Question

​Simmons, Inc. uses the​ lower-of-cost-or-market method to value its inventory that is accounted for using the LIFO method. Data regarding an item in its inventory is as​ follows: Cost $26 Replacement cost 20 Selling price 30 Cost of completion and disposal 2 Normal profit margin 7 What is the​ lower-of-cost-or-market for this​ item?

Answer 1

Answer:

The lower- of- market- or cost for the item is $21

Explanation:

In the lower of cost or market, the market begins at the replacement cost which is $20, which is then limited or restricted to a ceiling and a floor.

The ceiling is computed as:

Ceiling = Selling price - Completion cost

where

selling price is $30

Completion cost is $2

Putting the values above:

Ceiling = $30 - $2

Ceiling = $28

Computing the floor as:

Floor = Ceiling - Normal profit margin

Floor = $28 - $7

Floor = $21

As the market cannot be lower than the floor which is $21. Therefore, the lower of cost which is $26 and the market which is $21. But have to take lower. So, it is $21.