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.
Weighted Average Unit CostReplacement Cost (Market) at Year-End
Quantity on Hand
Alfred Sung Shi Animale
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.