Exercise 9-3 Michael Bolton Company follows the practice of pricing its inventor
ID: 2470218 • Letter: E
Question
Exercise 9-3 Michael Bolton Company follows the practice of pricing its inventory at the lower-of-cost-or-market, on an individual-item basis.
Item No.
Quantity
Cost per Unit
Cost to Replace
Estimated Selling Price
Cost of Completion and Disposal
Normal Profit
From the information above, determine the amount of Bolton Company inventory.
Item No.
Quantity
Cost per Unit
Cost to Replace
Estimated Selling Price
Cost of Completion and Disposal
Normal Profit
1320 1,600 $5.89 $5.52 $8.28 $0.64 $2.30 1333 1,300 4.97 4.23 6.44 0.92 0.92 1426 1,200 8.28 6.81 9.20 0.74 1.84 1437 1,400 6.62 5.70 5.89 0.46 1.66 1510 1,100 4.14 3.68 5.98 1.47 1.10 1522 900 5.52 4.97 6.99 0.74 0.92 1573 3,400 3.31 2.94 4.60 1.38 0.92 1626 1,400 8.65 9.57 11.04 0.92 1.84Explanation / Answer
Recall the lower of cost or market (LCM) rule: LCM is the lower of cost or replacement cost, with the replacement cost being no higher than NRV and no lower than NRV minus the normal profit.
Since the replacement cost was given, we will begin by calculating the net realizable value (NRV) of each of the products. Recall that net realizable value is the expected selling price in the ordinary course of business minus the cost to complete and dispose. NRV will be the upper limit (the ceiling) for the replacement cost.
Net Realisable Value (NRV): The Ceiling in LCM
Item No.
1320
1333
1426
1437
1510
1522
1573
1626
Estimated Selling price
8.28
6.44
9.2
5.89
5.98
6.99
4.6
11.04
Less: Cost of Completion and Disposal
0.64
0.92
0.74
0.46
1.47
0.74
1.38
0.92
NRV (Ceiling)
7.64
5.52
8.46
5.43
4.51
6.25
3.22
10.12
Next we will calculate the NRV minus the normal profit. This amount will be the lower limit (the floor) for the replacement cost.
Item No.
1320
1333
1426
1437
1510
1522
1573
1626
NRV
7.64
5.52
8.46
5.43
4.51
6.25
3.22
10.12
Less: Normal Profit
2.3
0.92
1.84
1.66
1.1
0.92
0.92
1.84
NRV – Profit (Floor)
5.34
4.6
6.62
3.77
3.41
5.33
2.3
8.28
Now we calculate Designated Market Value:
Item No.
1320
1333
1426
1437
1510
1522
1573
1626
NRV (Ceiling)
7.64
5.52
8.46
5.43
4.51
6.25
3.22
10.12
NRV – Profit (Floor)
5.34
4.60
6.62
3.77
3.41
5.33
2.30
8.28
Replacement Cost
5.52
4.23
6.81
5.70
3.68
4.97
2.94
9.57
Bolton Company Inventory Cost: $ 61,537
Item No.
Cost per Unit
Designated Market value
LCM
Quantity
Cost
1320
5.89
5.52
5.52
1,600
8,832.00
1333
4.97
4.60
4.60
1,300
5,980.00
1426
8.28
6.81
6.81
1,200
8,172.00
1437
6.62
5.43
5.43
1,400
7,602.00
1510
4.14
3.68
3.68
1,100
4,048.00
1522
5.52
5.33
5.33
900
4,797.00
1573
3.31
2.94
2.94
3,400
9,996.00
1626
8.65
9.57
8.65
1,400
12,110.00
61,537.00
Item No.
1320
1333
1426
1437
1510
1522
1573
1626
Estimated Selling price
8.28
6.44
9.2
5.89
5.98
6.99
4.6
11.04
Less: Cost of Completion and Disposal
0.64
0.92
0.74
0.46
1.47
0.74
1.38
0.92
NRV (Ceiling)
7.64
5.52
8.46
5.43
4.51
6.25
3.22
10.12
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