Answer:Product 1 will be valued at $16, Product 2 will be valued at $29
Explanation:
Lower of Cost or Market
Lower of Cost or Market is a Method for Valuing inventory which stipulates that inventory must be valued at the lower of cost or market price. Market price is defined as the replacement cost of inventory. There is however a Criteria to be followed when using Replacement costs
The replacement cost should not exceed or should not be greater than the Net Realizable Value, Net Realizable Value is the net amount we would receive from the sale of inventory after settling cost of selling inventory. If Replacement Cost is greater than Net relizable value, Net Realizable Value will be compared to historical cost in determining the value of inventory
The Replacement Cost Should also not be less than Net relizable value minus Ordinary profit, if it is less , Net relizable value minus Ordinary profit will be compare to historical costs in determining the value of inventory.
Replacement costs will be used if they are lower than Net realizable value and Higher than Net relizable value minus Ordinary profit
Product 1
Historical cost = $26
Net Realizable Value = $52 - 23 = $29
Net realizable Value minus Ordinary Profit = $29 - ( 52 -26) = $3
Replacement Cost $16
Replacement costs ($16) are less than Net realizable value ($29) But they are higher than Net realizable value minus Ordinary Profit ($3),. Product 1 will be valued at the lower of cost $26 or $16
Product 1 will be valued at $16
Product 2
Historical cost = $51
Net Realizable Value = $80 - 25 = $55
Net realizable Value minus Ordinary Profit = $29 - ( $80 -51) = $29
Replacement Cost $28
Replacement costs ($28) are less than Net realizable value ($55). They are also lower than Net realizable value minus Ordinary Profit ($29). Product 2 will be valued at the lower of cost $51 or $29
Product 2 will be valued at $29
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