[agripper]

Based on a physical inventory taken on December 31, 20X1, Chewy Co. determined its chocolate inventory on a FIFO basis at $26,000 with a replacement cost of $20,000. Chewy estimated that, after further processing costs of $12,000, the chocolate could be sold as finished candy bars for $40,000. Chewy’s normal profit margin is 10% of sales. What amount should Chewy report as chocolate inventory on its December 31, 20X1, balance sheet?

A.

$28,000

B.

$26,000

Incorrect C.

$24,000

D.

$20,000

You answered C. The correct answer is B.

Accounting Standards Update (ASU) 2015-11 requires that, for inventory measured using FIFO or average cost, it be measured at the lower of cost or net realizable value (NRV) rather than the lower of cost or market. NRV is the estimated, ordinary selling prices, less reasonably predictable costs of completion, disposal, and transportation. (Inventory measured under the LIFO or retail method is measured at the lower of cost or market.)

Net realizable value = Selling price – Processing costs

= $40,000 – $12,000

= $28,000

Chewy should report chocolate inventory on December 31, 20X1, at lower of cost or net realizable value of $26,000.