Question

Teel Distribution Co. has determined its December 31, 2007 inventory on a FIFO basis at $250,000. Information pertaining to that inventory follows:
Estimated selling price $255,000
Estimated cost of disposal/completion 10,000
Normal profit margin 30,000
Current replacement cost 225,000
Teel records losses that result from applying the lower-of-cost-or-market rule. At December 31, 2007, the loss that Teel should recognize is:__________.
a. $0.
b. $5,000.
c. $20,000.
d. $25,000.

Answer 1

Answer:

b. $5,000

Explanation:

Applying the lower-of-cost-or-market rule, Inventory are valued at the lower of the Cost or Market Value (Net Realizable Value).

where,

Cost of Inventory = $250,000

and

Net Realizable Value (NRV) = Estimated selling price- Estimated cost of disposal/completion

                                              = ($255,000 - $10,000)

                                              = $245,000

therefore,

Loss from write down of Inventory to Market Value = $5,000 ($250,000 - $245,000)