Question

Peterson Furniture Designs is preparing the annual financial statements dated December 31. Ending inventory information about the five major items stocked for regular sale follows:

Item Quality Unit Cost market value
Aligator armories 50 $15 $12
Bear Bureaus 75 40 40
Cougar beds 10 50 52
Dingo cribs 30 30 30
Elephant dresser 40 10 6

Compute the amount of the total write-down when the LCM/NRV rule is applied to each item.

Answer 1

Answer:

Written down value = $310

Explanation:

The lower of cost or market

The lower of cost or market rule states that a business must record the cost of inventory at whichever cost is lower – the original cost or its current market price. This situation typically arises when inventory has deteriorated, or has become obsolete, or market prices have declined.

The schedule of workings is attached.

Aligator armories

Cost = 15

Market value = $12

Therefore, Market value will be selected, and the cost will be written down by $3.

Bear Bureaus:

Cost = market value, therefore, no change.

Cougar beds

Cost is less than the market value, therefore, no change needed.

Dingo cribs:

Cost = market value, therefore, no change.

Elephant dresser

Cost = 10

Market value = $6

Therefore, Market value will be selected, and the cost will be written down by $4.