The following inventory information was taken from the records of Kleinfeld Inc.:$\begin{array}{ll}
\text { Historical cost } & \$ 12,000 \
\text { Replacement cost } & \$ 7,000 \
\text { Expected selling price } & \$ 9,000 \
\text { Expected selling cost } & \$ 500 \
\text { Normal profit margin } & 50 \% \text { of price }
\end{array}$
-Under U.S.GAAP, what should the balance sheet report for Inventory?
A)$9,000
B)$8,500
C)$7,000
D)$10,000

Question

Quizplus · Accepted Answer

Under U.S. GAAP, inventory is reported at the lower of cost or market (LCM). The market value is the replacement cost, but it cannot exceed the net realizable value (NRV) nor be less than NRV minus a normal profit margin. NRV is the expected selling price ($9,000) minus the expected selling cost ($500), which equals $8,500. The normal profit margin is 50% of the price, which is $4,500 (50% of $9,000). Therefore, the market limit is $8,500 - $4,500 = $4,000. However, the replacement cost given is $7,000, which is within the NRV and NRV minus normal profit margin but higher than the floor. Since the replacement cost is the relevant market value, and it is lower than the historical cost, the inventory should be reported at the replacement cost of $7,000.

The Following Inventory Information Was Taken from the Records of Kleinfeld