The following inventory information was taken from the records of GlobeKom Ltd.:$\begin{array}{lr}
\text { Historical cost } & \$ 12,000 \
\text { Replacement cost } & \$ 9,000 \
\text { Expected selling price } & \$ 10,000 \
\text { Expected selling cost } & \$ 500 \
\text { Normal profit margin } & 10 \% \text { of selling price }
\end{array}$
-Under U.S.GAAP, what should the balance sheet report for Inventory?
A)$9,000
B)$8,500
C)$9,500
D)$10,000

Question

Quizplus · Accepted Answer

Under U.S. GAAP, inventory is reported at the lower of cost or market (LCM), where market is defined as replacement cost, but not to exceed net realizable value (NRV) or be less than NRV minus a normal profit margin. The NRV is the expected selling price ($10,000) minus expected selling costs ($500), which equals $9,500. The normal profit margin is 10% of the selling price, which is $1,000 (10% of $10,000). Therefore, the floor (NRV minus normal profit margin) is $8,500 ($9,500 - $1,000). The ceiling (NRV) is $9,500, and the replacement cost is $9,000. Since the replacement cost of $9,000 is within the NRV ceiling and above the floor, it is the market value. Therefore, inventory should be reported at the replacement cost of $9,000.

The Following Inventory Information Was Taken from the Records of GlobeKom