Module Quiz 25.24 - Inventories

Can someone tell me why the answer is $42, not R$43? Thx!

Kamp, Inc., sells specialized bicycle shoes. At year-end, due to a sudden increase in manufacturing costs, the replacement cost per pair of shoes is $55. The original cost is $43, and the current selling price is $50. The normal profit margin is 10% of the selling price, and the selling costs are $3 per pair. Using the lower of cost or market method under U.S. GAAP, which of the following amounts should each pair of shoes be reported on Kamp’s year-end balance sheet?

The answer is 43? I just looked on Kaplan Schweser myself.

Anyway, the answer is 43 because GAAP uses the lower of cost or market for inventory valuation for companies that use the retail or LIFO methods. GAAP defines “market” as the following:

Market is replacement cost, unless replacement cost is less than NRV- normal profit margin (in which case it is that) or unless replacement cost is greater than NRV (in which case it is that)

So in this problem replacement cost got really high and exceeded the upper bound of this system GAAP has, so we really end up comparing NRV and historical cost. NRV is 47 (Sale value - costs) and historical cost is given as 43, so the answer is 43 .