market rule follows the historical cost method as per Generally Accepted Accounting Principles accounting framework. The method states that the cost of inventory must be taken as the original cost or its current market price whichever cost is less as the inventory might have become obsolete, damaged or its value might have declined.

To prepare:

The journal entry to value inventory at lower of cost or market.

To determine

(c)

Introduction:

The lower of cost or market rule follows the historical cost method as per Generally Accepted Accounting Principles accounting framework. The method states that the cost of inventory must be taken as the original cost or its current market price whichever cost is less as the inventory might have become obsolete, damaged or its value might have declined.

To state:

The impact of lower cost or market rule on financial statements and the impact of financial statement of a subsequent period in which inventory is sold.

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