Question

1. Lower of cost or net realizable value

Data related to the inventories of Key West Water Sports is presented below:

	Jet Skis	Kayaks	Paddle Boards	Scuba Gear
Selling price	$180,000	$140,000	$120,000	$65,000
Cost	128,000	133,000	90,000	55,000
Replacement cost	120,000	130,000	110,000	48,000
Sales commission	18,000	14,000	12,000	12,000
Normal Profit	10,000	7,000	6,000	3,000

Required:

Compute the Lower of Cost or Net Realizable Value for each inventory category.

2. Gross profit method

On July 5, 2021, a fire destroyed the entire inventory of Islamorada Art Warehouse. The following information is available from its accounting records, from January 1, through the date of the fire.:

Inventory, January 1, 2021	$    506,400
Purchases	1,260,000
Purchase returns	100,000
Freight-in	40,000
Sales	2,280,000
Sales returns	120,000
Normal gross margin	30%

Required:

Compute the estimated cost of inventory lost in the fire.

PROBLEM 2, continued

3. Retail inventory method

Key Largo Boat Company uses the conventional retail method to estimate ending inventories. The following data has been summarized for the year ended December 31, 2021:

	Cost	Retail
Inventory, January 1	$158,500	$237,600
Purchases	299,800	441,300
Purchase returns	6,400	9,300
Net markups		18,200
Net markdowns		16,600
Employee discounts		77,700
Net sales		383,400

Required:

Estimate the cost of ending inventory applying the conventional retail method.

Answer 1

Answer-a:
Inventory Category	Selling Price	Sales Comm.	NRV	Cost	Lower of cost or NRV
Jet Skis	$        180,000	$        18,000	$      162,000	$     128,000	$      128,000
Kayaks	140,000	14,000	126,000	133,000	126,000
Paddle Boards	120,000	12,000	108,000	90,000	90,000
Scuba Gear	65,000	12,000	53,000	55,000	53,000

Answer-b:
Beginning inventory		$      506,400
Add: Net purchase (1,260,000 - 100,000)		1,160,000
Add: Freight-in		40,000
Goods available for sale		1,706,400
Less: Cost of goods sold:
Net Sales (2,280,000 - 120,000)	$     2,160,000
Less: Normal gross margin	648,000	1,512,000
Cost of goods destroyed in fire		$      194,400