Lower-of-Cost-or-Market Rule Awards Etc. carries an inventory of trophies and ribbons for local…

Lower-of-Cost-or-Market Rule Awards Etc. carries an inventory of trophies and ribbons for local…

Lower-of-Cost-or-Market Rule

Awards Etc. carries an inventory of trophies and ribbons for local sports teams and school clubs.

The cost of trophies has dropped in the past year, which pleases the company except for the fact

that it has on hand considerable inventory that was purchased at the higher prices. The president

is not pleased with the lower profit margin the company is earning. “The lower profit margin will

continue until we sell all of this old inventory,” he grumbled to the new staff accountant. “Not

really,” replied the accountant. “Let’s write down the inventory to the replacement cost this year,

and then next year our profit margin will be in line with the competition.”

Required

Explain why the inventory can be carried at an amount less than its cost. Which accounts will be

affected by the write-down? What will be the effect on income in the current year and future

years?

 

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