Choice "B" is correct. Under the U.S. GAAP lower of cost or market method, the net carrying value of inventory is the lesser of the cost of the inventory determined using one of the inventory costing methods (LIFO, FIFO, etc.) and the market value of the inventory. Market value is the middle value of replacement cost, net realizable value (the market ceiling) and net realizable value less normal profit margin (the market floor). The cost of Ian Co.'s inventory is $258,000. Market value is $251,000, determined as follows:
Replacement cost$230,000
Market ceiling$275,000 - $14,000$261,000
Market floor$261,000 - $10,000$251,000 |
The market floor of $251,000 is the middle value and therefore market value. Because the market value of $251,000 is less than the cost of $258,000, the inventory will be reported at $251,000.
