Lower of Cost or Market (LCM) Inventory Write-Down: ASC 330 Journal Entries

When inventory value falls below cost, ASC 330 requires writing it down. The journal entry is: debit Cost of Goods Sold (or a separate Loss on Inventory Write-Down account), credit Inventory (direct method) or credit Allowance to Reduce Inventory to Market (allowance method). For inventory measured under FIFO or weighted-average, the rule is Lower of Cost or Net Realizable Value (LCNRV) per ASU 2015-11. For LIFO and retail inventory method, the legacy Lower of Cost or Market (LCM) rule still applies, with market constrained between a ceiling (NRV) and a floor (NRV minus normal profit margin). Write-downs to LCNRV cannot be reversed under U.S. GAAP, even if value recovers.

Atlas Co uses FIFO. At year-end, Product A has the following data: cost = $80, estimated selling price = $90, costs to complete and sell = $15. There are 1,000 units on hand. Net realizable value = $90 − $15 = $75 per unit. Since NRV ($75) is less than cost ($80), write down to NRV. Write-down per unit = $80 − $75 = $5. Total write-down = 1,000 × $5 = $5,000. Journal entry (direct method): Debit Cost of Goods Sold $5,000; Credit Inventory $5,000. Journal entry (allowance method): Debit Loss on Inventory Write-Down $5,000; Credit Allowance to Reduce Inventory to NRV $5,000. The direct method is more common in practice — it is simpler and the IRS does not require the allowance presentation. Allowance method preserves the original cost in the inventory account, which some companies prefer for analytical purposes.

Brown Industries uses LIFO. At year-end, Product B has cost = $100, replacement cost = $85, estimated selling price = $110, costs to complete and dispose = $20, normal profit margin = $15. There are 500 units on hand. Step 1 — Calculate the ceiling: NRV = $110 − $20 = $90. Step 2 — Calculate the floor: NRV − normal profit = $90 − $15 = $75. Step 3 — Determine "market": replacement cost ($85), constrained between floor ($75) and ceiling ($90). Replacement cost is within the bounds, so market = $85. Step 4 — Compare market ($85) to cost ($100). Use the lower = $85. Write-down = $100 − $85 = $15 per unit. Total = 500 × $15 = $7,500. Entry: Debit Cost of Goods Sold $7,500; Credit Inventory $7,500. The ceiling/floor sandwich exists to prevent two extremes: writing inventory down below recoverable value (floor) or showing it above what it can sell for (ceiling). LIFO companies still use this rule because ASU 2015-11 did NOT change LCM for LIFO.

Carter Co uses LIFO. Cost = $50, replacement cost = $30, NRV (ceiling) = $45, normal profit = $10, floor = $35. Replacement cost ($30) is below the floor ($35), so market is constrained UP to $35. Compare cost ($50) to market ($35). Use lower = $35. Write-down = $50 − $35 = $15. If the company simply used replacement cost ($30) without applying the floor, it would write inventory down too aggressively — recognizing a loss greater than the ultimate sale will produce. The floor protects against that by setting market no lower than NRV minus a normal profit margin.

U.S. GAAP requires LCNRV applied at the individual item level by default. Some companies request permission to apply at the inventory category or total level, which can produce smaller write-downs because gains on some items offset losses on others. DataPoint Inc has three products. Item X: cost $100, NRV $90 (loss $10). Item Y: cost $80, NRV $95 (no write-down). Item Z: cost $60, NRV $50 (loss $10). Individual method: total write-down = $10 + $0 + $10 = $20. Group method (treating as one inventory pool): total cost = $240, total NRV = $235 → write-down = $5. GAAP defaults to individual; group treatment requires the items to be functionally similar and is rare in practice. Auditors will challenge group treatment if the items have meaningfully different unit economics.

Eagle Manufacturing wrote down inventory to $40,000 (from $50,000) at year-end 2025. By Q1 2026, market conditions improve and the inventory could now be sold for $52,000. Under U.S. GAAP, NO reversal is permitted. The $40,000 carrying value becomes the new cost basis. When the inventory eventually sells, the gain (sale price − $40,000) flows through gross margin in the period of sale. Under IFRS (IAS 2), reversal IS permitted up to the original cost. The reversal would be: Debit Inventory $10,000, Credit Cost of Goods Sold (or a Reversal of Inventory Write-Down account) $10,000 — capped at the original $50,000 cost. This difference matters for U.S. companies with foreign operations and for cross-listed companies preparing dual-GAAP financial statements.

LCNRV and LCM problems appear regularly on intermediate accounting and the FAR section of the CPA exam, and the differences between the two rules — plus the ceiling/floor sandwich for LIFO — are exactly the kind of detail that gets tested. Snap a photo of the problem and AccountingIQ identifies which rule applies based on the costing method, runs the ceiling/floor calculation when needed, and produces the journal entry for either the direct write-down or allowance method.

Three traps consistently catch students. First: applying LCM to FIFO or weighted-average inventory. Since ASU 2015-11 (effective 2016 for public companies, 2017 for others), only LIFO and retail-method inventory use LCM with the ceiling/floor sandwich; everything else uses LCNRV (no floor). Second: forgetting to compare individually. U.S. GAAP defaults to item-level comparison, not category totals. Third: thinking write-downs can reverse under U.S. GAAP. They cannot — once written down, the new value is the cost basis. IFRS allows reversal, U.S. GAAP does not.