Question

J.H Corporation sells its product, a rare metal, in a controlled market with a quoted price applicable to all quantities. The total cost of 5,000 pounds of the metal now held in inventory is $400,000. The total selling price is $540,000, and estimated costs of disposal are $40,000. At what amount should the inventory of 5,000 pounds be reported in the balance sheet?

	a.	$400,000.
	b.	$360,000.
	c.	$500,000.
	d.	$540,000.

Answer 1

When a company deals in a product materials that are rare and operate in a controlled market, with a quoted price that is applicable to all the quantities, the company is allowed to report its inventory at Net realizable value. Additionally, the estimated costs of disposal should not be significant for it to be reported at its Net Realizable value.

Net Realizable Value = $540,000 Selling price - $40,000 costs of disposal = $500,000

Based on the above calculation, the correct answer is Option C - $500,000.

Option A is incorrect. $400,000 is the cost of the metal that the company paid to procure the product. The costs of rare metals where the market is controlled and price is quoted is generally reported at net realizable value and hence this option is incorrect.

Option B is incorrect. The $360,000 is obtained by reducing the $40,000 costs of disposal from the costs of the metal. However, the $40,000 costs to sell should be reduced from the selling price to find the Net Realizable value, which should be reported.

Option C is the correct answer. The costs of the rare metal that should be reported on its balance sheet is done on the basis of Net Realizable value (Selling price - costs of disposal).

Option D is incorrect. This $540,000 is the estimated costs to sell. This should be reduced by the estimated costs of disposals to obtain the Net Realizable value