Presented below is information related to Sage Inc.’s inventory, assuming Sage u
ID: 2548909 • Letter: P
Question
Presented below is information related to Sage Inc.’s inventory, assuming Sage uses lower-of-LIFO cost-or-market.
(per unit)
Skis
Boots
Parkas
$258.40
$144.16
$72.08
288.32
197.20
100.30
25.84
10.88
3.40
276.08
142.80
69.36
43.52
39.44
28.90
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.
(b) The cost amount that should be used in the lower-of-cost-or-market comparison of boots.
(c) The market amount that should be used to value parkas on the basis of the lower-of-cost-or-market.
(per unit)
Skis
Boots
Parkas
Historical cost$258.40
$144.16
$72.08
Selling price288.32
197.20
100.30
Cost to distribute25.84
10.88
3.40
Current replacement cost276.08
142.80
69.36
Normal profit margin43.52
39.44
28.90
Explanation / Answer
Answer (a) Ceiling Limit & Floor Limit for Skis
Ceiling Limit = NRV = Selling price - Cost to distribute = $288.32 - 25.84 = $262.48
Floor Limit = NRV - Normal profit margin = $262.48 - $43.52 = $218.96
Answer (b)
The cost amount that should be used in the lower-of-cost-or-market is always the Historical cost
The cost amount for boots = Historical cost = $144.16
Answer (c)
Market amount that is used in lower-of-cost-or-market. is always the replacement cost except in two below conditions :
In other words for replacement cost = market price , replacement cost should be between floor Limit & ceiling Limit
Ceiling Limit for Parkas = $100.30 - $3.40 = $96.90
Floor Limit for Parkas = $96.90 - $28.90 = $68
Replacement cost for Parkas = $69.36
Market amount for Parkas = Replacement cost = $69.36 [since replacement cost is between floor Limit & ceiling Limit]
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