Under the lower-of-cost-or-market method, the replacement cost of an inventory item would be used as the designated market value
A) when it is below the net realizable value less the normal profit margin.
B) when it is below the net realizable value and above the net realizable value less the normal profit margin.
C) when it is above the net realizable value.
D) regardless of net realizable value.

Question

Quizplus · Accepted Answer

The lower-of-cost-or-market method compares the cost of an inventory item to its replacement cost (designated market value), and records the item at the lower of the two values. However, in order for replacement cost to be used as the designated market value, it must be below the net realizable value (the estimated selling price less any costs of completion or disposal) but above the net realizable value less the normal profit margin. This ensures that the replacement cost reflects a realistic estimate of the inventory's true market value. Option A is incorrect because replacement cost must be below both net realizable value and normal profit margin, not just net realizable value less normal profit margin. Option C is incorrect because replacement cost must be below net realizable value to be used as designated market value. Option D is incorrect because replacement cost is compared to net realizable value to determine whether it should be used as designated market value.

Under the Lower-Of-Cost-Or-Market Method, the Replacement Cost of an Inventory