Question

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

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.