Sandra Inc.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 Inc.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

Since the market value of the inventory is lower than the recorded cost, the company must make an adjustment to reduce the inventory value to the lower of cost or market. In this case, the inventory value will be reduced by $400 (200 units x ($12 - $10)). This will result in a decrease in gross profit by $400 (200 units x ($15 - $12)) as cost of goods sold will increase by $400.