8SE - Horngren'S Financial And Managerial Accounting

Question

Question: Assume that a Logan Burger restaurant has the following perpetual inventory record for hamburger patties:

Date PurchasesCost ofMerchandise

Goods SoldInventory on Hand

Jul. 9 \( 450 \) 450

22 \( 270 180

31 210 390

At July 31, the accountant for the restaurant determines that the current replacementcost of the ending merchandise inventory is \)435. Make any adjusting entry needed toapply the lower-of-cost-or-market rule. Merchandise inventory would be reported onthe balance sheet at what value on July 31?

Step-by-Step Solution

Answer

There is no need for any adjustment as per the LCM rule. The ending inventory would be reported at $390 on the balance sheet. 

Step-by-Step-Solution Step1: Lower of cost or market rule

LCM rule in inventory valuation is an implication of the principle of conservatism. As per this rule, the inventories should be valued at a lower value only be it the cost at which it was acquired or the current market cost (replacement cost). If there is any difference between the market price and historic cost, an adjustment needs to be made in the balance sheet value of inventory. 

Step 2: Adjustment as per the LCM rule

At July 31,the book value (cost) of ending inventory = $390

 

On July 31, the replacement cost (market value) of inventory = $435

 

As per the LCM rule, the replacement cost is higher than the historical cost. Thus the ending inventory would be reported at its historical cost only.

There is no need for any adjustment in the balance sheet value of inventory.

 

Merchandise on July 31 would be reported on the balance sheet at a value of $390.