Sandra Company had 200 units of inventory on hand at the end of the year. These were recorded at a cost of $12 each using the last-in, first-out (LIFO)method. The current replacement cost is $10 per unit. The selling price charged by Sandra Company for each finished product is $15. In order to record the adjusting entry needed under the lower-of-cost-or-market rule, the Cost of Goods Sold will be:

Question

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According to the lower-of-cost-or-market rule, inventory should be valued at the lower of its cost or replacement cost. In this case, the replacement cost is $10 per unit, which is lower than the cost of $12 per unit. Therefore, the inventory should be written down to its replacement cost of $10 per unit, resulting in a total inventory value of $2,000 (200 units x $10 per unit).

Since the inventory write-down is considered a loss, it should be recognized in the income statement as a charge to the Cost of Goods Sold account. To record this adjusting entry, the Cost of Goods Sold should be debited by the amount of the write-down, which is $2,000. Therefore, the correct answer is C, debited by $400.

Sandra Company Had 200 Units of Inventory on Hand at the End