The December 31, 2014 inventory of Risen Company consisted of four products, for

Question

The December 31, 2014 inventory of Risen Company consisted of four products, for which certain information is provided below.

Original

Replacement

Estimated

Expected

Normal Profit

Product

Qty

Cost

Cost

Disposal Cost

Selling Price

on Sales

A

1

$25

$22

$6.50

$40

$8

B

1

$42

$40

$12

$48

$12

C

1

$120

$115

$25

$190

$57

D

1

$18

$15.80

$3

$30

$2.60

If Risen had applied the lower-of-cost-or-market to the entire inventory rather than individual items, prepare the journal entry necessary to record inventory at the lower-of-cost-or-market. Assume that Risen uses the cost of goods sold method (direct method).

Original

Replacement

Estimated

Expected

Normal Profit

Product

Qty

Cost

Cost

Disposal Cost

Selling Price

on Sales

A

1

$25

$22

$6.50

$40

$8

B

1

$42

$40

$12

$48

$12

C

1

$120

$115

$25

$190

$57

D

1

$18

$15.80

$3

$30

$2.60

Explanation / Answer

The lower of cost or market value for total of all theproduct is calculated as under: Upper limit Net realizable value Replacement cost-Disposable cost Replacement cost Lower limit : NRV-Normal profit Expected selling price-Normal profit A B C D Net realizable value Estimated selling price $40 $48 $190 $30 Less: disposal cost ($6.50) ($12.00) ($25.00) ($3.00) Net realizable value:Upper Limit $33.50 $36.00 $165.00 $27.00 Estimated selling price $40 $48 $190 $30 Less: disposal cost ($6.50) ($12.00) ($25.00) ($3.00) Less: Estimated normal profit ($8) ($12) ($57) ($2.60) Net realizable value: Lower Limit $25.50 $24.00 $108.00 $24.40 Replacement cost $22 $40 $115 $15.80 Total Net realizable value: Upper Limit $33.50 $36.00 $165.00 $27.00 $261.50 Replacement cost $22 $40 $115 $15.80 $192.80 Net realizable value: Lower Limit $25.50 $24.00 $108.00 $24.40 $181.90 Since the Repalcement cost is within the limits sets by LCM, Replacement cost will be treated as market value. The cost or market value whichever is lower is treated as cost of inventory: A B C D Total Cost $25 $42 $120 $18 $205 Market value $22 $40 $115 $15.80 $192.80 Lower of cost of market value $22 $40 $115 $15.80 $192.80 Loss on LCM adjustment $3.00 $2.00 $5.00 $2.20 $12.20 The journal entry to record loss on LCM adjustment is as under: Loss on LCM Adjustment $12.20 Cost of goods sold $192.80 Inventory $205.00

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