Handbags, Inc. had 400 units of inventory on hand at the end of the year. These were recorded at a cost of $14 each using the last-in, first-out (LIFO) method. The current replacement cost is $10 per unit. The selling price charged by Handbags, Inc. for each finished product is $17. In order to record the adjusting entry needed under the lower-of-cost-or-market rule, the Cost of Goods Sold will be ________.

Question

Quizplus · Accepted Answer

Under the lower of cost or market (LCM) rule, inventory is recorded at the lower of its historical cost or its current market value. In this case, the current market value is $10 per unit, which is lower than the historical cost of $14 per unit. Therefore, the inventory must be written down to its market value, resulting in a debit to the Cost of Goods Sold account for the difference between the historical cost and the market value, multiplied by the number of units. The adjustment would be:
400 units x ($14 - $10) = $1,600, which would be debited to Cost of Goods Sold. Therefore, the correct answer is C, debited by $1,600.