To Determine Lower of Cost or Market. First, Determine “Market”:. Identify Replacement Cost of the Item. This is the amount you would pay to replace the item. Identify the Net Realizable Value of the Item.
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First, Determine “Market”:
This is the amount you would pay to replace the item
This is the amount you could reasonably sell the item for in course of business, minus completion and sales costs.
This is a floor that is computed to prevent understatement of inventory.
“Market” is the middle of these three values.
Next, Determine New Inventory Value:
Compare “market” to historical cost value
Select the lower value of these two
This can be done at the individual item level, the inventory
category level, or at the total inventory level.
They also have a 20% normal profit margin above historical cost.
Assume these numbers are already known.
These must be computed.
First, determine “market” by taking middle value.
Next, choose lower of historical cost or “market.”
Do the same procedures, Item-by-Item.
Total up each column within Category. Then apply the same method.
Total all columns then apply same method.
Assume Paterno chooses Total Inventory Method
(LCM yields ending balance of $53,610)
Need a journal entry to adjust inventory balance down from Historical Cost balance of $57,130 to LCM ending balance of $53,610 (a difference of $3,520).
Two methods of adjustment:
Stated at LCM
Stated at Historical Cost
Presenting the Markdown to Market
Adj. Gross Marg.