Forester Company has five products in its inventory. Information about the Decem

Question

Forester Company has five products in its inventory. Information about the December 31, 2018, inventory follows.

The cost to sell for each product consists of a 15 percent sales commission. The normal profit percentage for each product is 40 percent of the selling price.

Required:
1. Determine the carrying value of inventory at December 31, 2018, assuming the lower of cost or market (LCM) rule is applied to individual products.
2a. Determine the carrying value of inventory at December 31, 2018, assuming the LCM rule is applied to the entire inventory.
2b. Assuming inventory write-downs are usual business practice for Forester, record any necessary year-end adjusting entry.

Product Quantity Unit
Cost Unit
Replacement
Cost Unit
Selling
Price A 1,000 $ 10 $ 12 $ 16 B 800 15 11 18 C 600 3 2 8 D 200 7 4 6 E 600 14 12 13

Explanation / Answer

1) Product Replacement cost (a) Selling price (b) Sales commission (c) NRV (d=b-c) Profit margin (e) NRV-Profit margin (f=d-e) Designated market value (g=Middle of a,d&f) Cost (h) Per unit inventory value (i=lower of f&g) Quantity (j) Carrying value of inventory (k=i*j) A 12 16 2.4 13.6 6.4 7.2 12 10 10 1000 10000 (16*15%) (16*40%) B 11 18 2.7 15.3 7.2 8.1 11 15 11 800 8800 (18*15%) (18*40%) C 2 8 1.2 6.8 3.2 3.6 3.6 3 3 600 1800 (8*15%) (8*40%) D 4 6 0.9 5.1 2.4 2.7 4 7 4 200 800 (6*15%) (6*40%) E 12 13 1.95 11.05 5.2 5.85 11.05 14 11.05 600 6630 (13*15%) (13*40%) Total 28030 b-1) Product Designated market value (a) Quantity (b) Carrying value based on market value (c=a*b) Cost (d) Carrying value based on cost (e=b*d) A 12 1000 12000 10 10000 B 11 800 8800 15 12000 C 3.6 600 2160 3 1800 D 4 200 800 7 1400 E 11.05 600 6630 14 8400 Total 30390 33600 Here the total carrying value based on market value is lower than the total carrying value based on cost (ie. $30390 is less than $33600), Hence the carrying value of inventory should be $30390 b-2) Entry: Cost of goods sold (33600-30390) $3210                                 Inventory                                         $3210

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