Question

Question: Part A

Santana Rey of Business Solutions is evaluating her inventory to determine whether it must be adjusted based on lower of cost or market rules. Business Solutions has three different types of software in its inventory, and the following information is available for each.

Inventory Item	Units	Cost Per unit	Market per unit
Office Productivity	3	\(76	\)74
Desktop publishing	2	103	100
Accounting	3	90	96

Required

1. Compute the lower of cost or market for ending inventory assuming Rey applies the lower of cost or market rule to inventory as a whole. Must Rey adjust the reported inventory value? Explain.

2. Assume that Rey had instead applied the lower cost or market rule to each product in inventory. Under this assumption, must Rey adjust the reported inventory value? Explain.

Short answer

Answer

Assumption	Ending Inventory	Adjustment Required
Inventory as Whole	$704	No
Each Product of Inventory	$692	Yes

Step-by-step solution

Definition of LCM Method

The method of inventory valuation in which the actual cost of the inventory is compared with the market value of the inventory and the business entity reports the value whichever is lower among them.

LCM is Applied to Inventory as Whole

Inventory Item	Units	Cost per unit	Market per unit	Total cost		Lower cost or market
				Cost	Market
Office Productivity	3	$76	$74	$228	$222	$222
Desktop publishing	2	103	100	$206	$200	$200
Accounting	3	90	96	$270	$288	$270
				$704	$710	$692

When LCM is applied to inventory as a whole, it will be reported at $704, and no adjustment is required to be made because the actual cost of the inventory is equal to the cost determined under LCM.

LCM is Applied to Each Product of the Inventory

Inventory Item	Units	Cost Per unit	Market per unit	Total cost		Lower of cost or market
				Cost	Market
Office Productivity	3	$76	$74	$228	$222	$222
Desktop publishing	2	103	100	$206	$200	$200
Accounting	3	90	96	$270	$288	$270
				$704	$710	$692

When LCM is applied to each product, it will be reported at $692, and an adjustment must be made because the actual cost of inventory is higher than the cost determined under LCM.