The following inventory information was taken from the records of a foreign corporation whose stock is listed on an exchange in the U.S. $\begin{array} { l l }
\text { Historical cost } & \$ 15,000 \
\text { Replacement cost } & \$ 11,000 \
\text { Expected selling price } & \$ 13,500 \
\text { Expected selling cost } & \$ 800 \
\text { Normal profit margin } & \$ 2,500
\end{array}$ How will income under the U.S.GAAP compare to income the company reported under IFRS after reconciliation?
A)Income will not be affected by the reconciliation.
B)Income under U.S.GAAP will be lower by $1,700.
C)Income under U.S.GAAP will be lower by $2,500.
D)Income under U.S.GAAP will be equal to income under IFRS.

Question

The following inventory information was taken from the records of a foreign corporation whose stock is listed on an exchange in the U.S. $\begin{array} { l l } 
\text { Historical cost } & \$ 15,000 \
\text { Replacement cost } & \$ 11,000 \
\text { Expected selling price } & \$ 13,500 \
\text { Expected selling cost } & \$ 800 \
\text { Normal profit margin } & \$ 2,500
\end{array}$ How will income under the U.S.GAAP compare to income the company reported under IFRS after reconciliation?
A)Income will not be affected by the reconciliation.
B)Income under U.S.GAAP will be lower by $1,700.
C)Income under U.S.GAAP will be lower by $2,500.
D)Income under U.S.GAAP will be equal to income under IFRS.

Quizplus · Accepted Answer

Under U.S. GAAP, inventory is valued at the lower of cost or market (LCM), where market is defined as current replacement cost, not exceeding net realizable value (NRV), and not less than NRV minus a normal profit margin. NRV is the expected selling price ($13,500) minus expected selling costs ($800), which equals $12,700. NRV minus normal profit margin is $12,700 - $2,500 = $10,200. The replacement cost ($11,000) is between the NRV and NRV minus normal profit margin, so it is used as the market value. The difference between the historical cost ($15,000) and the replacement cost ($11,000) is $4,000. Under IFRS, inventory is valued at the lower of cost and net realizable value. The NRV is $12,700, which is lower than the historical cost but higher than the replacement cost. Therefore, under IFRS, the inventory would be written down to $12,700, resulting in a write-down of $2,300 ($15,000 - $12,700). The difference in write-downs between U.S. GAAP ($4,000) and IFRS ($2,300) is $1,700, making income under U.S. GAAP lower by $1,700 after reconciliation.

The Following Inventory Information Was Taken from the Records of a Foreign