Sandals Company is preparing the annual financial statements dated December 31. Ending inventory information about the four major items stocked for regular sale follows:Product Line Quantity on Hand Unit Cost When Acquire(FIFO) Market Value at Year-EndAir Flow 35 $ 15 $ 17 Blister Buster 75 38 36 Coolonite 34 65 60 Dudesly 35 30 35 Required:1. Compute the amount that should be reported for the ending inventory using the LCM rule applied to each item. Ending Inventory 2. How will the write-down of inventory to lower of cost or market affect the company’s expenses reported for the year ended December 31?Cost of goods sold will be by

1) $6,315

2) since the ending inventory decreased in value (by $320), cost of goods sold will increase by that same amount. Since COGS increases, income will decrease. The adjusting journal entry should be:

December 31, 202x, LCM inventory adjustment

Dr Cost of goods sold 320

    Cr Inventory 320

Explanation:

Product Line                  Quantity     Unit Cost    Market Value     Total

Air Flow                             35               $15                 $17               $525

Blister Buster                    75               $38                $36            $2,700

Coolonite                          34               $65                $60           $2,040

Dudesly                             35               $30                $35            $1,050

total                                                                                                $6,315

When you use the lower of cost or market value, you must report your inventory using the lowest cost between purchase price and current market value (or replacement cost). Air Flow and Dudesly should be reported at purchase cost, while Coolnite and Blister Buster should be reported at market value.

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