Share
Explore BrainMass

# Lower of cost or market

The Red Sky company is a wholesale company that purchases items from manufacturers and sells them to retail establishments.

On December 31, 2010 Red Sky had the following in ending inventory:

Product Code Quantity Cost Each Current Replacement Cost Each

AB72YZ 1,970 \$58 \$63
CT68WS 3,280 38 36
FA92PL 1,640 51 57
GG18CF 660 109 125
IR39QL 1,310 131 145
TG56LK 5,250 10 15
HB83SD 985 154 152

Product GG18CF has been replaced by product IR39QL. Red Sky expects to be able to sell its remaining inventory of product GG18CF at a deep discount to an outlet store for a net realizable value of \$38 each.

1) Compute the value of the inventory as of December 31, 2010 using each of the following assumptions:

a. The lower of cost or market method is applied directly to each item.

b. The lower of cost or market method is applied to the total inventory.

2) Prepare any necessary adjusting journal entries assuming that the company used the direct method, using each of the following assumptions

a. The lower of cost or market method is applied directly to each item.

b. The lower of cost or market method is applied to the total inventory.

#### Solution Summary

The solution explains how to determine the inventory value using lower of cost or market and prepare the related journal entries

\$2.19