Question

Oslo Corporation has two products in its ending inventory, each accounted for at the lower of cost or market. Aprofit margin of 30% on selling price is considred normal for each product. Specific data with respect to each product follows:


Product 1 Product 2


Historical cost 20.00 35.00


Replacement cost 22.50 27.00


Estimated cost to dispose 5.00 13.00


Estimated selling price 40.00 65.00

In pricing its ending inventory using the lower of cost or market, waht units values should Oslo use for products #1 and # respectively?


Answer: 20.00 and 32.50


Please explain answer in detail

Answer 1

Answer:

Explanation:

Product 1

RC = 22.5

NRV = Estimated Selling price - Estimated cost to dispose 40-5=35

NRV-PM  = 35-(40*0.30 ) = 23

Cost = 20

lower-of-cost-or-market = 20

Product 2

RC = 27

NRV = Estimated Selling price - Estimated cost to dispose 65-13=52

NRV-PM  = 52-(65*0.30) = 32.5

Cost = 35

lower-of-cost-or-market = 32.50

Answer 2

Explanation In Details

The company will compare between their historical cost and the net realizable value

Product 1:

Selling price 40 less 30% profit = 40 x ( 1  - 30%) = 28

To dispose the good the company must incur in $5 cost

leaving a net realizable value of $23

as this is higher than the $20 historical cost Product 1 is valued at $20 (the lowest)

Product 2

Same calcualtion:

seeling price ( 1 - gross prifit ) - cost to dispose

60 x (1 - 30%) - 13 = 32.50

The historical cost is higher therefore, pick the net realizable valeu which is lower.