Tamarack Co.prepares its estimate of LCM using the net realizable value.Inventory item 101 cost $45 and its current replacement cost is $50.The item is currently selling in the market for $55 and selling costs are estimated to be $6.Tamarack expects to earn a profit of $4 on the sale of this item.In its year-end financial statements,Tamarack Co.should value this item at
A)$50.
B)$45.
C)$49.
D)$55.

Question

Quizplus · Accepted Answer

As per the net realizable value (NRV) method, the inventory should be valued at the estimated selling price less selling costs and any expected profit margin.

NRV = Estimated selling price - Selling costs - Expected profit margin

NRV = $55 - $6 - $4 = $45

As the estimated NRV of the inventory item 101 is lower than its cost, we should use the lower value of NRV or cost as the valuation. Therefore, the inventory item 101 should be valued at $45.