According to U.S.GAAP, under the lower of cost and market method, the replacement cost of an inventory item would be used as the designated market value
A)when it is below the net realizable value less the normal profit margin.
B)when it is below the net realizable value and above the net realizable value less the normal profit margin.
C)when it is above the net realizable value.
D)regardless of net realizable value.

Question

Quizplus · Accepted Answer

According to the lower of cost and market method, inventory is valued at the lower of its original cost or its current market value. In this case, the replacement cost serves as the designated market value. It should be used as the market value only if it is below the net realizable value but above the net realizable value less the normal profit margin. This is because if the replacement cost is less than the net realizable value less the normal profit margin, it would result in a loss on the inventory. However, if it is below the net realizable value, it is likely that the inventory will not sell for the expected price, resulting in a potential loss. Therefore, the replacement cost should be compared to the net realizable value less the normal profit margin to ensure that the inventory is properly valued.