A U.S. camera company’s annual report stated, “Inventories are stated at the lower of cost or market. The cost of most inventories in the U.S. is determined by the last-in, first-out (LIFO) method.” Assume severe price competition in 20X8 necessitated a write-down on December 31 for a class of camera inventories with a LIFO cost of $13 million. The appropriate valuation at market was deemed to be $9 million.

1. Assume sales of this line of camera for 20X8 were $20 million, and cost of goods sold was $14 million, and that the product line was terminated in 20X9 and the remaining inventory was sold for $8 million. Prepare a statement of gross margin for 20X8 and 20X9. Show the results under a strict LIFO cost method in the first two columns and under a lower-of-LIFO-cost-or-market method in the next two columns.

2. Assume the company did not discontinue the product line. Instead, a new marketing campaign spurred market demand. Replacement cost of the cameras in the December 31 inventory was $10 million on January 31, 20X9. What inventory valuation would be appropriate on January 31, 20X9, if the company still holds the inventory?