Mariah Company has inventory at the end of the year with a historical cost of $ 95 comma 000. Mariah Company uses the perpetual inventory system. Under the LCM rule, the current replacement cost is $ 72 comma 600. The company uses LIFO. Under U. S. GAAP, the journal entry to record the writeminusdown to LCM will:

U.S. GAAP, the journal entry to record the writeminusdown to LCM will:

Debit: Cost of goods sold $22400

Credit: Inventory $22400

Explanation:

In accordance to the GAAP Standard the LCM rule or the lower cost rule state that a company should value its inventory at the lowest cost(i.e actual cost of the inventory or its market price) at the end of each financial  year.

In case of Mariah Company the historical cost, which is also referred to as  the actual cost of the inventory and  is valued  in the books, as $95 000.

The current Replacement cost, which means  how much expense one need  to incur in order to  replace an asset based on market rates, is $72600. so we can say that  replacement cost is thus lower.

If the inventory is valued at historical cost in the books of accounts , it will have to been written down with the replacement cost value. To do this the difference between both costs will need to be deduced.

Difference is thus: $95 000 - $72600 =$22 400.

When we begin to  write down , this is expensed to cost of goods sold. This is because there is a decrease in closing inventories.

If there is a decrease in this figure then it will lead to a subsequent increase in cost of goods sold, leading to it being debited to show this increase

Inventory side is credited as the value of the inventory has decreased, and inventories decrease is shown on the credit side.

Debit: Cost of goods sold $22400

Credit: Inventory $22400

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