Question

Presented below is information related to Rembrandt Inc.’s inventory, assuming Rembrandt uses lower-of-LIFO cost-or-market. (per unit) Skis Boots Parkas Historical cost \(190.00 \)106.00 $53.00 Selling price 212.00 145.00 73.75 Cost to distribute 19.00 8.00 2.50 Current replacement cost 203.00 105.00 51.00 Normal profit margin 32.00 29.00 21.25 Determine the following: (a) the two limits to market value (i.e., the ceiling and the floor) that should be used in the lower-of cost-or-market computation for skis, (b) the cost amount that should be used in the lower-of-cost-or-market comparison of boots, and (c) the market amount that should be used to value parkas on the basis of the lower-of-cost-or-market.

Short answer

(a) The ceiling equals $193, and the floor equals $161.

(b) The cost equals $106.

(c) The market amount equals $51.

Step-by-step solution

Calculation of ceiling and floor

(a) Calculation of the ceiling (Net realizable value) is calculated as follows:

$$\begin{gathered} Ceiling(NetRealizableValue)=SellingPrice-CosttoDistribute \\ =\$212-\$19 \\ =\$193 \end{gathered}$$

Calculation of the floor (Net realizable value less normal profit margin) is calculated as follows:

$$\begin{gathered} Floor=Ceiling-NormalProfitMargin \\ =\$193-\$32 \\ =\$161 \end{gathered}$$

Calculation of cost

(b) The cost for the boots equals the historical cost of $106, which will be used in the lower-of-cost-or-market approach.

Calculation of market value

(c) Calculation of the ceiling (Net realizable value) is calculated as follows:

$$\begin{gathered} Ceilling(NetRealizablevalue)=SellingPrice-CosttoDistribute \\ =\$73.75-\$2.50 \\ =\$71.25 \end{gathered}$$

Calculation of the floor (Net realizable value less normal profit margin) is calculated as follows:

$$\begin{gathered} Floor=Ceilling-NormalProfitMargin \\ =\$71.25-\$21.25 \\ =\$50 \end{gathered}$$

The designated market value is the middle value of the current replacement cost, net realizable value less normal profit margin (floor), and net realizable value (ceiling). The middle value is $51, which will be considered a designated market value in the lower-of-cost-or-market approach.