Question

If the cost of an item of inventory is $70, the current replacement cost is $65, and the sales price is $85, the amount included in inventory according to the lower of cost or market is*

a.$65 b.$70 c.$85 d.$160

Answer 1

The amount included in inventory according to the lower of cost or market should be a. $65, as it is the lower amount between the cost of $70 and the current replacement cost of $65.

Step-by-step explanation:

When accounting for inventory, one common methodology used is the lower of cost or market rule.

According to this rule, the inventory is reported on the balance sheet at either its historical cost or its current replacement cost, whichever is lower.

Since the cost of the item is $70 and the current replacement cost is $65, you would use the lower of these two figures.

The sales price of the item does not factor into this particular inventory valuation method.

Therefore, the inventory should be valued at $65.

Answer 2

The inventory should be valued at $65 according to the lower of cost or market rule since the replacement cost of $65 is lower than the historical cost of $70.

Step-by-step explanation:

The question pertains to determining the value of inventory according to the lower cost or market rule. The cost of an item of inventory is $70, the current replacement cost is $65, and the sales price is $85. Under the lower of cost or market principle, the inventory is recorded at the lower value between the historical cost and the current market price, which in this case is the replacement cost. Therefore, the amount included in the inventory would be $65.