Calculating and Recording the Effects of Lower of Cost or Market (LCM) on Ending Inventory Assume…

Calculating and Recording the Effects of Lower of Cost or Market (LCM) on Ending Inventory

Assume you recently obtained a job in the Miami head office of Perfumania, the largest specialty retailer of discounted fragrances in the United States. Your job is to estimate the amount of write-down required to value inventory at the lower of cost or market. The cost of inventory is calculated using the weighted average cost method and, at $368 million, it represents the company’s biggest and most important asset. Assume the corporate controller asked you to prepare a spreadsheet that can be used to determine the amount of LCM write-down for the current year. The controller provides the following hypothetical numbers for you to use in the spreadsheet.

Product Line

Weighted Average Unit CostReplacement Cost (Market) at Year-End

 

Quantity on Hand

Alfred Sung Shi Animale

$22 15

$20 16

80 75

Azzaro

10

10

50

Mambo

16

17

30

OP Juice

8

7

400

You realize that you’ll need to multiply the quantity of each item by the lower of cost or market per unit. You e-mailed your friend Owen for Excel help.

1. Prepare a spreadsheet that calculates total LCM for inventory, applied on an item-by-item basis.

2. Prepare a journal entry to record the inventory LCM write-down.

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