Question

The Company uses lower-of-cost-or-market approach. The replacement cost of an inventory item is $75. Net realizable value is $82.50. Net realizable value less a normal profit margin is $69. The cost of the item is $76.50. The inventory item would be valued at:

Answer 1

Answer: $75

Explanation: Using the lower of cost or market approach, the cost of item in the inventory will be valued at $75.This is because the replacement cost is the assigned to the market value of the item in inventory. The lower of cart or market approach will first compare the cost of item purchased in inventory to the actual market value to the inventory. However, replacement cost in this case, cannot exceed net realizable value (ceiling) which in this case is $82.50 and cannot be lower than the difference between the net realizable value and the normal profit margin called the ( floor)

Answer 2

Answer:

The inventory would be valued at $75 each

Explanation:

From  a market approach to valuation,we need to first of all compare the replacement cost and net realizable in order to pick the lower of both values,hence the replacement cost of $75 is lower than net realizable value of $82.50.

As a result, we can then compare the lower of replacement cost and initial cost,such that inventory can then be valued at the lower of both.

From the foregoing analysis,the replacement of $75 each per item is lower than the initial cost $76.50,invariably our inventory is valued at $75 each.