Answer to Question #213159 in Accounting for zuby

Question

Magic Carpets Inc. sells a full line of area rugs, from top quality to bargain basement. Economic conditions have hit the textile industry, and Magic Carpets accountant is concerned that its rug inventory may not worth the amount Magic paid for it. Information about three lines of rugs is found below:

Figure 8.16

Cost

Replacement Cost

Sales Price

Cost to Sell

Number in inventory

High Flyers

$230

$240

$350

$40

80

Midflight

150

120

220

25

125

Under the Radar

100

100

110

20

165

1.

Determine market value for each type of rug.

2.

Determine lower-of-cost-or-market for each type of rug.

3.

Determine if Magic Carpets has suffered a loss of value on its inventory, and if so, what the amount of loss is.

Answer 1

1)

calculation of upper limit for each type of rug

Formula : upper limit = Net realizable value = selling price - cost to sell

Calculation of lower limit for each rug

Formula : upper limit = Net realizable value - normal profit

Where normal profit = sale price -replacement cost

Conditions to take market value

Replacement cost <lower limit<upper limit - market value = lower limit

lower limit<replacement cost<upper limit - market value =replacement cost

lower limit < upper limit <replacement cost - market value = upper limit

2) Calculation of lower of cost or market value.

3) Magic carpets suffered loss in case of mid-flight($150 - $120 = $30) and under the radar($100 -$90 =$10). So, total loss of $40