Question

Madison Co. has determined its year-end inventory on a LIFO basis to be $600,000. Information pertaining to that inventory is as follows:

Selling price $ 720,000

Costs to sell 30,000

Normal profit margin 80,000

Replacement cost 620,000

What should be the reported value of Madison's inventory?

A) $600,000

B)$620,000

C) $690,000

D) $610,000

Answer 1

Reported value of Madison's inventory = lower of cost or Market value = $600,000 (option A)

Step-by-step explanation:

Note

As per US GAAP , inventory is to be valued at lower of cost or market value.

Where , market value is always a replacement cost except in following two situations ;

When Replacement cost is above Market ceiling [ ie Selling price - Costs to sell ] , then Market value = Market ceiling

When Replacement cost is below Market floor [ ie Selling price - Costs to sell - Normal profit ] , then Market value = Market floor

Answer

Replacement cost = $620,000

Market ceiling = $720,000 - $30,000 = $690,000

Market floor = $720,000 - $30,000 - 80,000 = $610,000

Therefore , Market Value = Replacement cost = $620,000

Cost = $600,000 (given)