Question

Exercise 5-10A Lower-of-cost-or-market rule: perpetual system LO 5-2

The following information pertains to Hagen Metal Work’s ending inventory for the current year:

				Unit				Unit
Item	Quantity			Cost				Market Value
C		290			$	10			$	6
D		280				12				9
K		76				8				12
M		71				5				8

Required
a. Determine the value of the ending inventory using the lower-of-cost-or-market rule applied to (1) each individual inventory item and (2) the inventory in aggregate.

b. Prepare any necessary journal entries, assuming the decline in value is immaterial, using the (1) individual method and (2) aggregate method. Hagen Metal Works uses the perpetual inventory system. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Solution:

A)

1. Ending inventory using the individual item method: $5,223

2. Ending inventory using the aggregate method: $5,740

Working:

a	b	c	d	b*c	b*d
Item	Quantity	Cost	Market Value	Total cost	Total Market	Lowest cost
C	290	10	6	2,900	1,740	1,740
D	280	12	9	3,360	2,520	2,520
K	76	8	12	608	912	608
M	71	5	8	355	568	355
				7,223	5,740	5,223

　

B)

	Debit	Credit
Cost of goods sold	2,000
Inventory		2,000
Cost of goods sold	1,483
Inventory		1,483

Working:

1. Cost of goods sold: $7,223 – $5,223 = $2000

2. Cost of goods sold: $7,223– $5,740 = $1,483