Question

Perfect Catering​ Company's ending inventory was $103,700 at historical cost and $111,500 at current replacement cost. Before consideration of the ​lower-of-cost-or-market rule, the​ company's cost of goods sold was $62,000. Following U.S.​ GAAP, which of the following statements reflect the correct application of the​ lower-of-cost-or-market rule?A. The Ending Inventory balance will be $111,500​, and Cost of Goods Sold will be $62,000.B. The Ending Inventory balance will be $103,700​, and Cost of Goods Sold will be $62,000.C. The Ending Inventory balance will be $111,500​, and Cost of Goods Sold will be $69,800.D. The Ending Inventory balance will be $111,500​,and Cost of Goods Sold will be $54,200.

Answer 1

The correct option is B,the ending inventory balance will be $103,700​, and cost of goods sold will be $62,000.

Step-by-step explanation:

International Accounting Standards such the U.S GAAP and International Financial Reporting Standards favor valuing ending inventory at the lower of cost or market-based value,in order that inventory amount recorded in the balance sheet is not valued at an amount above what can be reasonably realized from selling the stock in future.

Hence the value attributable to this closing inventory is $103,700 which is lower than market value(replacement cost) of $111,500.

In addition, the costs of goods sold relates to items already sold in the normal course of business and they are not left in inventory at the end of year, hence there is no point for revaluing them.

Answer 2

B

Step-by-step explanation:

The Lower of Cost or Market Value Applies to the closing inventory and should be value at $103,700 Cost, which is the lower.