Sweet Co. follows the practice of valuing its inventory at the lower-of-cost-or-

Question

Sweet Co. follows the practice of valuing its inventory at the lower-of-cost-or-market. The following information is available from the company’s inventory records as of December 31, 2017.

Item

Quantity

Unit Cost

Replacement
Cost/Unit

Estimated Selling
Price/Unit

Completion & Disposal
Cost/Unit

Normal Profit
Margin/Unit

Greg Forda is an accounting clerk in the accounting department of Sweet Co., and he cannot understand why the market value keeps changing from replacement cost to net realizable value to something that he cannot even figure out. Greg is very confused, and he is the one who records inventory purchases and calculates ending inventory. You are the manager of the department and an accountant.

1. Calculate the lower-of-cost-or-market using the individual-item approach.

2. Show the journal entry he will need to make in order to write down the ending inventory from cost to market.

Item

Quantity

Unit Cost

Replacement
Cost/Unit

Estimated Selling
Price/Unit

Completion & Disposal
Cost/Unit

Normal Profit
Margin/Unit

A 1,800 $9.15 $10.25 $12.81 $1.83 $2.20 B 1,500 10.00 9.64 11.47 1.10 1.46 C 1,700 6.83 6.59 8.78 1.40 0.73 D 1,700 4.64 5.12 7.69 0.98 1.83 E 2,100 7.81 7.69 8.17 0.85 1.22

Explanation / Answer

1.

2.

Total cost of inventory = (1800 x 9.15) + (1500 x 10.00) + (1700 x 6.83) + (1700 x 4.64) + (2100 x 7.81)

= $67370

Amount to be written off = $67370 - $66341

= $1029

Journal

Item Unit cost Selling price Disposal cost NRV = SP - Disposal cost Lower of Unit cost or NRV Quantity Total inventory A $9.15 $12.81 $1.83 $10.98 $9.15 1800 $16470 B 10.00 11.47 1.10 10.37 10.00 1500 15000 C 6.83 8.78 1.40 7.38 6.83 1700 11611 D 4.64 7.69 0.98 6.71 4.64 1700 7888 E 7.81 8.17 0.85 7.32 7.32 2100 15372 Total $66341

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