Question

Help Save & Exit Submit Negredo Medical Supplies uses LIFO cost flow assumption and has developed the following data for its products Surgical Equipment Surgical Supplies 370 400 07.30 Number of units in inventory Per unit Selling Price Cost Replacement cost Cost to sell 345 255 325 64 Normal gross profit ratio 30% Normal gross profit ratio is expressed as a percentage of selling price Negredo adjusts an allowance account at year-end to record net realizable value adjustments to its inventory All products are reported at cost at the beginning of the year The entry at year-end will Multiple Choice O increase liabilities by 53,700 O O reduce equity by 53,700 O reduce equity by $31000 O reduce assets by $31000

Answer 1

Surgical equipment:
Recorded at cost of $ 255
Market value:
Replacement cost of $ 325 shall be taken as market value subject to ceilig ad floor limit
Ceiling limit=Net realizable value=Selling price-cost to sell=345-64=$ 281
Floor limit=Ceiling limit-Normal profit margin
Normal profit margin=Selling price*Normal gross profit ratio=345*30%=$ 103.50
Floor limit=281-103.50=$ 177.50
Replacement cost shall come within ceiling and floor limit
$ 325 does not come within $ 281 and $ 177.50
Hence,market value=ceiling limit=$ 281
Inventory is recorded at Lower of cost or market= Lower of $ 255 and $ 281= $ 255 (Cost)
Hence, no adjustment required in the books
Surgical supplies:
Recorded at cost of $ 175
Market value:
Replacement cost of $ 165 shall be taken as market value subject to ceilig ad floor limit
Ceiling limit=Net realizable value=Selling price-cost to sell=205-22=$ 183
Floor limit=Ceiling limit-Normal profit margin
Normal profit margin=Selling price*Normal gross profit ratio=205*35%=$ 71.75
Floor limit=183-71.75=$ 111.25
Replacement cost shall come within ceiling and floor limit
$ 165 comes within $ 183 and $ 111.25
Hence,market value=replacement cost=$ 165
Inventory is recorded at Lower of cost or market= Lower of $ 175 and $ 165= $ 165 (Market value)
Since, inventory is recorded at market value,following adjusting entry is required
Account titles					Debit	Credit
Loss on inventory write-down			370*(175-165)		3700
Inventory						3700
Loss on inventory write-down reduce equity by $ 3700
Inventory reduce assets by $ 3700
Answer is
reduce equity by $3700