Question

Samson Company had the following balances and transactions during 2015.

January 1 Beginning inventory:
20 units at $70 each
March 10 Purchased 10 units at $80 each
June 10 Sold 23 units for $100 each
December 31- Replacement cost: $75 each
What would Samson Company's inventory amount be on December 31, 2015 if the FIFO method was used with lower of cost or market?
A) $490
B) $510
C) $525
D) $560

Answer 1

Samson Company's inventory amount on December 31, 2015, using the FIFO method with the lower of cost or market, would be $525. This is because the 7 remaining units in inventory would be valued at the replacement cost of $75 each, as per FIFO method guidelines and the lower of cost or market rule.

Step-by-step explanation:

To calculate Samson Company's inventory amount on December 31, 2015 using the FIFO method with

lower of cost or market

, we'll follow these steps:

1. Determine the cost of the remaining inventory using FIFO.
2. Compare the cost to the replacement cost to apply the lower of cost or market rule.

Using FIFO, the first 20 units at $70 are sold first, then 3 out of the 10 units purchased at $80 are sold. This leaves 7 units from the March purchase. The inventory would be 7 units at $80 each, totaling $560.

However, since the replacement cost is $75 per unit, which is lower than the cost of $80 per unit, we use the replacement cost for our calculations.

The adjusted inventory value is 7 units * $75 = $525.