The Key West Group Uses the Lower of Cost and Net

question 98

Essay

The Key West Group uses the lower of cost and net realizable value rule to value its kayak inventory. The Kayaks in inventory were purchased on January 1, 2012 for $12,000. At year end December 31, 2012 the net realizable value of Key West's inventory dropped to $9,000. At the end of 2013 due to a shortage of Kayaks this inventory increased in value to $15,000.
Required:
Prepare the required journal entries (if any) required at the 2012 and 2013 year end.

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Definitions:

Annual Interest Rate

The percentage increase in money per year when it is lent or invested, excluding the effects of compounding.

Rate of Inflation

The percentage increase in prices for goods and services over a period, decreasing the purchasing power of money.

Risk Premium

The additional yield beyond the risk-free rate that investors demand as a reward for taking on the risk associated with an investment.

Risk-Free Asset

An investment with a guaranteed return and no risk of financial loss.