Ontario Inc Had the Following Data for 2012 and 2013

Essay

Ontario Inc had the following data for 2012 and 2013: $$\begin{array} { l r r } & \underline { 2012 } & \underline { 2013 } \\\text { Opening inventory } & \$ 250,250 & \$ 275,000 \\\text { Purchases } & \$ 1,675,000 & \$ 1,837,000 \\\text { Ending inventory, cost } & \$ 275,000 & \$ 302,500 \\\text { Sales } & \$ 2,825,000 & \$ 3,074,200\end{array}$$ Required:
A) Calculate the gross margin and gross margin percentage for each year.
B) If the 2012 ending inventory had a replacement cost of $262,500 and Ontario used replacement cost as their definition of market when applying the lower of cost or market, what is the effect on the gross margin and gross margin percentage for 2012 and 2013?
C) What accounting principle is the lower of cost and market based on? What is its effect in this case?
D) Based on your findings in parts A and B, how might management use the lower of cost or market to manipulate earnings?