Question

^{​​​​​​}

Based on the following information regarding Product A, what would be the value reported for inventory of Product A under lower of cost or market (LCM) approach?

	Product A
Cost	$25
Replacement Cost	$20
Selling Price	$50
Direct Disposal Cost	$8
Normal Profit Margin/Unit	$6

		A. $19
		B. $36
		C. $20
		D. $25

Answer 1

Given,

Purchase cost =$ 25

Replacement cost =$20

Selling price = $ 50

Direct disposal cost =$8

Normal profit margin =$6

1)Calculation of net realizable value:

Net realizable value =selling price - direct disposal cost

=$50-$8

=$42

2) determining Net realizable value minus normal profit margin

=$42-$6

=$36

3)compare replacement cost and net realizable value minus normal profit margin:

Then take net realizable value minus normal profit margin as replacement cost. since , replacement cost I.e., $20 is less than net realizable value minus normal profit margin I. e., $36

4) comparing purchase cost and replacement cost:

Purchase cost is $25 and replacement cost is $ 36. Here cost of inventory is less than replacement cost then we need not write down and we have to record the cost whichever is lower.

Therefore the value reported for inventory product A under lower of cost or market approach is $25 that is the cost of inventory.

So option D is correct answer.

Note:

- According to rule of lower of cost or market approach,

Any entity must record cost of inventory at whichever cost is lower I. e., purchase cost or the replacement cost.

-Net realizable value = selling price - cost of disposal