Question

Sarasota Co. follows the practice of valuing its inventory at the lower-of-cost-or-market. The following information is...

Sarasota Co. follows the practice of valuing its inventory at the lower-of-cost-or-market. The following information is available from the company’s inventory records as of December 31, 2017.

Item

Quantity

Unit Cost

Replacement
Cost/Unit

Estimated Selling
Price/Unit

Completion & Disposal
Cost/Unit

Normal Profit
Margin/Unit

A

1,200

$ 7.58

$ 8.48

$ 10.61

$ 1.52

$ 1.82

B

900

8.28

7.98

9.49

0.91

1.21

C

1,100

5.66

5.45

7.27

1.16

0.61

D

1,100

3.84

4.24

6.36

0.81

1.52

E

1,500

6.46

6.36

6.77

0.71

1.01


Greg Forda is an accounting clerk in the accounting department of Sarasota Co., and he cannot understand why the market value keeps changing from replacement cost to net realizable value to something that he cannot even figure out. Greg is very confused, and he is the one who records inventory purchases and calculates ending inventory. You are the manager of the department and an accountant.

(a)

Calculate the lower-of-cost-or-market using the individual-item approach.

Lower-of-Cost-or-Market
(Per unit basis)

Item A

$

Item B

$

Item C

$

Item D

$

Item E

$
Business   Accounting   
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Homework Answers

Answer #1
Item Unit Cost (A) Replacement Cost (1) NRV (Note 1) (2) NRV - Profit (3) Market value (B) (MID VALUE OF 1, 2, 3) Quantity (C) Lower of A or B (D) Final Inventory Value (C * D)
A 7.58 8.48 9.09 7.27 8.48 1200 7.58 9,096
B 8.28 7.98 8.58 7.37 7.98 900 7.98 7,182
C 5.66 5.45 6.11 5.5 5.5 1100 5.5 6,050
D 3.84 4.24 5.55 4.03 4.24 1100 3.84 4,224
E 6.46 6.36 6.06 5.05 6.06 1100 6.06 6,666

Final Inventory Value = $33,218

Note 1

NRV = Estimated Selling Price/Unit - Completion & Disposal Cost/Unit

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