Online Accounting Course Simple Studies

Accounting Solution 7.3 (Accounting for Inventories)

The table below shows the lower of cost or market rule for My New Bike:

Item

Cost

Market Value

Lower of Cost
or Market
Sport Bike

$1,200

$1,300

$1,200
Mountain Bike

$1,500

$1,400

$1,400
Racing Bike

$1,000

$950

$950
In aggregate

$3,700

$3,650

$3,650

Below you can see the journal entries to record the loss resulting from the lower of cost or market calculation. Note that Sport Bike does need to be decreased in cost. The three journal entries do not relate to each other and should be considered separately:

Account titles

Debit

Credit
Inventory Loss
    Inventory (Mountain Bike)		 100 (1) 100 (1)
Inventory Loss
    Inventory (Racing Bike)		 50 (2) 50 (2)
Inventory Loss (in aggregate)
    Inventory		 50 (3) 50 (3)

(1) Mountain Bike: $1,500 - $1,400 = $100
(2) Racing Bike: $1,000 - $950 = $50
(3) In aggregate: $3,700 - $3,650 = $50