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Adjusting entries; lower of cost or market, inventory

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.

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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