(Lower of Cost or Market) Fiedler Co. follows the practice of valuing its inventory at the lower of cost or market. The following information is available from the company’s inventory records as of December 31, 2012.
|
Item |
Quantity |
Unit Cost |
Replacement Cost/Unit |
Estimated Selling Price/Unit |
Completion & Disposal Cost/Unit |
Normal Profit Margin/Unit |
|
A |
1,100 |
$7.50 |
$8.40 |
$10.50 |
$1.50 |
$1.80 |
|
B |
800 |
8.20 |
7.90 |
9.40 |
0.90 |
1.20 |
|
C |
1,000 |
5.60 |
5.40 |
7.20 |
1.15 |
0.60 |
|
D |
1,000 |
3.80 |
4.20 |
6.30 |
0.80 |
1.50 |
|
E |
1,400 |
6.40 |
6.30 |
6.70 |
0.70 |
1.00 |
Instructions
Greg Forda is an accounting clerk in the accounting department of Fiedler 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.
(a) Calculate the lower of cost or market using the “individual item” approach.
(b) Show the journal entry he will need to make in order to write down the ending inventory from cost to market.
(c) Then write a memo to Greg explaining what designated market value is as well as how it is computed. Use your calculations to aid in your explanation.