Question

Oriole Distribution Co. has determined its December 31, 2020 inventory on a LIFO basis at $1007000. Information pertaining to that inventory follows: Estimated selling price $1050000 Estimated cost of disposal 43000 Normal profit margin 123000 Current replacement cost 927000 Oriole records losses that result from applying the lower-of-cost-or-market rule. At December 31, 2020, the loss that Oriole should recognize is

Answer 1

At December 31, 2020, the loss that Oriole should recognize is $123,000

Step-by-step explanation:

Given:

Estimated selling price = $ 1,050,000

Estimated cost of disposal = $43,000

Normal profit margin = $123,000

Current replacement cost = $927,000

Net realizable value of the inventory = Estimated selling price - Estimated cost of disposal

Net realizable value = $1,050,000 - $43,000 = $1,007,000

Replacement cost = $927,000

Net realizable value - Normal profit = $1,007,000 - $123,000 = $884,000

The replacement cost will be taken as the market value of the inventory because it is higher than the floor (net realizable value - normal profit) and lower than ceiling (net realizable value).

Cost of inventory = $1,007,000

Loss to be recognized using lower of cost or market rule = Cost - market value

= $1,007,000 - $884,000 = $123,000