Lumber Number Ltd.began business in 2001.It uses a periodic inventory system and values inventory at lower-of-cost-or-market.The following data represents price information related to the inventory on a unit basis: $$\begin{array} { | l | r| r |r |r| r | }
\hline & { \text { 2002 Inventory } } & &{ \text { 2003 Inventory } } \
\hline & \text { Beginning } & \text { Ending } & \text { Beginning } & \text { Ending } \
\hline \text { Cost } & \$ 80 & \$ 86 & \$ 86 & \$ 98 \
\hline \text { Market } & 80 & 84 & 84 & 90 \
\hline
\end{array}$$ What effect will this information have on the 2003 statement of income if the allowance method is used?
A)$2 holding loss
B)$4 holding loss
C)$6 holding loss
D)$8 holding loss

Question

Lumber Number Ltd.began business in 2001.It uses a periodic inventory system and values inventory at lower-of-cost-or-market.The following data represents price information related to the inventory on a unit basis: $$\begin{array} { | l | r| r |r |r| r | } 
\hline &  { \text { 2002 Inventory } } & &{ \text { 2003 Inventory } } \
\hline & \text { Beginning } & \text { Ending } & \text { Beginning } & \text { Ending } \
\hline \text { Cost } & \$ 80 & \$ 86 & \$ 86 & \$ 98 \
\hline \text { Market } & 80 & 84 & 84 & 90 \
\hline
\end{array}$$ What effect will this information have on the 2003 statement of income if the allowance method is used?
A)$2 holding loss
B)$4 holding loss
C)$6 holding loss
D)$8 holding loss

Quizplus · Accepted Answer

The allowance method recognizes a holding loss when the market value of inventory is less than its cost. In this case, the market value of the 2003 ending inventory is $90, which is less than its cost of $98. Therefore, a holding loss of $8 ($98 - $90) will be recognized in the 2003 statement of income.

Lumber Number Ltd What Effect Will This Information Have on the 2003 Statement