The following information pertains to inventory held by a company at December 31, 2011. $$\begin{array} { | l | r | }
\hline \text { Historical cost } & \$ 25,000 \
\hline \text { Replacement cost } & \$ 20,000 \
\hline \text { Net realizable value } & \$ 21,000 \
\hline \text { Normal profit Margin } & 20 \% \
\hline
\end{array}$$
-What amount of inventory should be reported under U.S. GAAP?

Question

The following information pertains to inventory held by a company at December 31, 2011. $$\begin{array} { | l | r | } 
\hline \text { Historical cost } & \$ 25,000 \
\hline \text { Replacement cost } & \$ 20,000 \
\hline \text { Net realizable value } & \$ 21,000 \
\hline \text { Normal profit Margin } & 20 \% \
\hline
\end{array}$$
-What amount of inventory should be reported under U.S. GAAP?

Quizplus · Accepted Answer

Under U.S. GAAP, inventory is reported at the lower of cost or market. The market is defined as the replacement cost, but it should not exceed the net realizable value (ceiling) or be less than the net realizable value minus a normal profit margin (floor). Here, the replacement cost is $20,000, which is lower than the historical cost of $25,000 and falls between the ceiling ($21,000) and the floor ($16,800). Therefore, the inventory should be reported at $20,000.

The Following Information Pertains to Inventory Held by a Company