Williams Company had the following balances and transactions during 2014. Williams maintains its records of inventory on a perpetual basis using the last-in, first-out method. Calculate the amount of ending Merchandise Inventory at December 31, 2014 using the lower-of-cost-or-market rule.

Question

Williams Company had the following balances and transactions during 2014.  Williams maintains its records of inventory on a perpetual basis using the last-in, first-out method. Calculate the amount of ending Merchandise Inventory at December 31, 2014 using the lower-of-cost-or-market rule.

Quizplus · Accepted Answer

Using the LIFO method, the cost of goods sold for 2014 would be calculated as follows:

Beginning inventory:
100 units @ $10 = $1,000

Purchases:
400 units @ $13 = $5,200
200 units @ $15 = $3,000

Total cost of goods available for sale: $9,200

Sales:
500 units @ $20 = $10,000

Ending inventory:
200 units @ $15 = $3,000 (based on LIFO)

Therefore, the cost of goods sold is $6,200 ($9,200 - $3,000).

Using the lower-of-cost-or-market rule, we compare the cost of each item in ending inventory to its market value (i.e. the cost to replace the item). The market value is defined as the current replacement cost, with a ceiling of net realizable value (i.e. selling price less costs to complete and sell) and a floor of net realizable value less a normal profit margin.

Based on market values, the cost of 100 units is $10 each ($1,000 total) and the cost of 100 units is $15 each ($1,500 total). Since the cost of the 100 units at $15 each exceeds the market value of $10 each, we must adjust the inventory to its market value, resulting in a lower ending inventory of $1,400 ($1,000 for 100 units at $10 each and $400 for 40 units at $10 each). Therefore, the correct answer is B) $1,140.

Williams Company Had the Following Balances and Transactions During 2014