Question

Stellar 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, 2017.

Item		Quantity		Unit Cost		Replacement Cost/Unit			Estimated Selling Price/Unit			Completion & Disposal Cost/Unit			Normal Profit Margin/Unit
A		1,900		$ 8.10		$ 9.07			$ 11.34			$ 1.62			$ 1.94
B		1,600		8.86		8.53			10.15			0.97			1.30
C		1,800		6.05		5.83			7.78			1.24			0.65
D		1,800		4.10		4.54			6.80			0.86			1.62
E		2,200		6.91		6.80			7.24			0.76			1.08

Greg Forda is an accounting clerk in the accounting department of Stellar 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.

Answer 1

Now, for the first part we need to know what the market values are.
For which we need to calculate two more columns: NRV (Net Realizable Value) and (NRV – Normal Profit Margin)
So, Now
Item	Quantity	Unit Cost	Replacement Cost / unit	Estimated Selling price / unit	Completion & Disposal cost / unit	Normal Profit Margin	NRV	NRV-MARGIN	Market	Lower Of Cost or Market
A	1,900	$8.10	$9.07	$11.34	$1.62	$1.94	$9.72	$7.78	$9.07	$8.10
B	1,600	8.86	8.53	10.15	0.97	1.3	$9.18	$7.88	8.53	$8.53
C	1,800	6.05	5.83	7.78	1.24	0.65	$6.54	$5.89	$5.89	$5.89
D	1,800	4.1	4.54	6.8	0.86	1.62	$5.94	$4.32	4.54	$4.10
E	2,200	6.91	6.8	7.24	0.76	1.08	$6.48	$5.40	$6.48	$6.48
Where Market is calculated by comparing Replacement Cost / unit, NRV and NRV – Profit Margin. The value which is between the other two is taken as the market.
For the Lower cost or market, the value is the lowest between market and the unit cost.