Cullumber Co. follows the prac
Cullumber Co. follows the practice of valuing its inventory atthe lower-of-cost-or-market. The following information is availablefrom the company’s inventory records as of December 31, 2017. ItemQuantity Unit Cost Replacement Cost/Unit Estimated SellingPrice/Unit Completion & Disposal Cost/Unit Normal ProfitMargin/Unit A 1,600 $ 8.33 $ 9.32 $ 11.66 $ 1.67 $ 2.00 B 1,3009.10 8.77 10.43 1.00 1.33 C 1,500 6.22 5.99 7.99 1.28 0.67 D 1,5004.22 4.66 6.99 0.89 1.67 E 1,900 7.10 6.99 7.44 0.78 1.11 GregForda is an accounting clerk in the accounting department ofCullumber Co., and he cannot understand why the market value keepschanging from replacement cost to net realizable value to somethingthat he cannot even figure out. Greg is very confused, and he isthe one who records inventory purchases and calculates endinginventory. You are the manager of the department and an accountant.Calculate the lower-of-cost-or-market using the individual-itemapproach. Lower-of-Cost-or-Market (Per unit basis) Item A $ Item B$ Item C $ Item D $ Item E $
Account Titles and Explanation |
Debit |
Credit |
Cost of Goods sold Method: | ||
The Loss method: |
Answer:
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a | For which we need tocalculate two more columns: NRV (Net Realizable Value) and (NRV –Normal Profit Margin) | |||||||||||
Item | Quantity | Unit Cost | Replacement Cost /unit | Estimated Selling price /unit | Completion & Disposal cost /unit | Normal Profit Margin | NRV | NRV-MARGIN | Market | Lower Of Cost orMarket | ||
A | 1,600 | $8.33 | $9.32 | $11.66 | $1.67 | $2.00 | $9.99 | $7.99 | $9.32 | $8.33 | ||
B | 1,300 | $9.10 | $8.77 | $10.43 | $1.00 | $1.33 | $9.43 | $8.10 | $8.77 | $8.77 | ||
C | 1,500 | $6.22 | $5.99 | $7.99 | $1.28 | $0.67 | $6.71 | $6.04 | $5.99 | $5.77 | ||
D | 1,500 | $4.22 | $4.66 | $6.99 | $0.89 | $1.67 | $6.10 | $4.43 | $4.66 | $4.22 | ||
E | 1,900 | $7.10 | $6.99 | $7.44 | $0.78 | $1.11 | $6.66 | $5.55 | $6.99 | $6.99 | ||
Where Market is calculated by comparingReplacement Cost / unit, NRV and NRV – Profit Margin. The valuewhich is between the other two is taken as the market. | ||||||||||||
For the Lower cost or market, the value is thelowest between market and the unit cost. | ||||||||||||
b | Journal Entry in order to write down theinventory loss. | |||||||||||
The total loss is (1300*(9.10-8.77)) +(1500*(6.22-5.99)) + (1900*(7.10-6.99)) = $983 | ||||||||||||
Debit | Credit | |||||||||||
Loss on LCM Adjustment | $983 | |||||||||||
Finished Goods Inventory | $983 |
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