Landers, Inc. has 7 units in inventory on December 31. The units were purchased in November for $180 each. The price lists from suppliers indicate the current replacement cost of the item to be $174 each. What is the effect on gross profit if Landers values its ending merchandise inventory using the lower-of-cost-or-market rule?

Question

Quizplus · Accepted Answer

The lower-of-cost-or-market rule requires inventory to be reported at the lower of its cost or its market value. In this case, the market value is $174, which is lower than the cost of $180. Therefore, the inventory must be valued at $174 each, resulting in a decrease of $6 in the value of each unit. This means that the total value of the inventory is reduced by 7 x $6 = $42. As gross profit is calculated by subtracting cost of goods sold from sales revenue, the decrease in the value of inventory will result in a lower gross profit. Therefore, the correct answer is C.