Question

Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $106. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at:_____________

a) $102
b) $106
c) $104
d) $110

Answer 1

$100

Step-by-step explanation:

Compute the valuation for the inventory item

1. a. Calculate the Ceiling Price/NRV

= Expected Sales Price - Estimated Selling Costs

= $110-$6 = $104

b. Calculate the Floor Price which represents Net Realizable Value - 20% of the Expected Sales Price= $22

=$104- $22 = $82

C. Replacement Cost is $106,

Therefore the Market price for the market approach represents the middle price of the three values.

The three values are Ceiling= %104, Floor = $82 and Replacement= $106

Therefore, the middle price is $104. The market is $104

D. Valuing inventory based on the lower of Cost or Market Approach is calculated as follows:

If $104 is the market approach cost then compared with the inventory cost of $100, then the cost of inventory is lower and should be used for inventory valuation.

Therefore, valuation is at $100