Question

Sheridan 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 $11 $21 Replacement cost 7 13 Estimated cost to dispose 8 10 Estimated selling price 22 35 In pricing its ending inventory using the lower-of-cost-or-market, what unit values, rounded to the nearest dollar, should Sheridan use for products #1 and #2, respectively?

Answer 1

Sheridan Corporation

Value of Ending Inventory:

Product #1 Product #2

Before the new LCM rule:

Ending Inventory $7 $13

After the new LCM rule:

Ending Inventory $ 11 $21

Step-by-step explanation:

a) Data and Calculations:

Product #1 Product #2

Historical cost $11 $21

Replacement cost 7 13

Estimated cost to dispose 8 10

Estimated selling price 22 35

Net realizable value 14 (22 - 8) 25 (35 - 10)

Less profit margin (30%) 4.2 7.5

Normal historical cost 9.8 17.5

Method of pricing its ending inventory = lower-of-cost-or-market

Product #1 Product #2

Historical cost $11 $21

Replacement cost 7 13

Net realizable value 14 25

Before the new LCM rule:

Ending Inventory 7 13

After the new LCM rule:

Ending Inventory 11 21

The new LCM rule states that the measurement of the ending inventory is solely restricted to the lower of cost and net realizable value.