Question

Pharoah Co. follows the practice of valuing its inventory at the lower-of-cost-or-market. The following information is available from the company’s inventory records as of December 31, 2020. Item Quantity Unit Cost Replacement Cost/Unit Estimated Selling Price/Unit Completion & Disposal Cost/Unit Normal Profit Margin/Unit A 1,500 $8.40 $9.41 $11.76 $1.68 $2.02 B 1,200 9.18 8.85 10.53 1.01 1.34 C 1,400 6.27 6.05 8.06 1.29 0.67 D 1,400 4.26 4.70 7.06 0.90 1.68 E 1,800 7.17 7.06 7.50 0.78 1.12 Greg Forda is an accounting clerk in the accounting department of Pharoah Co., and he cannot understand why the market value keeps changing from replacement cost to net realizable value to something that he cannot even figure out. Greg is very confused, and he is the one who records inventory purchases and calculates ending inventory. You are the manager of the department and an accountant.

(a) Calculate the lower-of-cost-or-market using the individual-item approach. Lower-of-Cost-or-Market (Per unit basis) Item A $ Item B $ Item C $ Item D $ Item E $

Answer 1

Correct Answer:

Item	Lower of Cost or NRV per unit
A	$       8.40
B	$       9.18
C	$       6.27
D	$       4.26
E	$       6.72

Working:

	A	B	C =A-B	D	E = C-D
Item	Selling price/unit	Less: Completion & Disposal cost/unit	NRV	Less: Normal profit margin/unit	NRV-Normal Profit
A	11.76	1.68	10.08	2.02	8.06
B	10.53	1.01	9.52	1.34	8.18
C	8.06	1.29	6.77	0.67	6.1
D	7.06	0.9	6.16	1.68	4.48
E	7.5	0.78	6.72	1.12	5.6

We will take the middle value for each item and compare it with unit cost and take the lower value from them.

Item	Cost per unit	NRV	Lower of Cost or NRV
A	$       8.40	$    10.08	$       8.40
B	$       9.18	$       9.52	$       9.18
C	$       6.27	$       6.77	$       6.27
D	$       4.26	$       6.16	$       4.26
E	$       7.17	$       6.72	$       6.72

End of Answer.

Thanks