Question

Taylor Music Center has 5 CD players on hand at the balance sheet date. Each costs $400. The current replacement cost is $380 per unit. Under the lower-of-cost-or-market basis of accounting for inventories, what value should be reported for the CD players on the balance sheet?

Answer 1

The correct answer is $380 per unit.

The lower-of-cost-or market rule requires that you report the lower value of either the purchase price or current market price of items in inventory. In this case the current market price is lower, so it should be used when calculating the value of inventory.