Question

Iris Company has provided the following information regarding two of its items of inventory at year‐end: • There are 100 units of Item A, having a cost of $20 per unit and a replacement cost of $18 per unit. • There are 50 units of Item B, having a cost of $50 per unit and a replacement cost of $55 per unit. How much is the ending inventory using lower of cost or market on an item‐by‐item basis?

Answer 1

Answer:

Inventory, End (A): $1,800. Inventory, End (B): $2,500.

Explanation:

Accountants conservatively recognize ending inventory at lower of cost or market value in the balance sheet. Upon purchase of inventory, this is recorded at cost. However, if it loses its value, FASB Accounting Standards Update requires recognition of the inventory at its net realizable value. Thus, Iris Company should recognize its ending inventory of Item A at $1,800 (100 units x $18) and Item B at $2,800 (50 units x $50).