1) Inventory

At the end of the year, Ian Co. determined its inventory to be $258,000 on a LIFO (last in, rst out)
basis. The current replacement cost of this inventory was $230,000. Ian estimates that it could
sell the inventory for $275,000 at a disposal cost of $14,000. If Ian’s normal prot margin for its
inventory was $10,000, what would be its net carrying value?

To determine the net carrying value of Ian Co.'s inventory, we need to consider
the lower of cost or market (LCM) rule. The LCM rule requires inventory to be
reported at the lower of its cost or market value. Here, "market value" is defined as the
middle value of replacement cost, net realizable value (NRV), and NRV minus a normal
profit margin.

Let’s break this down step by step:

1. Determine the cost of inventory

The cost of inventory is given as $258,000 (LIFO basis).

2. Calculate the market value

The market value is the middle value of the following three amounts:

 Replacement cost: $230,000

 Net realizable value (NRV): Selling price
(275,000)minusdisposalcosts(275,000)minusdisposalcosts(14,000)
= $261,000
 NRV minus normal profit margin: NRV
(261,000)minusnormalprofitmargin(261,000)minusnormalprofitmargin(
10,000) = $251,000

The three values are:

 Replacement cost = $230,000

 NRV = $261,000
 NRV minus normal profit margin = $251,000
The middle
value is 251,000∗∗,sothemarketvalueis∗∗251,000∗∗,sothemarketvalueis∗∗25
1,000.

3. Compare cost and market value

 Cost = $258,000
 Market value = $251,000

The lower of cost or market is $251,000.

4. Net carrying value

The net carrying value of the inventory is $251,000.

Final Answer:

The net carrying value of Ian Co.'s inventory is $251,000.

Loft Co. reviewed its LIFO basis inventory values for proper pricing at year end. The following
summarizes two inventory items examined for the lower of cost or market: Inventory Inventory item #1
item #2 Original cost $210,000 $400,000 Replacement cost 150,000 370,000 Net realizable value (NRV)
240,000 410,000 Net realizable value (NRV) minus prot margin 208,000 405,000 What amount should
Loft include in inventory at year end if it uses the total of the inventory to apply the lower of cost or
market (LCM)

To determine the amount Loft Co. should include in inventory at year end using the lower of cost or
market (LCM) rule, we need to compare the total cost of the inventory to the total market
value of the inventory. The LCM rule is applied to the total inventory in this case, not to individual
items.

Step 1: Calculate Total Cost

The total original cost of the inventory is the sum of the original costs of the two items:
  Item #1: $210,000
 Item #2: $400,000
 Total cost = 210,000+210,000+400,000 = $610,000

Step 2: Determine Market Value for Each Item

The market value for each item is the middle value of the following three amounts:

1. Replacement cost
2. Net realizable value (NRV)
3. NRV minus profit margin

Item #1:
 Replacement cost = $150,000
 NRV = $240,000
 NRV minus profit margin = $208,000

The three values are: 150,000,150,000,240,000,

and 208,[Link]∗∗middlevalue∗∗is∗∗208,[Link]∗∗middlevalue∗∗is∗∗208,000**, so the
market value for Item #1 is $208,000.

Item #2:
 Replacement cost = $370,000
 NRV = $410,000
 NRV minus profit margin = $405,000

The three values are: 370,000,370,000,410,000,

and 405,[Link]∗∗middlevalue∗∗is∗∗405,[Link]∗∗middlevalue∗∗is∗∗405,000**, so the
market value for Item #2 is $405,000.

Step 3: Calculate Total Market Value

The total market value is the sum of the market values of the two items:

 Item #1: $208,000

 Item #2: $405,000
 Total market value = 208,000+208,000+405,000 = $613,000
Step 4: Apply the Lower of Cost or Market (LCM)

Compare the total

cost (610,000)tothe∗∗totalmarketvalue∗∗(610,000)tothe∗∗totalmarketvalue∗∗(613,000). The
lower of the two is $610,000.

Final Answer:

Loft Co. should include $610,000 in inventory at year end.

Lialia Co. has determined the cost of its scal year-end unnished FIFO inventory to be $300,000.
Information pertaining to that inventory at year-end is as follows: Estimated selling price
$330,000 Estimated cost of disposal 20,000 Normal prot margin 15% Current replacement cost
280,000 Estimated completion costs 15,000 What amount should Lialia report as inventory on its
year-end balance sheet?

To determine the amount Lialia Co. should report as inventory on its year-end balance
sheet, we need to apply the lower of cost or market (LCM) rule. The LCM rule requires
inventory to be reported at the lower of its cost or market value. Here, "market value" is
defined as the middle value of replacement cost, net realizable value (NRV), and NRV
minus a normal profit margin.

Step 1: Determine the Cost of Inventory

The cost of the inventory is given as $300,000 (FIFO basis).

Step 2: Calculate Net Realizable Value (NRV)

Net realizable value (NRV) is the estimated selling price minus the estimated cost of
disposal and completion costs.

 Estimated selling price = $330,000

 Estimated cost of disposal = $20,000
  Estimated completion costs = $15,000

NRV = Estimated selling price - (Estimated cost of disposal + Estimated

completion costs)
NRV = 330,000−(330,000−(20,000 + 15,000)NRV=15,000)NRV=330,000 -
35,000NRV=∗∗35,000NRV=∗∗295,000**

Step 3: Calculate NRV Minus Normal Profit Margin

The normal profit margin is 15% of the estimated selling price.

 Normal profit margin = 15% × 330,000=330,000=49,500

NRV minus normal profit margin = NRV - Normal profit margin

NRV minus normal profit margin = 295,000−295,000−49,500
NRV minus normal profit margin = $245,500

Step 4: Determine Market Value

The market value is the middle value of the following three amounts:

1. Replacement cost = $280,000

2. NRV = $295,000
3. NRV minus normal profit margin = $245,500

The three values are: 280,000,280,000,295,000,

and 245,[Link]∗∗middlevalue∗∗is∗∗245,[Link]∗∗middlevalue∗∗is∗∗280,000*
*, so the market value is $280,000.

Step 5: Compare Cost and Market Value

 Cost = $300,000
 Market value = $280,000

The lower of cost or market is $280,000.

Final Answer:

Lialia Co. should report $280,000 as inventory on its year-end balance sheet.

A company has the following items on its year-end trial balance: Net sales $500‚000 Common stock
100,000 Insurance expense 75,000 Wages 50,000 Cost of goods sold 100,000 Cash 40,000 Accounts
payable 25,000 Interest payable 25,000 What is the company’s gross prot?

To calculate the company's gross profit, we use the following formula:

Gross Profit = Net Sales - Cost of Goods Sold (COGS)

Step 1: Identify Net Sales and COGS

From the trial balance:

 Net sales = $500,000

 Cost of goods sold (COGS) = $100,000

Step 2: Calculate Gross Profit

Using the formula:

Gross Profit = Net Sales - COGS
Gross Profit = 500,000−500,000−100,000
Gross Profit = $400,000

Final Answer:

The company’s gross profit is $400,000.

Ward Distribution Company has determined its December 31 inventory on a LIFO basis at
$200,000. Information pertaining to that inventory follows: Estimated selling price $204,000
Estimated cost of disposal 10,000 Normal prot margin 30,000 Current replacement cost 180,000
Ward records losses that result from applying the lower-of-cost-or-market rule. At December 31,
the loss that Ward should recognize is
To determine the loss that Ward Distribution Company should recognize at December 31, we
need to apply the lower of cost or market (LCM) rule. The LCM rule requires inventory to be
reported at the lower of its cost or market value. Here, "market value" is defined as the middle
value of replacement cost, net realizable value (NRV), and NRV minus a normal profit margin.

Step 1: Determine the Cost of Inventory

The cost of the inventory is given as $200,000 (LIFO basis).

Step 2: Calculate Net Realizable Value (NRV)

Net realizable value (NRV) is the estimated selling price minus the estimated cost of disposal.

 Estimated selling price = $204,000

 Estimated cost of disposal = $10,000

NRV = Estimated selling price - Estimated cost of disposal

NRV = 204,000−204,000−10,000
NRV = $194,000

Step 3: Calculate NRV Minus Normal Profit Margin

The normal profit margin is given as $30,000.

NRV minus normal profit margin = NRV - Normal profit margin

NRV minus normal profit margin = 194,000−194,000−30,000
NRV minus normal profit margin = $164,000

Step 4: Determine Market Value

The market value is the middle value of the following three amounts:

1. Replacement cost = $180,000

2. NRV = $194,000
3. NRV minus normal profit margin = $164,000
The three values are: 180,000,180,000,194,000,
and 164,[Link]∗∗middlevalue∗∗is∗∗164,[Link]∗∗middlevalue∗∗is∗∗180,000**
, so the market value is $180,000.

Step 5: Compare Cost and Market Value

 Cost = $200,000
 Market value = $180,000

The lower of cost or market is $180,000.

Step 6: Calculate the Loss

The loss is the difference between the cost and the market value.

Loss = Cost - Market Value

Loss = 200,000−200,000−180,000
Loss = $20,000

Final Answer:

Ward Distribution Company should recognize a loss of $20,000 at December 31.