Explanation Lower-of-cost-or-market method: Under conservative approach of valuation, firms use to value the inventory at cost or market price whichever is less; it is termed as lower-of-cost-or-market method. It is done to record the loss due to decrease in the value of inventory beyond its cost. Calculation of value of inventory under lower-of-cost-or-market method is based on ceiling limit and floor limit. Rain: Ceiling limit is $71 and floor limit is $59; as the floor limit is lower, and cost value $60 is between ceiling limit and floor limit therefore $60 will be the value of inventory and there will be no written-down amount. Snow: Ceiling limit is $86 and floor limit is $71; as the floor limit is lower, and the cost value $93 is more than ceiling limit so, therefore $86 will be the value of inventory. Written-down amount per unit will be $7 ( $ 93 − $ 86 ) . Working Note: Rain: Given, Selling price is $95. Coat of completion and disposal is $24. Normal profit margin is $12. FIFO cost value of inventory is $60. Replacement cost or market value is $70. Calculation of ceiling limit, Ceiling limit = Selling price − Cost of completion and disposal = $ 95 − $ 24 = $ 71 Calculation of fl

3rd Edition

ISBN: 9780136946465

Author: SANNELLA

Publisher: VST

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Inventory Valuation

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in…

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Chapter 10, Problem 10.19BE

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The per unit value of ending inventory using lower-of-cost-or-market method.

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The per unit value of ending inventory using lower-of-cost-or-market method.

Solution Summary: The author explains the lower-of-cost-or-market method, which is done to record the loss due to decrease in the value of inventory beyond its cost.

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The per unit value of ending inventory using lower-of-cost-or-market method.

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