Purchase Solution

# Lower of cost or market

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I3-1:

A company carries 5 products in its inventory. It uses the FIFO method of valuing inventory under the perpetual method. Data at the end of the month is as follows:

Product FIFO Value Replacement Cost Estimated Selling Price
A \$68,000 \$64,000 \$75,000
B 36,000 40,000 45,000
C 42,000 40,000 65,000
D 33,000 37,000 55,000
E 73,000 68,000 96,000
Total \$252,000 \$249,000 \$336,000

Selling costs are 20% of FIFO Value and the normal profit margin is 25% of sales.

Instructions:

1) Determine the inventory value to be reported on the company's balance sheet for the end of the month.

2) Prepare any journal entry necessary at the end of the month to properly reflect the inventory value under each of the following assumptions:

a) The direct method

b) The indirect/allowance method

##### Solution Summary

The solution explains inventory valuation using lower of cost or market

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I3-1:

A company carries 5 products in its inventory. It uses the FIFO method of valuing inventory under the perpetual method. Data at the end of the month is as follows:

Product FIFO Value Replacement Cost Estimated Selling Price
A \$68,000 \$64,000 \$75,000
B 36,000 40,000 45,000
C 42,000 40,000 65,000
D 33,000 37,000 55,000
E 73,000 68,000 96,000
Total \$252,000 \$249,000 \$336,000

Selling costs are 20% of FIFO Value and the normal profit margin is 25% of sales.

Instructions:

1) Determine the inventory value to be reported on the company's balance sheet for the end of the month.

In lower of cost or market we take the lower of cost or replacement cost where replacement is checked against the Net realizable value which is the ceiling and NRV - profit margin which is the floor
We calculate the NRV ...

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