U.S. GAAP, the journal entry to record the writeminusdown to LCM will:
<u>Debit: Cost of goods sold $22400</u>
<u>Credit: Inventory $22400</u>
<u></u>
Explanation:
In accordance to the GAAP Standard the LCM rule or the lower cost rule state that a company should value its inventory at the lowest cost(i.e actual cost of the inventory or its market price) at the end of each financial year.
In case of Mariah Company the historical cost, which is also referred to as the actual cost of the inventory and is valued in the books, as $95 000.
The current Replacement cost, which means how much expense one need to incur in order to replace an asset based on market rates, is $72600. so we can say that replacement cost is thus lower.
If the inventory is valued at historical cost in the books of accounts , it will have to been written down with the replacement cost value. To do this the difference between both costs will need to be deduced.
<u>Difference is thus: $95 000 - $72600 =$22 400.</u>
When we begin to write down , this is expensed to cost of goods sold. This is because there is a decrease in closing inventories.
If there is a decrease in this figure then it will lead to a subsequent increase in cost of goods sold, leading to it being debited to show this increase
Inventory side is credited as the value of the inventory has decreased, and inventories decrease is shown on the credit side.
<u>Debit: Cost of goods sold $22400</u>
<u>Credit: Inventory $22400</u>
<u></u>
