Eagle Resources, Inc., has the following account balances at May 31, 2016. The inventory balance was determined using FIFO
Beginning Balance 10,000
Ending Balance 42,000
Cost of Goods Sold
Ending Balance 90,000
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
Therefore the journal entry is:
|Write-down of inventory due to the lower-of-cost-or-market rule||500|
|Finished goods inventory||500|
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from Accounting 101: Financial AccountingChapter 6 / Lesson 15