Question

The company uses the lower-of-cost-or-market approach. The replacement cost of an inventory item is 75.00. The net realizable value is86.88. The net realizable value less a normal profit margin is 64.00. The cost of the item is77.14. How would the inventory item be valued?

1) At the replacement cost of $75.00
2) At the net realizable value of $86.88
3) At the net realizable value less a normal profit margin of $64.00
4) At the cost of the item of $77.14

Answer 1

Under the lower-of-cost-or-market approach, the inventory item would be valued at the replacement cost of $75.00 since it's lower than the cost but higher than the net realizable value less a normal profit margin.

Step-by-step explanation:

When using the lower-of-cost-or-market approach to value inventory, an item should be valued at the lowest figure when comparing cost, market replacement cost, net realizable value (NRV), and NRV less a normal profit margin. In this scenario:

• The replacement cost of the inventory item is $75.00.
• The net realizable value (NRV) is $86.88.
• The NRV less a normal profit margin is $64.00.
• The cost of the item is $77.14.

Since the market replacement cost ($75.00) is less than the item's cost ($77.14) but greater than the NRV less a normal profit margin ($64.00), we would value the inventory item at the replacement cost of $75.00.