Hougton Company follows U.S. GAAP and has the following inventory data available:

Item
Cost
Selling Price
Disposal
Costs
Current Replacement Cost
Normal Profit
Men Shirt 1
$10
$36
$16
$15
$8
Men Shirt 2
20
23
4
18
2
Women Shirt 3
5
6
3
4
1
Women Shirt 4
8
20
5
12
4

The company has 1,000 shirts of each style in stock at year end. The company uses the indirect method to record the lower-of-cost-or-market rule.

Required:
1. a. Determine the value of inventory reported on the balance sheet at year end if the lower-of-cost-or-market rule is applied to each inventory item.
b. Prepare the journal entry required at year end.
2. a. Determine the value of inventory reported on the balance sheet at year end if the lower-of-cost-or-market rule is applied to the shirts as a group of items. Use gender to group the items.
b. Prepare the journal entry required at year end.

What will be an ideal response?

Answer:
1. a.
Item
Current Replacement Cost
Net Realizable Value(NRV)
NRV - Normal Profit
Market
Men Shirt 1
$15
$20
$12
$15
Men Shirt 2
18
19
17
18
Women Shirt 3
4
3
2
3
Women Shirt 4
12
15
11
12

Item
Market
Cost
LCM
Write-down
Men Shirt 1
15
10
10
0
Men Shirt 2
18
20
18
2
Women Shirt 3
3
5
3
2
Women Shirt 4
12
8
8
0

b.
Account
Account
DR
CR
Loss on Inventory Write-down

$4,000

Allowance to Reduce Inventory to Market

$4,000
($2 × 1,000) + ($2 × 1,000) = $4,000

2. a.
Item
Market Value
Cost
Men Shirt 1
$15 × 1,000 = $15,000
$10 × 1,000 = $10,000
Men Shirt 2
$18 × 1,000 = $18,000
$20 × 1,000 = $20,000
Total
$33,000
$30,000
Women Shirt 3
$3 × 1,000 = $3,000
$5 × 1,000 = $5,000
Women Shirt 4
$12 × 1,000 = $12,000
$8 × 1,000 = $8,000
Total
$15,000
$13,000

b. No journal entry is required because the market value of each group exceeds the cost of each group.