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: $\begin{array} { | l | l | l | l | l | }
\hline & 2002 \text { Inventory } & &{ 2003 \text { Inventory } } \
\hline & \text { Beginning } & \text { Ending } & \text { Beginning } & \text { Ending } \
\hline \text { Cost } & \$ 80 & \$ 86 & \$ 86 & \$ 98 \
\hline \text { Market } 80 & 84 & 84 & 90 \
\hline
\end{array}$
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: $\begin{array} { | l | l | l | l | l | } 
\hline & 2002 \text { Inventory } & &{ 2003 \text { Inventory } } \
\hline & \text { Beginning } & \text { Ending } & \text { Beginning } & \text { Ending } \
\hline \text { Cost } & \$ 80 & \$ 86 & \$ 86 & \$ 98 \
\hline \text { Market } 80 & 84 & 84 & 90 \
\hline
\end{array}$
 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 below its cost. In this case, the market value of the 2003 beginning inventory is $84, which is below its cost of $86. Therefore, a holding loss of $2 is recognized. The market value of the 2003 ending inventory is $90, which is below its cost of $98. Therefore, a holding loss of $8 is recognized. The total holding loss for 2003 is $2 + $8 = $10.

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