Steel Company, a wholesaler that has been in business for two years, purchases its inventory from various suppliers. During the two years, each purchase has been at a lower price than the previous purchase. Steel uses the lower of cost or market method to value inventories. The original cost of the inventory is above replacement cost and below their net realizable value. That is, the net realizable value less the normal profit margin is below replacement cost.
Required: What do you think about the criteria used to determine which costs should be included in the inventory?
Steel Company, a wholesaler that has been in business for two years, purchases its inventory from various suppliers. During the two years, each purchase has been at a lower price than the previous purchase. Steel uses the lower of cost or market method to value inventories. The original cost of the inventory is above replacement cost and below their net realizable value. That is, the net realizable value less the normal profit margin is below replacement cost.
Required: What do you think about the criteria used to determine which costs should be included in the inventory?
Related questions
Sweet Co. follows the practice of valuing its inventory at the lower-of-cost-or-market. The following information is available from the companyâs inventory records as of December 31, 2017.
| Item | Quantity | Unit Cost | Replacement | Estimated Selling | Completion & Disposal | Normal Profit | ||||||||||
| A | 1,800 | $9.15 | $10.25 | $12.81 | $1.83 | $2.20 | ||||||||||
| B | 1,500 | 10.00 | 9.64 | 11.47 | 1.10 | 1.46 | ||||||||||
| C | 1,700 | 6.83 | 6.59 | 8.78 | 1.40 | 0.73 | ||||||||||
| D | 1,700 | 4.64 | 5.12 | 7.69 | 0.98 | 1.83 | ||||||||||
| E | 2,100 | 7.81 | 7.69 | 8.17 | 0.85 | 1.22 | ||||||||||
Greg Forda is an accounting clerk in the accounting department of Sweet Co., and he cannot understand why the market value keeps changing from replacement cost to net realizable value to something that he cannot even figure out. Greg is very confused, and he is the one who records inventory purchases and calculates ending inventory. You are the manager of the department and an accountant.
1. Calculate the lower-of-cost-or-market using the individual-item approach.
2. Show the journal entry he will need to make in order to write down the ending inventory from cost to market.
