[timmyj]

Question # 1189 | Blueprint Area: 2 C : Inventory

The following information pertains to each unit of merchandise purchased for resale by Vend Co.:
March 1 December 31
Purchase price $ 8
Selling price 12 $ 15
Price level index 110 121
Replacement cost 10 Under current cost accounting, what is the amount of Vend’s holding gain on each unit of this merchandise?
A. $0
B. $0.80
C. $1.20
D. $2.00
You answered A. The correct answer is D.
Under current cost accounting, the amount of holding gain on a unit of inventory is the increase in current cost from holding the inventory from period to period. The inventory in question was purchased at $8 per unit on March 1 and has a replacement cost of $10 on December 31. Thus, under current cost accounting, Vend has a holding gain of $2 (i.e., $10 – $8) on each unit of the inventory.

-Is this question asking about IFRS? GAAP does not allow inventory to be valued upwards. I thought if a questions doesn’t ask about IFRS or international we are to assume it is asking about GAAP. Can anyone explain this to me?

[GoCart]

I'm 99% sure that the key words here are “current cost.” This would indicate that they are talking about the Fair Value Option. Holding Gain would be $2 since the value appreciated.

[timmyj]

I was not aware you could FMV your inventory for GAAP (they don't even allow inventory to be written back up), I thought it was LCM for LIFO and Lower cost or NRV for FIFO.

[GoCart]

Here's what my recommendation is: I am not sure which study materials this question is from but I would reach out to the source of the materials. I used Roger and it has the awesome ability to communicate with help online.

I would also like to say that I have taken all the exams and passed all but BEC (waiting on score) and I can truly say that I have never seen a question discussing “current cost accounting.” I am under the impression that if this is discussing inventory, yes, the valuation would be the LCM/LCNRV and I am not aware of the ability to choose a Fair Value Option (i.e. current cost accounting) unless the question is trying to indicate that the merchandise is being used as a financial asset (investment)? Sorry I couldn't be better help. It's definitely a tricky if not an incorrect question.
Good luck!

[Author]

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