March 8 Purchase	24 units @ $18
March 14 Sale	20 units @ $36
March 22 Purchase	16 units @ $20
March 27 Sale	24 units @ $36    Assume that a Queen Burger restaurant has the following perpetual inventory record for hamburger​ patties:
View the perpetual inventory record.LOADING...
At February 28​, the accountant for the restaurant determines that the current replacement cost of the ending merchandise inventory is $ 470. Make any adjusting entry needed to apply the​ lower-of-cost-or-market rule. Merchandise inventory would be reported on the balance sheet at what value on February 28​? 
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Part 1
Make any adjusting entry needed to apply the​ lower-of-cost-or-market rule. ​(Record debits​ first, then credits. Exclude explanations from journal entries. If no entry is required select​ "No entry​ required" on the first line of the journal entry​ table.)
Date
Accounts
Debit
Credit
Feb. 28

### Lower of Cost or Market Rule

The **Lower-of-Cost-or-Market (LCM) rule** requires that inventory be reported at the lower of its cost or market value (replacement cost) on the balance sheet. The market value is determined by comparing it to the cost, and if the replacement cost (market value) is lower than the historical cost, an adjusting entry must be made to reduce the inventory value and recognize a loss.

### Step-by-step analysis:

1. **Merchandise Inventory at Cost**:  
   The hamburger patties purchased by Queen Burger are as follows:
   
   - March 8: 24 units @ $18 = $432
   - March 22: 16 units @ $20 = $320
   - Ending inventory: (24 units + 16 units) = **40 units**

2. **Cost of Ending Inventory** (as per perpetual record):
   - Remaining patties: **40 units**
   - Using the latest purchase (LIFO or FIFO can apply depending on inventory method):
     - Assuming FIFO, the first 24 units are from the March 8 purchase and the next 16 units from the March 22 purchase.
     - **Ending inventory at cost**:
       \[
       24 \, \text{units} \times 18 + 16 \, \text{units} \times 20 = 432 + 320 = 752 \, \text{(total cost)}
       \]
   
3. **Current Replacement Cost**:  
   The accountant has determined the **current replacement cost** of the ending merchandise inventory is **$470**.

4. **Application of Lower-of-Cost-or-Market Rule**:  
   Since the **cost** of the inventory is $752, but the replacement cost is lower at $470,** the inventory must be adjusted to reflect this lower value.

### Journal Entry for Adjustment:

On February 28, the adjustment would reduce the merchandise inventory to its market value (replacement cost) and recognize a loss:

| **Date**  | **Accounts**             | **Debit** | **Credit** |
|-----------|--------------------------|-----------|------------|
| Feb. 28   | Loss on Inventory Write-down | $282      |            |
| Feb. 28   | Merchandise Inventory     |            | $282       |

**Explanation**:  
- The debit of **$282** ($752 - $470) is the loss recognized to bring the inventory down to its replacement cost.
- The credit reduces the Merchandise Inventory account to reflect the lower value on the balance sheet.

### Value of Merchandise Inventory on the Balance Sheet:
Merchandise inventory would be reported on the balance sheet at its lower value of **$470** on February 28.

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Would you like further details or have any questions?

Here are 5 related questions you might find interesting:
1. How is the perpetual inventory method different from the periodic method?
2. What is the purpose of the lower-of-cost-or-market rule in inventory accounting?
3. How do different inventory valuation methods (FIFO, LIFO) impact financial reporting?
4. What are the potential tax implications of using LCM adjustments?
5. How does the LCM rule affect profitability ratios like gross margin?

**Tip**: The Lower-of-Cost-or-Market rule is particularly important in industries with fluctuating prices, helping businesses avoid overvaluing inventory on their financial statements.

March 8 Purchase 24 units @ $18 March 14 Sale 20 units @ $36 March 22 Purchase 16 units @ $20 March 27 Sale 24 units @ $36 Assume that a Queen Burger restaurant has the following perpetual inventory record for hamburger​ patties. At February 28​, the accountant for the restaurant determines that the current replacement cost of the ending merchandise inventory is $470. Make any adjusting entry needed to apply the​ lower-of-cost-or-market rule. Merchandise inventory would be reported on the balance sheet at what value on February 28​?

Learn how to apply the lower-of-cost-or-market rule in inventory accounting with this example for Queen Burger. This step-by-step solution demonstrates how to calculate the inventory value at replacement cost and record an adjusting entry for a $282 write-down.

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