Question

Daniel Corporation has two products in its ending inventory, each accounted for at the lower of cost or market. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follows:

                                                                      Product #1          Product #2

Historical cost                                                  $25.00              $ 31.00

Replacement cost                                                22.50                  27.00

Estimated cost to dispose                                     5.00                  13.00

Estimated selling price                                        40.00                  65.00

In pricing its ending inventory using the lower-of-cost-or-market, what unit values should Oslo use for products #1 and #2, respectively?

a.   $20.00 and $32.50.

b.   $23.00 and $31.00.

c.   $22.50 and $31.00.

d.   $22.50 and $27.00.

Answer 1

Note :

• Upper limit for market = Estimated selling price - Estimated cost to dispose
• Lower limit for market =  Estimated selling price - Estimated cost to dispose - Normal Profit
• In general market value = Replacement cost , but when Replacement cost > upper limit , then market value = upper limit . And when Replacement cost < lower limit , then market value = lower limit

Answer

b.   $23.00 and $31.00.

Explanation :

	Replacement cost	Upper limit	Lower limit	Market Value	Historical cost	lower-of-cost-or-market
Product #1	22.50	40 - 5 =35	40 - 5 - (40 * .30) = 23	23	25	$23
Product #2	27	65- 13 = 52	65- 13 - (65 * .30) = 32.50	32.50	31	$31