Question

Lower of Cost or Market Stiles Corporation uses the lower of cost or market rule for...

Lower of Cost or Market Stiles Corporation uses the lower of cost or market rule for each of two products in its ending inventory. A profit margin of 30% on the selling price is considered normal for each product. Specific data for each product are as follows: Product A Product B Historical cost $80 $96 Replacement cost 70 98 Estimated cost of disposal 32 47 Estimated selling price 150 200 Required: What is the correct inventory value for each product?

Product A $____ per unit Product B $ 96 per unit

Stiles Corporation uses the lower of cost or market rule for products in its ending inventory. A profit margin of 30% on the selling price is considered normal. Product A has a historical cost of $68; replacement cost of $60; estimated costs of disposal of $32; and estimated selling price of $140. In this case, use of the "floor" constraint prevents excessive losses being recognized in the period of the write-down

Homework Answers

Answer #1

1. Calculation of net realizable value without profit

Particular Product A Product B
Sales $150 $200
Less - cost of disposal $32 $47
Less - profit margin (30%) $45 $60
Net realizable value without profit $73 $93

In product A replacement cost which is $70 is lower than net realizable value without profit i.e. $73 hence it will be valued at $73.

While in Product B, historical cost is lower than replacement cost hence it will be recorded at $96 replacement cost.

2. In this question

Net realizable value without profit

= $140 - $32 - $42 = $66

Since replacement cost is lower than this $66. Inventory will be recorded at $60.

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