Question

Given the following information for the Raquel Company:

Date Cost Market
December 31, 2018 $500 $500
December 31, 2019 700 700
December 31, 2020 800 730

Under the perpetual system, if the direct method of recording lower of cost or market is in use, which December 31, 2020 entry is correct?

a. Inventory 70
Cost of Goods Sold 70
b. Cost of Goods Sold 70
Inventory 70
c. Loss Due to Write-Down of Inventory 70
Allowance to Reduce Inventory to NRV 70
d. Cost of Goods Sold 70
Allowance to Reduce Inventory to NRV 70

Answer 1

The correct entry for Raquel Company under the direct method of recording lower of cost or market is debiting Loss Due to Write-Down of Inventory and crediting Allowance to Reduce Inventory to NRV by $70.

Step-by-step explanation:

lower of cost or market

The student is asking about an accounting concept: The lower of cost or market (LCM). On December 31, 2020, Raquel Company has inventory with a cost of $800 and a market value of $730. Because the direct method of recording LCM is in use, Raquel Company must write down the inventory to its market value if the market value is lower than the cost. In this case, the correct journal entry to reduce inventory to its market value would involve debiting a loss account and crediting an allowance account. Therefore, the correct December 31, 2020 entry is: Loss Due to Write-Down of Inventory 70 Allowance to Reduce Inventory to NRV 70.

Under the perpetual system, the lower of cost or market rule states that if the market value of inventory is lower than its original cost, the inventory should be written down to its market value.

In this case, the market value of the inventory on December 31, 2020 is $730, which is lower than its original cost of $800. Therefore, the correct entry would be:

d. Cost of Goods Sold $70

Allowance to Reduce Inventory to NRV $70