Washington Distribution Co. has determined its December 31, 2020, inventory on a FIFO basis at $240,000. Information pertaining to that inventory follows: $\begin{array}{llcc}
\text { Etimated selling price } & \$255,000 \
\text { Estimated cost of disposal } &10,000\
\text { Normal profit margin } &30,000\
\end{array}$
Washington records losses that result from applying the lower of cost and net realizable value rule. At December 31, 2020, the loss that Washington should recognize is
A) $0.
B) $5,000.
C) $15,000.
D) $25,000.

Question

Washington Distribution Co. has determined its December 31, 2020, inventory on a FIFO basis at $240,000. Information pertaining to that inventory follows: $\begin{array}{llcc}
  \text { Etimated selling price } & \$255,000 \
 \text { Estimated cost of disposal } &10,000\
 \text { Normal profit margin } &30,000\
\end{array}$
 Washington records losses that result from applying the lower of cost and net realizable value rule. At December 31, 2020, the loss that Washington should recognize is
A) $0.
B) $5,000.
C) $15,000.
D) $25,000.

Quizplus · Accepted Answer

Net realizable value (NRV) is calculated as the estimated selling price minus the estimated cost of disposal, which is $255,000 - $10,000 = $245,000. Since the FIFO cost of the inventory is $240,000, which is lower than the NRV of $245,000, there is no need to recognize a loss. Therefore, the loss that Washington should recognize is $0.

Washington Distribution Co Washington Records Losses That Result from Applying the Lower of on a FIFO