Choice "D" is correct. Under U.S. GAAP, inventory is reported at the lower of cost or market. Under lower of cost or market, market is the middle value of replacement cost, the market ceiling (net realizable value), and the market floor (NRV - normal profit):
Ceiling, net realizable value ($75,000 - 8,000) | $67,000 |
Replacement cost | 65,000 |
Floor, NRV less profit [$67,000 - (30% of $75,000)] | 44,500 |
Therefore, the inventory will be reported at the market value (replacement cost) of $65,000, which is lower than the cost of $70,000.Choice "b" is incorrect. The inventory would not be reported at the market floor of $44,500 because the market floor is less than replacement cost. Under lower of cost or market method, market is the middle value of replacement cost, the market ceiling (net realizable value), and the market floor (NRV - normal profit).
Choice "c" is incorrect. The inventory would not be reported at the market ceiling of $67,000 because the market ceiling is greater than replacement cost. Under lower of cost or market, market is the middle value of replacement cost, the market ceiling (net realizable value), and the market floor (NRV - normal profit).
Choice "a" is incorrect. The inventory would not be reported at the cost of $70,000 because cost exceeds the market value of $65,000.
