[Sticky Nicky]

Its sad that we are paying for outdated materials and getting questions n concepts wrong because of them. Am I wrong here?

Garcel, Inc. held unfinished inventory at a cost of $85,000 with a sales value of $125,000. The inventory will cost $10,500 to complete. The normal profit margin is 30% of sales. The replacement cost of the inventory was $75,000. What amount should Garcel report as inventory on balance sheet?

A.
$114,500

Incorrect B.
$85,000

C.
$77,000

D.
$75,000

Explaination:
A departure from the cost basis is required when the utility of goods is no longer as great as cost; for inventory, the loss should be recognized in the period in which the decline takes place. Inventory measured using any method other than LIFO or the retail inventory method (e.g., FIFO or average cost) is measured at the lower of cost and net realizable value (NRV), which is defined to be the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If the NRV of inventory is lower than its cost, the difference is recognized as a loss in earnings in the period in which it occurs.

In this case, market value will be the replacement cost unless replacement cost exceeds net realizable value (NRV) (estimated selling price less costs of completion and disposal), in which case market will be net realizable value (the ceiling); OR replacement cost is less than net realizable value reduced by a normal profit margin (the floor), in which case market will be the floor.

NRV (ceiling) $125,000 – $10,500 = $114,500
Replacement cost = $ 75,000
NRV – Normal profit (floor) $114,500 – (30% × $125,000) = $ 77,000

Garcel should report inventory at $77,000, the lower of cost or market. (Note: market cannot be less than the floor value of $77,000.)

[ahsq]

no i have seen a few wrong MCQs too.

[jeff]

The question isn't outdated…it's current. Email me at support@another71.com and I'll refund your $$, no problem.

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[mjbey1s]

@Sticky Nicky,

I am not sure how you think this question is wrong.

It is actually perfectly right according to (GAAP). If you were talking in terms of (IFRS), then you are right, the answer would be $85,000. Because the question does not reference IFRS, you have to use your critical thinking skills and “assume” that they are referring to GAAP.

The Cost is 85,000

NRV is 114,500
NRV – Profit = 77,000
Repl. Cost = 75,000

The middle of the three is 77,000. 77,000 is less than the original cost of 85,000, so inventory would be reported at 77,000.

If is fine if you want to ask questions about specific questions, but it may be better to make sure you fully understand the concepts before you start questioning if the materials are correct or not. I have been bad about this before too, and from experience, just make sure you know what you are talking about first. I really do think Jeff tries his best to give us the best materials he possibly can to pass these exams.

[zr125]

@mjbey1s, effective 12/15/2016 inventory (other than LIFO or the retail inventory method) is to be reported at lower of cost or NRV (no longer lower of cost or market). I believe that's what the OP is referring to.

[mjbey1s]

Oh wow, didn't know this. That's interesting because on my last exam, all of the LCM questions all stated IFRS in the question. So it was easy for me to know to use lower of Cost of NRV. Wonder if this was their way of trying not to confuse candidates during the transition of the change?

[Sticky Nicky]

Exactly zr125! and Jeff I don't understand how this is current. Can you explain? Isn't the new rule lower of cost or NRV? Cost=$85000 and NRV=$114,500. Cost is lower. it marked my correct answer incorrect. Unless I'm missing an indication that the company was using LIFO or retail method.??

[Missy]

Usually it takes at least 2 testing quarters for changes in accounting principals (or tax rates, or tax threshholds) to make it onto the exam. Even though the rules changed a month ago were you told that those changes had been incorporated into the exam? Whats in the review material should correspond to the current test which is not necessarily the current rules.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Andrew]

If the question didn't state which inventory method was used, I'm not sure how you are supposed to answer the question since GAAP includes both FIFO and LIFO.

[Sticky Nicky]

mjbey..next time u jump down someones throat for not knowing the concept make sure you know the concept urself. thanks

[Andrew]

^please fight

[Sticky Nicky]

mla…we were told that this change takes effect on the Q1 2017 exam

[sallybreann]

I took the FAR exam in January with the understanding that inventory is to be valued at Lower of Cost or NRV unless it states that it is LIFO or retail inventory because of the new standard. If the question did not refer to LIFO, then I used lower of cost or NRV. Becker had a pass key for it and Tim Gearty pointed out how important it was to note that pass key.

[Sticky Nicky]

Andrew I would assume you have to use LCNRV unless specifically told otherwise. Thats how all the other questions I've encountered like this have gone.

[Andrew]

I would agree with you on that. If I had no other choice I would assume the question would be referring to GAAP non LIFO. But still, I think the question should state which inventory method was used. And that is pretty shitty that the explanation basically said haha should have assumed LIFO sucka!!!!

[mjbey1s]

@Sticky Nicky,

I actually do understand the concepts. (Obvious by the fact I spelled out the details for you and how the answer was arrived at, whether right or wrong under the new changes). Just wasn't aware of the new rule that was put in place at the end of 2016. And I wasn't jumping down anyone's throat. Was trying to explain how Ninja arrived at their answer.

Luckily this didn't effect me since all of mine were IFRS and used the lower of cost or NRV method.

[Author]

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