Pharrell Co. has determined its December 31, 2015 inventory on a FIFO basis at $
ID: 2479319 • Letter: P
Question
Pharrell Co. has determined its December 31, 2015 inventory on a FIFO basis at $245,000. Information pertaining to that inventory follows:
Estimated selling price $255,000
Estimated cost of disposal 10,000
Normal profit margin 30,000
Current replacement cost 225,000
Company records losses that result from applying the lower-of-cost-or-market rule. At December 31, 2015, the loss that Pharrell should recognize is how much?
Explanation / Answer
Cost as per FIFO valuation: $ 245,000
Net realizable value = Estimated selling price - Estimated cost of disposal = $ 255,000 - $ 10,000 = $ 245,000
Net realizable value - normal profit margin = $ 245,000 - $ 30,000 = $ 215,000
Current replacement cost : $ 225,000
As, in the given case, the current replacement cost nether exceeds the net realizable value, nor is less than net realizable value less nomal profit margin, the lower of cost or market rule will apply, and inventory loss of $ 245,000 - $ 225,000 or $ 20,000 would need to be recognized.
At Decmber 31,2015, therefore, Pharell Co. should recognize inventory loss of $ 20,000
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