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    Adjusting entries; lower of cost or market, inventory

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    Lower-of-Cost-or-Market

    Fortner Co. follows the practice of valuing its inventory at the
    lower-of-cost-or-market. The following information is available from the companyâ??s inventory records
    as of December 31, 2006.
    Estimated Completion Normal
    Unit Replacement Selling & Disposal Profit
    Item Quantity Cost Cost/Unit Price/Unit Cost/Unit Margin/Unit
    A 1,100 $7.50 $8.40 $10.50 $1.50 $1.80
    B 800 8.20 8.00 9.40 0.90 1.20
    C 1,000 5.60 5.40 7.20 1.10 0.60
    D 1,000 3.80 4.20 6.30 0.80 1.50
    E 1,400 6.40 6.30 6.80 0.70 1.00
    Instructions
    Finn Berge is an accounting clerk in the accounting department of Fortner 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. Finn 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 â??individual itemâ? 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 Finn explaining what designated market value is as well as how it is computed.
    Use your calculations to aid in your explanation.

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    Solution Preview

    P9-10 (Lower-of-Cost-or-Market) Fortner Co. follows the practice of valuing its inventory at the
    lower-of-cost-or-market. The following information is available from the companyâ??s inventory records
    as of December 31, 2006.
    Estimated Completion Normal
    Unit Replacement Selling & Disposal Profit
    Item Quantity Cost Cost/Unit Price/Unit Cost/Unit Margin/Unit
    A 1,100 $7.50 $8.40 $10.50 $1.50 $1.80
    B 800 8.20 8.00 9.40 0.90 1.20
    C 1,000 5.60 5.40 7.20 1.10 0.60
    D 1,000 3.80 4.20 6.30 0.80 1.50
    E 1,400 6.40 6.30 6.80 0.70 1.00
    Instructions
    Finn Berge is an accounting clerk in the accounting department of Fortner ...

    Solution Summary

    The expert examines adjusting entries and lower of cost or market inventory.

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