Question

1.Given the following information for an inventory item of the Scottsdale Corporation:



Using the LCM Rule, the proper inventory amount for the balance sheet is:

$104 Cost Replacement Cost Estimated Sales Price Normal Profit Cost of Completion $ 98 $130 $ 6 $ 13

Select one:

a. $98

b. $104

c. $111

d. $117

e. $124

2.

The following information is available for October for Jordan Company:



A fire destroyed most of Jordan’s October 31 inventory warehouse, leaving undamaged inventory with a cost of $3,000. Using the gross profit method, the estimated ending inventory destroyed by fire is:

Select one:

a. $13,000

b. $35,889

c. $47,000

d. $50,000

e. $62,000

Answer 1

Ans. 1	Option b   $104
	Ceiling = Estimated sales price - Cost of completion
	$130 - $13 = $117
	Floor = Ceiling - Normal profit
	$117 - $6 = $111
	Replacement cost = $98
	*Designated Market value = Mid value among replacement cost, ceiling and floor.
	Designated market value = $111
	Proper inventory amount using LCM = Lower value between designated market value and Cost
	Proper inventory amount (Cost) = $104
Ans. 2	Option b   $47,000
	Particulars	Amount	Amount
	Beginning inventory (at cost)		$50,000
	Plus : Net purchase		$150,000
	Cost of goods available for sale		$200,000
	Less: Cost of goods sold
	Net sales (at selling price)	$270,000
	Less: Estimated gross profit	-$120,000
	Estimated cost of goods sold		$150,000
	Estimated cost of inventory before fire		$50,000
	Less: Undamaged inventory		-$3,000
	Estimated ending inventory destroyed by fire		$47,000
	*Calculations:
	Net purchase =   Purchases - Purchase returns
	$165,000 - $15,000   =   $150,000
	Net sales =   Sales - Sales returns
	$290,000 - $20,000 =   $270,000
	Markup on 60% of cost   =   80% / (100% + 80%) * 100 =   44.4444% of sales
	Estimated gross profit = Net sales * 44.44%
	$270,000 * 44.44%
	$120,000