Almaden Hardware Store sells two distinct types of products, tools and paint pro
ID: 2496577 • Letter: A
Question
Almaden Hardware Store sells two distinct types of products, tools and paint products. Information pertaining to its 2013 year-end inventory is as follows: Inventory, by Product Type Quantity Per Unit Cost Designated Market Tools: Hammers 110 $ 5.40 $ 5.90 Saws 240 10.40 9.40 Screwdrivers 340 2.40 3.00 Paint products: 1-gallon cans 540 6.40 5.40 Paint brushes 110 4.40 4.90 Required:
1. Determine the balance sheet inventory carrying value at year-end, assuming the LCM rule is applied to (a) individual products, (b) product type, and (c) total inventory.
2. Assuming that the company recognizes an inventory write-down as a separate income statement item, for each of the LCM applications determine the amount of the loss.
inventory cost
Explanation / Answer
Generally accepted accounting principles allow for the lower of cost or market rule to be applied in one of three ways: (1) on an inventory totals basis, (2) on an inventory categories basis, or (3) on an item-by-item basis. Applying LCM to inventory totals is the least conservative application since it results in the smallest writedown or reduction of inventory from cost and the smallest loss on the income statement. Applying LCM to inventory categories results in values that fall somewhere in between the other two methods of applying LCM. Applying LCM on an item-by-item basis is the most conservative application since it results in the largest writedown or reduction of inventory from cost and the largest loss on the income statement. category item number units on hand cost per unit market per unit* total cost total market lcm by category lcm item-by Item Tools hammers 110 $ 5.40 $ 5.90 $ 594.00 $ 649.00 $ 594.00 Saws 240 $ 10.40 $ 9.40 $ 2,496.00 $ 2,256.00 $ 2,496.00 screwdrivers 340 $ 2.40 $ 3.00 $ 816.00 $ 1,020.00 $ 816.00 1- gallon cans 540 $ 6.40 $ 5.40 $ 3,456.00 $ 2,916.00 $ 2,916.00 Total $ 7,362.00 $ 6,841.00 $ 6,841.00 Paints paint brushes 110 $ 4.40 $ 4.90 $ 484.00 $ 539.00 $ 484.00 Total $ 484.00 $ 539.00 $ 484.00 grand total $ 7,846.00 $ 7,380.00 $ 7,325.00 $ 7,306.00 * the market cost per unit amounts that are less than cost appear in BOLD $ 521.00 The Total Cost column shows a grand total of $7,846. This is the cost of the items held in inventory. In most industries, the inventory reported on the balance sheet cannot exceed this amount. However, because of the lower of cost or market rule, the inventory reported on the balance sheet might be smaller than this amount. The smaller amount could be based on the lower of cost or market applied to the inventory totals, inventory categories, or each individual item in inventory. If the LCM rule is applied to the inventory totals the Grand Total Cost ($7846) is compared to Grand Total Market ($7380). The lower of cost or market is the lower of these two amounts. Therefore $7380 is the amount to be reported on the company's balance sheet. The difference of $466 ($7846 minus $7380) is reported as a loss on the company's income statements in the accounting periods when the loss took place. If the LCM rule is applied to the inventory categories the lower of each category's total cost and total market amount is selected. For example, the Category Tools Total Market amount of $6841 is selected over Category Tools Total Cost amount of $1,080 and is entered in the column "LCM by Category." The Grand Total LCM by Category of $7325 is less than the Grand Total Cost of $7846. Therefore, $7,325 is the amount reported on the company's balance sheet. The amount of the writedown or reduction from $7,846 to $7325 is $181. This $521 will be reported on the income statements in the periods when the market amount dropped below cost. If the LCM is applied on an item-by-item basis The lower of each item's total cost and total market amount is selected. The Grand Total LCM Item-by-Item of $7,306 is the amount reported on the company's balance sheet. The difference between this amount and the Grand Total Cost of $7,846 is $540. This $540 reduction from cost is reported as a loss on the company's income statements in the accounting periods when the loss took place. As mentioned earlier, this is the most conservative way in which to apply the lower of cost or market rule.
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