Cammy Company had inventory at the end of the first quarter having a cost of $420,000 and a market value of $410,000.Cammy recognized a $10,000 loss in its first quarter financial statements due to market declines.At the end of the second quarter, the inventory had a cost of $450,000, and a market value of $480,000.Cammy's action in the second quarter should be:
A)nothing.
B)recognize a $30,000 gain due to market recoveries.
C)recognize a $10,000 gain due to market recoveries.
D)recognize a recovery based on the first quarter write-down multiplied by the gross profit percentage.

Question

Cammy Company had inventory at the end of the first quarter having a cost of $420,000 and a market value of $410,000.Cammy recognized a $10,000 loss in its first quarter financial statements due to market declines.At the end of the second quarter, the inventory had a cost of $450,000, and a market value of $480,000.Cammy's action in the second quarter should be:
A)​nothing.
B)​recognize a $30,000 gain due to market recoveries.
C)​recognize a $10,000 gain due to market recoveries.
D)​recognize a recovery based on the first quarter write-down multiplied by the gross profit percentage.

Quizplus · Accepted Answer

During the first quarter, Cammy recognized a $10,000 loss due to market declines, bringing the value of the inventory down from $420,000 (cost) to $410,000 (market value). However, in the second quarter, the market value of the inventory increased to $480,000 while its cost increased to $450,000. Therefore, Cammy should recognize a $10,000 gain in the second quarter due to the recovery of the inventory's market value. This gain can be recognized because the original write-down in the first quarter was only $10,000, and the market value of the inventory recovered by the same amount. Choosing option (C) recognizes this gain correctly.

Cammy Company Had Inventory at the End of the First