I guess its time to render ninja MCQs useless:
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.)
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
.