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On April 1, Robert LLC purchased two units of inventory, A and B. The cost of unit A was $650, and the cost of unit B was $625. On April 30, Robert LLC had not sold the inventory. The market value of unit A was now $685 while the market value of unit B was $550. The journal entry associated with the lower-of-cost-or-market method on April 30 will be:

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Answer:

Debit : Cost of Goods Sold : $75

Credit : Inventory : $75

Explanation:

The lower-of-cost-or-market method is based on the conservative accounting theory. This is where company accounts are prepared with caution and verification. All losses are recorded as they are discovered whereas gains are recorded only after realised. In this case, there is a gain in Inventory A, hence it won’t be recorded as of yet. However, the value of Inventory B has reduced and this requires to be recorded.

The cost of Inventory B should be reduced to the lower net realizable value, hence it would be reduced by the difference : $625 - $550 = $75

Debit : Cost of Goods Sold : $75

Credit : Inventory : $75

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