Question

Forester Company has five products in its inventory. Information about the December 31, 2021, inventory follows. Product Quantity Unit Cost Unit Replacement Cost Unit Selling Price A 1,000 $ 26 $ 28 $ 32 B 500 31 27 34 C 900 19 18 24 D 900 23 20 22 E 800 30 28 29 The cost to sell for each product consists of a 10 percent sales commission. The normal profit for each product is 35 percent of the selling price. Required: 1. Determine the carrying value of inventory at December 31, 2021, assuming the lower of cost or market (LCM) rule is applied to individual products. 2. Determine the carrying value of inventory at December 31, 2021, assuming the LCM rule is applied to the entire inventory. 3. Assuming inventory write-downs are common for Forester, record any necessary year-end adjusting entry based on the amount calculated in requirement 2.

Answer 1

Answer:

A)

A 1,000 x $26.00 =  $ 26,000

B   500 x  $30.60 =  $  15,300

C   900 x  $ 19.00 =  $   17,100

D   900 x $ 19.80 =   $  17,820

E   800 x $26.10 =   $ 20,880  

Total                           $ 97,100

B)

102,240

C)

Write-down at NRV 1,060 debit

        Inventory                1,060 credit

Explanation:

We have to  calculate the net realizable value(NRV) for each item and compare with the historic cost:

      Units//    Cost    ///    NRV

A 1,000 $ 26       $ 32(1 - 0.1) = 28.8

B   500 $  31       $  34(1-0.1)   = 30.60

C   900 $  19       $  24(1-0.1)  = 21.60

D   900 $ 23       $  22(1-0.1)  = 19.80

E 800    $ 30      $  29(1-0.1)  =  26.10

We will always pick the lowest to valuate the goods:

A 1,000 x $26.00 =  $ 26,000

B   500 x  $30.60 =  $  15,300

C   900 x  $ 19.00 =  $   17,100

D   900 x $ 19.80 =   $  17,820

E   800 x $26.10 =   $ 20,880  

Total                           $ 97,100  

Total Cost:

1,000 x 26

+ 500 x 31

+ 900 x 19

+ 900 x 23

+ 800 x 30

103,300

Total NRV

1,000 x 28.80

+ 500 x 30.60

+ 900 x 21.60

+ 900 x 19.80

+ 800 x 26.10

102,240

Comparing at the entire inventory level we get the following adjustment

103,300 - 102,240 = 1,060