Eagle Resources, Inc., has the following account balances at May 31, 2016. The inventory balance...

Question:

Eagle Resources, Inc., has the following account balances at May 31, 2016. The inventory balance was determined using FIFO

Inventory

Beginning Balance 10,000

Ending Balance 42,000

Cost of Goods Sold

Ending Balance 90,000

Sales Revenue

Ending Balance 186,000

Eagle Resources, Inc,, has determined that the replacement cost (current market value) of the May 31, 2016, ending inventory is $41,500.

According to the lower-of-cost-or-market rule, Eagle Resources, Inc., should report inventory on the May 31 balance sheet at $41,500.

Requirement 2. Prepare any adjusting journal entry required from the information given.

What Is The Lower Of Cost Or Market Rule:

US GAAP requires that companies apply the Lower Of Cost Or Market Rule in valuing its inventory at the end of every reporting period. Essentially, the rule ensures that the company's inventory will never be presented at a value that is ABOVE the inventory's market value.

Answer and Explanation:

There is a write-down of inventory to be recorded as follows:

Write-down = book value of ending inventory - replacement cost of ending inventory

= 42,000 - 41,500

=$500

Therefore the journal entry is:

Account Dr Cr
Write-down of inventory due to the lower-of-cost-or-market rule 500
Finished goods inventory 500

Learn more about this topic:

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The Lower of Cost or Market of Inventory: Definition & Method

from Accounting 101: Financial Accounting

Chapter 6 / Lesson 15
13K

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