Question

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

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.