Lower of Cost or Market

Question 1

How do we determine Market Value when calculating LCM?

Answer 1

-Middle value of Replacement Cost, Net Realizable Value (Sales Price - Estimated Cost to Complete and Sell Inventory), and Net Realizable Value - Normal Profit Margin

Question 2

What are 3 approaches to calculating LCM?

Answer 2

• Individual Item Basis
• Category Basis
• Total Basis

Question 3

Describe the two methods of recording LCM journal entry.

Answer 3

1) Direct method- Dr. COGS Cr. Inventory

2) Allowance Method- Dr. Holding Loss, Cr. Inventory Allowance Account