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 is the amount of inventory loss shown on the income statement 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 is the amount of inventory loss shown on the income statement under U.S. GAAP?

Quizplus · Accepted Answer

Under U.S. GAAP, inventory is reported at the lower of cost or market. The market value is the middle value of replacement cost, net realizable value, and net realizable value minus normal profit margin. Here, the market value is $20,000, so the inventory is written down from $25,000 to $20,000, resulting in a $5,000 loss.

The Following Information Pertains to Inventory Held by a Company