Lower of Cost or Market Valuation
Newcomer, Inc., values inventories using the lower of cost or market method applied to total inventory. Inventory values at the end of the company’s first and second years of operation follow.
Cost |
Market |
|
Year 1 |
$58,000 |
$53,000 |
Year 2 |
75,000 |
73,800 |
1. Prepare the journal entries necessary to reflect the proper inventory valuation at the end of each year. (Assume Newcomer uses an inventory allowance account.)
2. For Year 1, assume sales were $510,000 and purchases were $440,000.What amount would be reported as cost of goods sold on the income statement for Year 1 if: (a) the inventory decline is reported separately and (b) the inventory decline is not reported separately?