Use the following information for problems #47-48. Applying LCM, NeCo determines

Question

Use the following information for problems #47-48. Applying LCM, NeCo determines that as of December 31, 20X3, mer- chandise that originally cost $46,300 is now $43,500 at market. NeCo determines that the loss is not material enough to warrant disclosure as a line item on its income statement. Therefore it should.. 47. a. make no entry but disclose the loss in a note on the financial statements. b. make no entry and make no disclosure c. make an entry to reduce retained earnings. d. make an entry to increase cost of goods sold. Early in 20X4, the market value of NeCo's inventory unexpectedly increases to $47,500. If the original credit to write-down inventory was to the Inventory account, NeCo should. . . 48. a. recognize a $4,000 gain. b. recognize a $2,800 gain. c. make no entry but disclose the loss in a note accompanying the fi- nancial statements. d. make no entry and make no disclosure.

Explanation / Answer

47) Neco determines that the loss is not material enough to warrant disclosure as a line item on its income statement. Therefore it should c. make an entry to reduce retained earnings.

Explanation:-

While applying LCM at the year end the cost of merchandise should be compared with market value. The excess value and shorfall in inventory value should be adjusted to retained earnings. To record the LCM adjustment below mentioned Journal entry should be passed.

Allowance to reduce inventory to LCM Dr....... $2800

Loss on inventory write down Cr.... $2800

($46,300-$43,500=$2800)

Note:- As there are two separate question I have answered first question only.

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