Question

Martial Medical Supplies uses LIFO cost flow assumption and has developed the following data for its...

Martial Medical Supplies uses LIFO cost flow assumption and has developed the following data for its products:

Surgical Equipment Surgical Supplies
Number of units in inventory 380 610
Per unit:
Selling price 345 250
Cost 255 247
Replacement cost 325 243
Cost to sell 64 44
Normal gross profit ratio 30% 45%

Normal gross profit ratio is expressed as a percentage of selling price. Martial adjusts an allowance account at year-end to record net realizable value adjustments to its inventory. All products are reported at cost at the beginning of the year. The entry at year-end will:

Multiple Choice

  • reduce assets by $29,450

  • reduce equity by $25,010

  • reduce equity by $93,635

  • increase liabilities by $29,450

Business   Accounting   
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Answer #1
Correct Option B i.e. reduce equity by $25010
Step 1: Calculate Market value of Inventory
Equipment Supplies Total
Cost of Inventory 96900 150670 247570
Replacement Cost 123500 148230
NRV 106780 125660
NRV-NP 74746 69113
Market value 106780 125660 232440
Step 2: Calculate Lower of Cost or market
Lower of cost or market 96900 125660 222560
Step 3: Calculated difference in value of inventory
Total Cost of Inventory 247570
Less: Lower of cost or market -222560
Value of Inventory to be reduced 25010
The same will be the inventory value reduced and equity reduced.
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