The original cost of an inventory item is below both replacement cost and net realizable value. The net realizable value less normal profit margin is below the original cost. Under the lower of cost or market method, the inventory item should be valued at

Question

Dereon

Business

26 December, 04:24

The original cost of an inventory item is below both replacement cost and net realizable value. The net realizable value less normal profit margin is below the original cost. Under the lower of cost or market method, the inventory item should be valued at

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Answers (1)

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Coleman Dean · Answer 1

D) Original cost.

Explanation:

When the company uses the lower of cost or market method, it should assign value to its inventory by calculating the middle figure between replacement cost or net realizable value, and net realizable value - normal profit.

In this case, the market value must be either the replacement cost or the net realizable value, but both values are the highest. Since the original cost is below the market value, but above the net realizable value - normal profit, the inventory must be valued at the original cost.