Question

Hot Pepper Company had the following information in its accounting records at year end:

Inventory Cost $4,000,000
It estimates the net realizable value of this inventory is $3,500,000. As a result of this information Hot Pepper Co. would:
Multiple Choice
A. Make a journal entry debiting the allowance for inventory valuation for $500,000
B. Make a journal entry debiting a gain on market appreciation for $500,000
C. Make a journal entry crediting the allowance for inventory valuation for $500,000
D. Make no entry

Answer 1

The correct answer is C

Based on the given information, Hot Pepper Company would make a journal entry to reflect the lower of cost or net realizable value of the inventory. This is known as the lower of cost or market (LCM) rule.

The net realizable value is estimated to be $3,500,000, which is lower than the cost of $4,000,000. In accordance with the LCM rule, Hot Pepper Company would reduce the value of the inventory to its net realizable value.