Question

Pharoah Corporation has two products in its ending inventory, each accounted for at the lower of...

Pharoah Corporation has two products in its ending inventory, each accounted for at the lower of cost or market. A profit margin of 25% on selling price is considered normal for each product. Specific data with respect to each product follows:

Product #1

Product #2
Historical cost

$10

$19
Replacement cost

8

12
Estimated cost to dispose

7

9
Estimated selling price

20

32


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

$8 and $15.
$8 and $12.
$12 and $13.

$12 and $15.
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Homework Answers

Answer #1

Product #1

Ceiling = Net realizable value = Selling price - Costs to sell

= $20 - $7

= $13

Replacement cost = $8

Floor = Ceiling - Normal profit margin

= $13 - ($20 * 25%)

= $8

Market value is the middle of ceiling, replacement cost and floor.

Market value = $8

Lower of cost or market = Lower of $10, $8

= $8

Product #2

Ceiling = Net realizable value = Selling price - Costs to sell

= $32 - $9

= $23

Replacement cost = $12

Floor = Ceiling - Normal profit margin

= $23 - ($32 * 25%)

= $15

Market value is the middle of ceiling, replacement cost and floor.

Market value = $15

Lower of cost or market = Lower of $19,15

= $15

The answer is $8 and $15.

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