[Anonymous]

This is a pretty easy topic that I understand well but this question’s explanation does not make sense to me. The question is “The original cost of an inventory item is above the replacement cost and below the NRV. The NRV less the normal profit margin is above the replacement cost and the original cost. Using LCM, the inventory should be priced at

a.replacement cost

b.original cost

c. NRV less normal profit margin

d. NRV.

Since NRV less normal profit margin is the floor and it is above both the replacement cost (market) and original cost, wouldn’t that mean the inventory should be valued at NRV less normal profit margin (the floor). WTB insists that it should be valued at original cost, but since original cost is below the floor, I thought it could not be used?

[Anonymous]

the floor vs. ceiling is only considered in determining the “market” in LCM…the cost is independent from the floor/ceiling rules.

so in the example above i like to add in example numbers

Original cost = 50

Replacement cost = 45

NRV= 55

NRV – normal PM = 52

you only consider the floor and ceiling in determining the Market value that will then be compared to the cost. So the MV is the middle value of 45,55, and 52, so 52. Now the MV of 52 is independently compared to the Original cost of 50 and you need to choose the lower of the two…so according to the LCM rules, the reported cost is 50

hth 🙂

[Anonymous]

the floor vs. ceiling is only considered in determining the “market” in LCM…the cost is independent from the floor/ceiling rules.

so in the example above i like to add in example numbers

Original cost = 50

Replacement cost = 45

NRV= 55

NRV – normal PM = 52

you only consider the floor and ceiling in determining the Market value that will then be compared to the cost. So the MV is the middle value of 45,55, and 52, so 52. Now the MV of 52 is independently compared to the Original cost of 50 and you need to choose the lower of the two…so according to the LCM rules, the reported cost is 50

hth 🙂

[finne]

When calculating the market value to compare to cost, just calculate the three numbers (replacement cost, NRV, and NRV – normal profit) and pick the one in the middle. Don't worry about the ceiling/floor stuff. Just line up the 3 numbers, pick the one in the middle, call that number market and compare it to cost.

So here, NRV > replacement cost and NRV – normal profit > replacement cost. This means that NRV – normal profit will be “market” since it will be in the middle. The problem also says that NRV – normal profit > cost. This means that “market” > cost. Since you are looking for the LOWER of cost or market, you must value the inventory at cost in this case.

REG - 85
AUD - 99
FAR - 89 - w/ NINJA Audio and Blitz
BEC - 91

Using Wiley - books and test bank - 6 months - all 4 first time

[finne]

When calculating the market value to compare to cost, just calculate the three numbers (replacement cost, NRV, and NRV – normal profit) and pick the one in the middle. Don't worry about the ceiling/floor stuff. Just line up the 3 numbers, pick the one in the middle, call that number market and compare it to cost.

So here, NRV > replacement cost and NRV – normal profit > replacement cost. This means that NRV – normal profit will be “market” since it will be in the middle. The problem also says that NRV – normal profit > cost. This means that “market” > cost. Since you are looking for the LOWER of cost or market, you must value the inventory at cost in this case.

REG - 85
AUD - 99
FAR - 89 - w/ NINJA Audio and Blitz
BEC - 91

Using Wiley - books and test bank - 6 months - all 4 first time

[Anonymous]

understood..just to be sure @CPA4birthdaypresent, the market value is an option to compare to cost so long as the market value is between the floor and ceiling?

[Anonymous]

understood..just to be sure @CPA4birthdaypresent, the market value is an option to compare to cost so long as the market value is between the floor and ceiling?

[Anonymous]

The question is not asking IF MV is supposed to be compared to Original cost, because in the case of LCM questions, MV is ALWAYS being compared to Original cost. The real point of the MCQ is “what value are you using as the MV”?

MV can be one of three values, 1) replacement cost, 2) “Ceiling” NRV, or 3) “Floor” NRV-normal PM. MV is ALWAYS determined to be whatever the middle value is.

So Step 1: determine what the MV is based on the above rules

Step 2: compare the MV from Step 1 to the Original cost and whichever one is the LOWEST is the recorded cost…

Does this answers you question??

[Anonymous]

The question is not asking IF MV is supposed to be compared to Original cost, because in the case of LCM questions, MV is ALWAYS being compared to Original cost. The real point of the MCQ is “what value are you using as the MV”?

MV can be one of three values, 1) replacement cost, 2) “Ceiling” NRV, or 3) “Floor” NRV-normal PM. MV is ALWAYS determined to be whatever the middle value is.

So Step 1: determine what the MV is based on the above rules

Step 2: compare the MV from Step 1 to the Original cost and whichever one is the LOWEST is the recorded cost…

Does this answers you question??

[Anonymous]

I believe you erroneously are thinking the replacement cost = MV…NOT ALWAYS TRUE!

MV is whatever the middle value is between replacement cost, nrv, and nrv-nomal pm.

[Anonymous]

I believe you erroneously are thinking the replacement cost = MV…NOT ALWAYS TRUE!

MV is whatever the middle value is between replacement cost, nrv, and nrv-nomal pm.

[Anonymous]

got it now…thank you!

[Anonymous]

got it now…thank you!

[Author]

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