The following information pertains to an inventory item:

Cost $12.00

Estimated selling price 13.60

Estimated disposal cost. 20

Normal gross margin 2.20

Replacement cost 10.90

Under the lower-of-cost-or-market rule, this inventory item should be valued at

1. $10.70

2. $10.90

3. $11.20

4. $12.00

4. $12.00

Explanation:

the market price of the good is the estimated selling price of 13.60

the historic cost is 12.00

the lower between these is the historic cost.

The replacement cost will be considered for new purchases as their historic cost but will not impact the historic cost of the previous goods.

Only a market price lower than historic cost will create a loss in inventory.