Forest Company has five products in its inventory. Information about ending inventory follows. Product Quantity Unit Cost Unit Replacement Cost Unit Selling Price A 900 $ 19 $ 21 $ 25 B 800 24 20 27 C 1,000 12 11 17 D 500 16 13 15 E 800 23 21 22 The cost to sell for each product consists of a 15 percent sales commission. The normal profit for each product is 25 percent of the selling price.
Forest Company has five products in its inventory. Information about ending inventory follows. Product Quantity Unit Cost Unit Replacement Cost Unit Selling Price A 900 $ 19 $ 21 $ 25 B 800 24 20 27 C 1,000 12 11 17 D 500 16 13 15 E 800 23 21 22 The cost to sell for each product consists of a 15 percent sales commission. The normal profit for each product is 25 percent of the selling price.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Forest Company has five products in its inventory. Information about ending inventory follows.
| Product | Quantity | Unit Cost | Unit Replacement Cost | Unit Selling Price |
|---|---|---|---|---|
| A | 900 | $ 19 | $ 21 | $ 25 |
| B | 800 | 24 | 20 | 27 |
| C | 1,000 | 12 | 11 | 17 |
| D | 500 | 16 | 13 | 15 |
| E | 800 | 23 | 21 | 22 |
The cost to sell for each product consists of a 15 percent sales commission. The normal profit for each product is 25 percent of the selling price.
Required:
- Determine the carrying value of ending inventory, assuming the lower of cost or market (LCM) rule is applied to individual products.
- Determine the carrying value of inventory, assuming the LCM rule is applied to the entire inventory.
- Assuming inventory write-downs are common for Forest, record any necessary year-end
adjusting entry based on the amount calculated in requirement 2.
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Step 1: Explain "Lower of cost or market Rule":
VIEWStep 2: (1) Determine the carrying value of ending inventory assuming lower of cost or market (LCM) rule:
VIEWStep 3: (2) Determine the carrying value of inventory, assuming LCM rule is applied to the entire inventory:
VIEWStep 4: (3) Record any necessary year-end adjusting entry based on the amount calculated in requirement 2:
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