A local Chevrolet dealership carries the following types of vehicles:

Inventory Items Quantity Cost per Unit Market (replacement cost) per Unit
Vans 3 $22,000 $20,000
Trucks 6 17,000 16,000
2-door sedans 2 12,000 14,000
4-door sedans 7 16,000 19,000
Sports cars 3 32,000 35,000
SUVs 5 28,000 23,000

Because of recent increases in gasoline prices, the car dealership has noticed a reduced demand for its SUVs, vans, and trucks.

Required:
a. Compute the total cost of the entire inventory.
b. Determine whether each inventory item would be reported at cost or market. Multiply the quantity of each inventory item by the appropriate cost or market amount and place the total in the "Lower-of-Cost-or-Market" column. Then determine the total for that column.
c. Compare your answers in Requirement 1 and Requirement 2 and then record any necessary adjustment to write down inventory from cost to market value.
d. Discuss the financial statement effects of using lower-of-cost-or-market to report inventory.

Since the table doesn't show up correctly, the first dollar value is the Cost per Unit of the vehicle, while the second dollar value is the Market Cost per Vehicle.

a. If we compute the cost using the Cost per Unit then they would be the following.

Vans: 3 * $22,000 = $66,000
Trucks: 6 * $17,000 = $102,000
2-Door Sedans: 2 * $12,000 = $24,000
4-Door Sedans: 7 * $16,000 = $112,000
Sports Cars: 3 * $32,000 = $96,000
SUV's: 5 * $28,000 = $140,000
Total Inventory: $504,000

b. The "Lower-of-Cost-or-Market" basically states that whatever of the two prices is lower is ultimately the one that is recorded as the cost. Therefore, under this method the costs would be the following...(Purchase Cost or Market Cost)

Vans: 3 * $20,000 = $60,000 Market
Trucks: 6 * $16,000 = $96,000 Market
2-Door Sedans: 2 * $12,000 = $24,000 Purchase Cost
4-Door Sedans: 7 * $16,000 = $112,000 Purchase Cost
Sports Cars: 3 * $32,000 = $96,000 Purchase Cost
SUV's: 5 * $23,000 = $115,000 Market
Total Inventory: $504,000 Purchase Cost

c. There were only 3 changes made from from requirement 1 and 2 these were the changes in total cost...

Vans: $60,000 - $66,000 = - $6000
Trucks: $96,000 - $102,000 = - $6000
SUV's: $115,000 - $140,000 = - $25,000

d. This allows companies to report losses at a much more reasonable and consistent way. Thus allowing profits to be more predictable.