Question

Data related to the inventories of Mountain Ski Equipment and Supplies is presented below:

Skis Boots Apparel Supplies
Selling price $ 180,000 $ 150,000 $ 120,000 $ 60,000
Cost 128,000 133,000 90,000 48,000
Replacement cost 120,000 130,000 110,000 50,000
Sales commission 10 % 10 % 10 % 10 %
Normal gross profit ratio 20 % 20 % 15 % 15 %
In applying the lower of cost or market rule, the inventory of apparel would be valued at:
a. $108,000.
b. $ 90,000.
c. $110,000.
d. $115,000.

Answer 1

b. $ 90,000.

Step-by-step explanation:

Net realizable value(Market value) for apparel=Selling price minus associated selling expenses e.g sales commission.

Market value for Apparel= $ 120,000-(120,000*10%)

=$ 120,000-12,00

Market value for Apparel =$108,000

Apparel cost=$90,000

The lower of the above costs is $90,000.

Lower of cost or market is one of approaches of valuing and reporting inventory. Ending inventory is usually stated at historical cost. When original cost of the ending inventory is greater than the net realizable value, meaning that the inventory has lost value. The inventory has decreased in value below historical cost, then its carrying value is reduced and reported on the balance sheet. The method for reporting this is called current market value.