Data related to the inventories of Kimzey Medical Supply are presented below: Surgical Surgical Rehab Rehab
Equipment Supplies Equipment Supplies
Selling price $ 335 $195 $415 $240
Cost 245 165 325 237
Replacement cost 315 155 310 233
Costs to sell 60 20 40 40
Normal gross profit ratio 30 % 30 % 30 % 20 %
In applying the lower of cost or market rule, the inventory of surgical supplies would be valued at:.
a. $175.
b. $165.
c. $155.
d. $135.

c. $155.

Explanation:

Kimzey Medical Supply's merchandise inventory:

                  Surgical equip.  Surgical supplies  Rehab equip.  Rehab  supplies

Selling price          $335              $195                   $415                    $240

Cost                       $245              $165                   $325                   $237

Replacement         $315              $155                    $310                    $233

cost

Net RV                   $275              $175                    $375                   $200

If we apply the lower of cost or market rule for determining the value of surgical equipment, its value would be: $155 because the replacement cost  (or market price) is lower than the historical cost or the net realizable value.

When we use the lower of cost or market rule, we should value our inventory at the lowest value between original purchase cost, replacement (or market) price or net realizable value.

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