Delaware Retail, Inc. had the following balances and transactions during 2019. $$\begin{array} { | l | l | }
\hline \text { Beginning Inventory } & 20 \text { units at } \$ 74 \
\hline \text { June 10 } & \text { Purchased } 40 \text { units at } \$ 84 \
\hline \text { December 30 } & \text { Sold 30 units } \
\hline \text { December 31 } & \text { Replacement cost } \$ 64 \
\hline
\end{array}$$ The company maintains its records of inventory on a perpetual basis using the last-in, first-out inventory costing method. Calculate the amount of ending Merchandise Inventory at December 31, 2019 using the lower-of-cost-or-market rule.

Question

Delaware Retail, Inc. had the following balances and transactions during 2019. $$\begin{array} { | l | l | } 
\hline \text { Beginning Inventory } & 20 \text { units at } \$ 74 \
\hline \text { June 10 } & \text { Purchased } 40 \text { units at } \$ 84 \
\hline \text { December 30 } & \text { Sold 30 units } \
\hline \text { December 31 } & \text { Replacement cost } \$ 64 \
\hline
\end{array}$$ The company maintains its records of inventory on a perpetual basis using the last-in, first-out inventory costing method. Calculate the amount of ending Merchandise Inventory at December 31, 2019 using the lower-of-cost-or-market rule.

Quizplus · Accepted Answer

To calculate the ending Merchandise Inventory at December 31, 2019 using lower-of-cost-or-market (LCM) rule, we need to compare the cost and the market value of inventory and take the lower of the two.

Given:
Beginning Inventory at January 1, 2019 = $3,380
Purchases = $9,520
Sales = $11,300
Cost of Goods Sold = $9,700

To find the cost of ending inventory, we need to subtract the cost of goods sold from the cost of goods available for sale:
Cost of Goods Available for Sale = Beginning Inventory + Purchases
= $3,380 + $9,520
= $12,900

Cost of Ending Inventory = Cost of Goods Available for Sale - Cost of Goods Sold
= $12,900 - $9,700
= $3,200

Next, we need to compare this cost with the market value of inventory. The market value is the lower of the replacement cost or net realizable value (selling price minus disposal costs). We are not given the replacement cost, but we can calculate the net realizable value as follows:

Net Realizable Value = Selling Price - Disposal Costs
= $12,800 - ($12,800 × 10%)
= $11,520

Since the cost of ending inventory ($3,200) is higher than the market value ($1,920), we need to use the LCM rule and value the inventory at the market value of $1,920.

Therefore, the amount of ending Merchandise Inventory at December 31, 2019 using lower-of-cost-or-market rule is $1,920.

Option C is the correct answer.

Delaware Retail, Inc The Company Maintains Its Records of Inventory on a Perpetual