Under the lower-of-cost-or-market method, JLC reports its inventory at replacement cost. Which of the following statements must be correct? The original cost is: A. greater than replacement cost, and the net realiable value less the normal profit margin, is greater than replacement cost. B. greater than replacement cost, and the net realizable value less the normal profit margin, is less than replacement cost. C. less than replacement cost, and the net realizable value less the normal profit margin, is greater than replacement cost. D. less than replacement cost, and the net realizable value less the normal profit margin, is less than replacement cost. The answer is B. I get the first part of the answer but can someone explain the second part of the answer? How does normal profit come into play? Thanks
with LCM method, if the replacement cost > original cost, the LCM is NRZ - NPM. You subtract the normal profit if the replacement cost > original
Inventory needs to be recorded at lower of cost or market, so the fact that it’s being recorded at market (replacement cost) means that the (historical) cost is greater than replacement cost. Okay so market value (replacement cost) falls within a range. The high end of the range is the NRV itself (Selling price - seilling costs). The lower end of the range is the NRV-Net Profit Margin (net profit margin = profit margin*selling price). SO, if replacement cost is GREATER than NRV, the inventory is reported at NRV. However, this inventory is reported at Replacement Cost which automatically means NRV>Replacement Cost. If replacement cost is LESS than the LOWER end of the above mentioned range (NRV-Net Profit Margin) then inventory is reported at NRV-Net Profit Margin. However, since this inventory is reported at replacement cost, it must mean that Replacement cost>NRV-Net Profit Margin Hope that made sense.