Sandra Company had two hundred units of inventory on hand at the end of the year. These were recorded at a cost of $12 each using the last-in, first-out (LIFO)method. The current replacement cost is $10 per unit. The selling price charged by Sandra Company for each finished product is $15. As a result of recording the adjusting entry as per the lower-of-cost-or-market rule, the gross profit will:

Question

Quizplus · Accepted Answer

Under the lower-of-cost-or-market rule, inventory should be valued at the lower of its cost or market value. In this case, the market value is $10 per unit, which is lower than the recorded cost of $12 per unit. Therefore, the inventory must be written down to $10 per unit, resulting in a decrease in the value of inventory by $400 (200 units x $2 per unit). This decrease in inventory value will result in a decrease in gross profit by $400 (200 units x ($15 selling price - $10 market value)). Therefore, the correct choice is D.

Sandra Company Had Two Hundred Units of Inventory on Hand