Question

Forester Company has five products in its inventory. Information about the December 31, 2021, inventory follows.

Product		Quantity		Unit Cost				Unit Replacement Cost				Unit Selling Price
A		700		$	21			$	23			$	27
B		1,000			26				22				29
C		900			14				13				19
D		600			18				15				17
E		500			25				23				24

The cost to sell for each product consists of a 20 percent sales commission. The normal profit for each product is 40 percent of the selling price.

Required:
1. Determine the carrying value of inventory at December 31, 2021, assuming the lower of cost or market (LCM) rule is applied to individual products.
2. Determine the carrying value of inventory at December 31, 2021, assuming the LCM rule is applied to the entire inventory.
3. Assuming inventory write-downs are common for Forester, record any necessary year-end adjusting entry based on the amount calculated in requirement 2.

Answer 1

1. *Selling price less costs to sell. Costs to sell = 20% of selling price

**NRV less normal profit margin. Profit = 40% of the selling price.

Product	Selling price	*NRV per unit	**NRV (NP) per unit
A	27	27 * 80% = 21.6	21.6 - (27 * 40%) = 10.8
B	29	29 * 80% = 23.2	23.2 - (29 * 40%) = 11.6
C	19	19 * 80% = 15.2	15.2 - (19 * 40%) = 7.6
D	17	17 * 80% = 13.6	13.6 - (17 * 40%) = 6.8
E	24	24 * 80% = 19.2	19.2 - (24 * 40%) = 9.6

Market = Middle value of RC, NRV, and NRV-NP.

Inventory Value = [Lower of (Market) or (Cost)]

Product (units)	RC	NRV	NRV - NP	Market	Cost	Inventory value
A (700)	$16,100	$15,120	$7,560	$15,120	$14,700	$14,700
B (1,000)	$22,000	$23,200	$11,600	$22,000	$26,000	$22,000
C (900)	$11,700	$13,680	$6,840	$11,700	$12,600	$11,700
D (600)	$9,000	$8,160	$4,080	$8,160	$10,800	$8,160
E (500)	$11,500	$9,600	$4,800	$9,600	$12,500	$9,600
			Total	$65,980	$76,600	$66,160

2. Inventory carrying value would be $65,980, the lower of aggregate inventory cost ($76,600) and aggregate inventory market ($65,980). The amount of the loss from inventory write-down is $10,620 ($76,600 - $65,980)

3. Cost of goods sold. Dr. $10,620

To Inventory. $10,620