12) Martha, Inc. had 21,000 units of ending inventory that were recorded at the cost of $8.00 per unit
using the FIFO method. The current replacement cost is $4.25 per unit. Which of the following amounts
would be reported as ending Merchandise Inventory on the balance sheet using the lower–of–cost-or–
market rule?
A) $168,000
B) $257,250
C) $189,000
D) $89,250
13) Better Deals, Inc. has 6 units in inventory on December 31. The units were purchased in November for
$165 each. The price lists from the suppliers indicate that the same items would now cost the company a
total of $1,020. What would be the amount reported as ending Merchandise Inventory on the balance
sheet?
A) $2,010
B) $335
C) $990
D) $1,020
14) The Bridal Gift Shop, Inc. has 14 units in ending merchandise inventory on December 31. The units
were purchased in November for $165 each. The price lists from suppliers indicate the current
replacement cost of the item to be $171 each. What would be the amount reported as Merchandise
Inventory on the balance sheet?
A) $2,310
B) $4,704
C) $336
D) $2,394
15) Everyday Wear Retail had the following balances and transactions during 2018:
Beginning Inventory
15 units at $72
June 10
Purchased 30 units at $85
December 30
Sold 20 units
December 31
Replacement cost $67
The company maintains its records of inventory on a perpetual basis using the first-in, first-out inventory
costing method. Calculate the amount of ending Merchandise Inventory on December 31, 2018 using the
lower-of-cost-or-market rule.
A) $2,010
B) $1,675
C) $1,800
D) $1,080
16) Delaware Retail, Inc. had the following balances and transactions during 2019.
Beginning Inventory
20 units at $74
June 10
Purchased 40 units at $84
December 30
Sold 30 units
December 31
Replacement cost $64
The company maintains its records of inventory on a perpetual basis using the last-in, first-out inventory
costing method. Calculate the amount of ending Merchandise Inventory at December 31, 2019 using the
lower-of-cost-or-market rule.
A) $2,520
B) $2,560
C) $1,920
D) $3,840
17) Boulevard Home Furnishings had the following balances and transactions during 2018.
Beginning Inventory
20 units at $71
June 10
Purchased 40 units at $85
December 30
Sold 25 units
December 31
Replacement cost $87
The company maintains its records of inventory on a perpetual basis using the FIFO inventory costing
method. Calculate the amount of ending Merchandise Inventory at December 31, 2018 using the lower–of–
cost-or-market rule.
A) $2,975
B) $3,045
C) $3,480
D) $5,220
18) Smart Phones, Inc. had the following balances and transactions during 2019.
Beginning Inventory
40 units at $70
June 10
Purchased 120 units at $74
December 30
Sold 114 units
December 31
Replacement cost $77
The company maintains its records of inventory on a perpetual basis using the last-in, first-out inventory
costing method. Calculate the amount of ending Merchandise Inventory at December 31, 2019 using the
lower-of-cost-or-market rule. (Round any intermediate calculations two decimal places, and your final
answer to the nearest dollar.)
A) $2,800
B) $3,244
C) $3,542
D) $3,404
19) Under International Financial Reporting Standards (IFRS), which of the following statements
regarding the lower-of-cost–or-market rule is incorrect?
A) It is not necessary to record inventory at the lower–of-cost-or-market.
B) The market value is defined as net realizable value.
C) If the historical cost is higher than the net realizable value, the inventory must be written down.
D) The IFRS approach results in fewer write-downs of inventory than U.S. GAAP.
20) The Cost of Goods Sold account is credited to write down the inventory as required by the lower–of–
cost-or-market rule.
21) The Merchandise Inventory account is debited to write down the inventory as required by the lower-
of-cost-or-market rule.
22) Companies often disclose that the LCM rule is followed in notes to their financial statements.
23) Second Street, Inc. has 7 units in ending merchandise inventory on December 31. The units were
purchased in November for $180 each. The price lists from suppliers indicate the current replacement cost
of the item to be $178 each. Which of the following statements is true of the effects of the adjustments to
ending merchandise inventory and the cost of goods sold?
A) The cost of goods sold would increase by $2.
B) The cost of goods sold would not be affected.
C) The cost of goods sold would decrease by $14.
D) The cost of goods sold would increase by $14.
24) Landers, Inc. has 7 units in inventory on December 31. The units were purchased in November for
$180 each. The price lists from suppliers indicate the current replacement cost of the item to be $174 each.
What is the effect on gross profit if Landers values its ending merchandise inventory using the lower–of–
cost-or-market rule?
A) The gross profit would increase by $6.
B) The gross profit would not be affected.
C) The gross profit would decrease by $42.
D) The gross profit would increase by $42.
25) When a company uses the perpetual inventory method, which of the following would be the entry to
adjust inventory to lower–of-cost-or-market?
A) debit Loss on Inventory and credit Merchandise Inventory
B) debit Merchandise Inventory and credit Inventory Adjustment
C) debit Cost of Goods Sold and credit Merchandise Inventory
D) debit Merchandise Inventory and credit Cost of Goods Sold
26) Handbags, Inc. had 400 units of inventory on hand at the end of the year. These were recorded at a
cost of $14 each using the last-in, first-out (LIFO) method. The current replacement cost is $10 per unit.
The selling price charged by Handbags, Inc. for each finished product is $17. In order to record the
adjusting entry needed under the lower-of-cost-or-market rule, the Cost of Goods Sold will be ________.
A) debited by $4,000
B) credited by $4,000
C) debited by $1,600
D) credited by $1,600
27) Kim’s Retail had 800 units of inventory on hand at the end of the year. These were recorded at a cost
of $15 each using the last-in, first-out (LIFO) method. The current replacement cost is $11 per unit. The
selling price charged by Kim’s Retail for each finished product is $18. In order to record the adjusting
entry needed under the lower-of-cost-or-market rule, the Merchandise Inventory will be ________.
A) debited by $8,800
B) credited by $8,800
C) debited by $3,200
D) credited by $3,200
28) Camping Gear, Inc. had 600 units of inventory on hand at the end of the year. These were recorded at
a cost of $17 each using the last-in, first-out (LIFO) method. The current replacement cost is $15 per unit.
The selling price charged by Camping Gear, Inc. for each finished product is $23. As a result of recording
the adjusting entry as per the lower–of–cost-or-market rule, the gross profit will ________.
A) increase by $9,000
B) decrease by $9,000
C) increase by $1,200
D) decrease by $1,200
29) The ending inventory of a company was $450,000 as per the perpetual inventory records. The current
replacement cost for the ending inventory is $410,000. Prepare the journal entry to adjust inventory. Omit
explanation.
30) The ending inventory of a company was $552,000 as per the perpetual inventory records. The current
replacement cost for the ending inventory is $547,000. Prepare the journal entry to adjust inventory. Omit
explanation.
1) An overstatement of ending merchandise inventory in the current period results in an understatement
of net income in the current period.
2) An overstatement of ending merchandise inventory in the current period results in an overstatement of
net income in the current period.
3) An overstatement of ending merchandise inventory in the current period results in an overstatement of
cost of goods sold in the current period.
4) An overstatement of ending merchandise inventory in the current period results in an understatement
of cost of goods sold in the current period.
5) An inventory error cancels out after two periods.
6) The ending merchandise inventory for the current year is overstated by $20,000. What effect will this
error have on the following year’s net income?
A) The net income will be overstated by $40,000.
B) The net income will be overstated by $20,000.
C) The net income will be understated by $20,000.
D) The net income will be understated by $40,000.
7) The ending merchandise inventory for the current accounting period is overstated by $3,500. What will
be the effect of this error?
A) The net income for the current accounting period will be overstated by $3,500.
B) The cost of goods sold for the current accounting period will be overstated by $3,500.
C) The ending merchandise inventory for the next accounting period will be overstated by $3,500.
D) The cost of goods sold for the next accounting period will be understated by $3,500.