(Lower of cost and market, LO 3, 7) Wolf Ltd. (Wolf) reports its inventory at the lower of cost and market. You obtain the following information about Wolf for its year ended August 31, 2004:

Required:

a. If Wolf defines market as replacement cost, by how much should Wolf’s inventory be written down?

b. If Wolf defines market as NRV, by how much should Wolf’s inventory be written down?

c. If Wolf knew the replacement cost and NRV of its inventory on August 31, 2004, which should it use to determine the lower of cost and market?

d. What would be the effect of applying the lower of cost and market rule on Wolf’s gross margin and inventory turnover ratio?

Transcribed Image Text:

Inventory, at cost on August 31, 2003 Inventory, at cost, on August 31, 2004 Inventory, at NRV, on August 31, 2004 Inventory, at replacement cost, on August 31, 2004 Sales during the year ended August 31, 2004 Cost of sales for the year ended August 31, 2004 $ 501,000 525,000 995,000 497,000 2,340,000 1,090,000