Question

Ryan Distribution Co. has determined its December 31, 2014 inventory on a FIFO basis at $490,000. Information pertaining to that inventory follows:Estimated selling price $510,000Estimated cost of disposal 20,000Normal profit margin 60,000Current replacement cost 450,000Ryan records losses that result from applying the lower-of-cost-or-market rule. At December 31, 2014, the loss that Ryan should recognize is:a. $0.b. $10,000.c. $20,000.d. $40,000.

Answer 1

d. $40,000.

Step-by-step explanation:

We must compare the cost of book inventory with the replacement cost and the net realizable value. From this option we must pick the lowest.

book value 490,000

net realizable value:

510,000 - 20,000 = 490,000

replacement cost (market cost) 450,000

The lowest option is the replacement cost. Thus, the loss for holding inventory is:

book value - replacement cost: 490,000 - 450,000 = 40,000