Ryan Distribution Co. has determined its December 31, 2012 inventory on a FIFO b
ID: 2499682 • Letter: R
Question
Ryan Distribution Co. has determined its December 31, 2012 inventory on a FIFO basis at $500,000. Information pertaining to that inventory follows:
Estimated selling price $510,000
Estimated cost of disposal $20,000
Normal profit margin $60,000
Current replacement cost $450,000
Ryan records losses that result from applying the lower-of-cost-or-market rule. At December 31, 2012, the loss that Ryan should recognize (Under US GAAP) is
a. $0.
b. $10,000.
c. $40,000.
d. $50,000.
Ryan records losses that result from applying the lower-of-cost-or-market rule. At December 31, 2012, the loss that Ryan should recognize (Under IFRS) is
a. $0.
b. $10,000.
c. $40,000.
d. $50,000.
Explanation / Answer
Net realizable value of the inventory = Estimated selling price - Estimated cost of disposal
Net realizable value = $510,000 - $20,000 = $490,000
Replacement cost = $450,000
Net realizable value - Normal profit = $490,000 - $60,000 = $430,000
Therefore,
The replacement cost will be taken as the market value of the inventory because it is higher than the floor (net realizable value - normal profit) and lower than celling (net realizable vaue).
Cost of inventory = $500,000
Loss to be recognized using lower of cost or market rule
= Cost - market value = $500,000 - $450,000 = $50,000
Therefore, d is the correct answer.
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