Presented below is information related to Sarasota Inc.\'s inventory, assuming S

Question

Presented below is information related to Sarasota Inc.'s inventory, assuming Sarasota uses lower-of-LIFO cost-or-market. (per unit) Skis Boots Parkas Historical cost Selling price Cost to distribute Current replacement cost Normal profit margin $231.80 258.64 23.18 247.66 39.04 $129.32 176.90 9.76 128.10 35.38 $64.66 89.98 3.05 62.22 25.93 Determine the following (a) The two limits to market value (i.e., the ceiling and the floor) that should be used in the lower-of-cost-or-market computation for skis Ceiling Limit Floor Limit (b) The cost amount that should be used in the lower-of-cost-or-market comparison of boots The cost amount (c) The market amount that should be used to value parkas on the basis of the lower-of-cost-or-market. The market amount $

Explanation / Answer

(a) Skis:

Ceiling limit = Net realizable value (NRV) = Selling price – Cost to distribute = $258.64 – $23.18 = $235.46

Floor limit = Net realizable value (NRV) – Normal profit margin = $235.46 - $39.04 = $196.42

(b) Boots:

Cost amount: $129.32

The cost amount is the historical cost of the inventory.

(c) Parkas:

The market amount: $62.22

Ceiling limit = Net realizable value (NRV) = Selling price – Cost to distribute = $89.98 – $3.05 = $86.93

Floor limit = Net realizable value (NRV) – Normal profit margin = $86.93 – $25.93 = $61

NRV = $86.93

Current replacement cost = $62.22

NRV - Normal profit margin = $61

Since the replacement cost lies within the ceiling and floor limits set by the LCM rule, the replacement cost is the allowable market amount.

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