Question

Moore Corporation uses the com LO imp Ald ADA cation uses the FIFO cost flow method and has numerous units of two products ding inventory. Each is accounted for at the lower of cost or net realizable value under inting Standards Update (ASU) 2015-11. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follows: Product 1 Product 2 Historical cost $ 17 $ 45 Replacement cost Estimated cost to sell 5 Estimated selling price 30 100 Required: 1. In pricing its ending inventory using the lower of cost or net realizable value, what unit values should Moore use for products 1 and 2, respectively? 2. Show how your answer would change if Moore is using the LIFO cost flow method. 15 46 26

Answer 1

Solution:

1) In pricing its inventory using the lower of cost or net realizable value Moore should take the net realizable value as estimated selling price less estimated cost to sell and compare this value with the historical cost.

net realizable value for product 1 = $30- $5= $25; Historical Cost = $ 17

As Historical cost of $17 is lower than Net Realizable value of $25 ,$17 should be treated as ending unit value.

net realizable value for product 2 = $100- $26= $74; Historical Cost = $ 45

As Historical cost of $45 is lower than Net Realizable value of $74 ,$45 should be treated as ending unit value.

2) Inventory accounted for using LIFO method is measured at the lower of cost or market(LCM) . Under this method, market is current replacement cost , which is subject to a maximum ceiling price equal to net realizable value and a minimum floor price which is equal to net realizable value less normal profit. Net realizable value is calculated as estimated selling price less estimated cost to sell.

Product 1= Here original cost is $17 and replacement cost is $15. The LCM method uses the lower of the two, $15 to measure inventory. But the inventory amount cannot exceed the NRV of $25 ( $30 selling price- $5 cost to sell).Furthermore, the inventory value cannot be lower than the NRV less normal profit or $ 16 ($25 - $30 x 30%). As the lower of cost or market $15 is less than the floor amount of $16, the ending unit value is $16.

Product 2= Here original cost is $45 and replacement cost is $46. The LCM method uses the lower of the two, $45 to measure inventory. But the inventory amount cannot exceed the NRV of $74 ( $100 selling price- $26 cost to sell).Furthermore, the inventory value cannot be lower than the NRV less normal profit or $ 44 ($74 - $100 x 30%). As the lower of cost or market $45 is between the floor amount of $44 and ceiling amount of $74, the ending unit value is $45