Question

The following inventory information was taken from the records of GlobeKom Ltd: Historical cost $12,000 Replacement...

The following inventory information was taken from the records of GlobeKom Ltd:

Historical cost $12,000
Replacement cost $9,000
Expected selling price $10,000
Expected selling cost $1,500
Normal profit margin 10% of selling price

Under U.S. GAAP, what should be the market value for Inventory (assuming LCM method is used)?

A.

$8,500
B.

$9,500
C.

$10,000
D.

$9,000
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Homework Answers

Answer #1

The correct answer is "A": $8,500

Calculation:

Market value for inventory under U.S. GAAP = Replacement cost considering following 2 conditions are fulfiled:

1. Replacement cost does not exceed NRV (if it does, market value = NRV)

2. Replacement cost cannot be lower than (NRV - Normal profit margin)

Condition 1: Replacement cost = $9,000

NRV = Expected selling prie - Expected selling costs = $10,000 - $1,500 = $8,500

Since NRV is less than replacement cost, market value shall be equal to NRV, i.e., $8,500.

Since NRV of $8,500 will always be higher than (NRV - Normal profit margin), hence our final answer for market value of inventory will be $8,500.

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