Question

The Eserine Wood Corporation manufactures desks. Most of the company’s desks are standard models that are sold at catalogue prices. At December 31, 2020, the following finished desks appear in the company’s inventory:

Finished Desks		Type A			Type B			Type C			Type D
2020 catalogue selling price		$460			$490			$890			$1,040
FIFO cost per inventory list, Dec. 31, 2020		410			450			830			960
Estimated current cost to manufacture (at Dec. 31, 2020, and early 2021)		460			440			790			1,000
Sales commissions and estimated other costs of disposal		40			65			95			130
2021 catalogue selling price		575			650			780			1,420
Quantity on hand		15			117			113			110

The 2020 catalogue was in effect through November 2020, and the 2021 catalogue is effective as of December 1, 2020. All catalogue prices are net of the usual discounts. Generally, the company tries to obtain a 20% gross margin on the selling price and it has usually been successful in achieving this.

a) Explain the rationale for using the lower of cost and net realizable rule for inventories.

b) Explain the impact if inventory was valued at lower of cost and net realizable value on a total basis.

Answer 1

a) Explain the rationale for using the lower of cost and net realizable rule for inventories.

b) Explain the impact if inventory was valued at lower of cost and net realizable value on a total basis.

Refer to the below images for the above mentioned questions in a detailed way of solution with explanation and calculations.