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Lower of Cost or Market journal entries for inventory

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At 12/31/06, the end of Smith Company's first year of business, inventory was $4,100 and $2,800 at cost and at market, respectively.
Following is data relative to the 12/31/07 inventory of Smith:

Original Net Net Realizable Appropriate
Cost Replacement Realizable Value Less Inventory
Item Per Unit Cost Value Normal Profit Value
A $ .65 $ .45
B .45 .40
C .70 .75
D .75 .65
E .90 .85

Selling price is $1.00/unit for all items. Disposal costs amount to 10% of selling price and a "normal" profit is 30% of selling price. There are 1,000 units of each item in the 12/31/07 inventory.


(a) Prepare the entry at 12/31/06 necessary to implement the lower-of-cost-or-market procedure assuming Smith uses a contra account for its balance sheet.
(b) Complete the last three columns in the 12/31/07 schedule above based upon the lower-of-cost-or-market rules.
(c) Prepare the entry(ies) necessary at 12/31/07 based on the data above.
(d) How are inventory losses disclosed on the income statement?

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The solution explains the Lower of Cost or Market journal entries for inventory