Problem:
The Mayflower Company began its operations in early 2011. The company carries five different types of inventory which are listed below along with other relevant data. The company values its inventory at the lower of cost or market. At December 31, 2011, Mayflower has exactly one unit of each item in ending inventory.
Estimated Normal Profit
Actual Replacement Selling Estimated Margin on
Item Cost Cost Price Cost to Sell Selling Price
1 $15.00 $11.00 $20.00 $7.00 20%
2 5.00 6.00 10.00 5.00 10%
3 19.00 13.00 20.00 9.00 15%
4 21.00 18.00 24.00 5.00 25%
5 23.00 25.00 30.00 7.00 30%
(1) Complete the following information using the lower-of-cost-or-market method as of December 31, 2011.
Item Ceiling Floor Market LCM
1
2
3
4
5
(2) Compute the inventory loss, if any, Mayflower should show in 2011 using the lower-of-cost-or-market method applied on an individual items basis.
(3) Prepare the adjusting entry, if any, required as of December 31, 2011, assuming all such entries are made directly to the inventory account.