Presented below is information related to Sarasota Inc.\'s inventory, assuming S
ID: 2513208 • Letter: P
Question
Presented below is information related to Sarasota Inc.'s inventory, assuming Sarasota uses lower-of-LIFO cost-or-market. (per unit) Skis Boots Parkas Historical cost Selling price Cost to distribute Current replacement cost Normal profit margin $231.80 258.64 23.18 247.66 39.04 $129.32 176.90 9.76 128.10 35.38 $64.66 89.98 3.05 62.22 25.93 Determine the following (a) The two limits to market value (i.e., the ceiling and the floor) that should be used in the lower-of-cost-or-market computation for skis Ceiling Limit Floor Limit (b) The cost amount that should be used in the lower-of-cost-or-market comparison of boots The cost amount (c) The market amount that should be used to value parkas on the basis of the lower-of-cost-or-market. The market amount $Explanation / Answer
(a) Skis:
Ceiling limit = Net realizable value (NRV) = Selling price – Cost to distribute = $258.64 – $23.18 = $235.46
Floor limit = Net realizable value (NRV) – Normal profit margin = $235.46 - $39.04 = $196.42
(b) Boots:
Cost amount: $129.32
The cost amount is the historical cost of the inventory.
(c) Parkas:
The market amount: $62.22
Ceiling limit = Net realizable value (NRV) = Selling price – Cost to distribute = $89.98 – $3.05 = $86.93
Floor limit = Net realizable value (NRV) – Normal profit margin = $86.93 – $25.93 = $61
NRV = $86.93
Current replacement cost = $62.22
NRV - Normal profit margin = $61
Since the replacement cost lies within the ceiling and floor limits set by the LCM rule, the replacement cost is the allowable market amount.