Question

Montana Co. has determined its year-end inventory on a FIFO basis to be $633,000. Information pertaining to that inventory is as follows:

Selling price $610,000
Costs to sell 37,000
Replacement cost 548,000

What should be the reported value of Montana's Inventory?

O $573,000.
O $548,000.
O $610,000.
O $592,000.

Answer 1

The inventory of Montana Co. should be reported at the market replacement cost of $548,000, as it is lower than the FIFO cost according to the lower of cost or market rule.

Step-by-step explanation:

The reported value of Montana Co.'s inventory should be based on the lower of cost or market (LCM) rule used in accounting. Under this rule, the inventory is reported at the lower of its historical cost (on a FIFO basis) or its market replacement cost. In this case, the historical cost is $633,000, and the replacement cost is $548,000. Since the market replacement cost is lower than the FIFO cost, the inventory should be reported at $548,000.

This ensures that the inventory is not overstated on the balance sheet and reflects possible losses in value. The selling price of $610,000 and costs to sell of $37,000 are relevant for determining the net realizable value, but they do not affect the inventory's reported value under the LCM rule because the replacement cost is lower than the net realizable value (selling price - costs to sell). Consequently, the FIFO cost and the selling-related costs are not considered for this decision.