Question

Based on a physical inventory taken on December 31, 2017, Chewy Co. determined its chocolate inventory on a LIFO basis at $26,000 with a replacement cost of $20,000. Chewy estimated that, after further processing costs of $12,000, the chocolate could be sold as finished candy bars for $40,000. Chewy's normal profit margin is 10% of sales. Under the lower of cost or market rule, what amount should Chewy report as chocolate inventory in its December 31, 2017, balance sheet?

Answer 1

Answer:

Under the lower of cost or market rule, Chewy should report $20,000 as chocolate inventory in its December 31, 2017.

Explanation:

Under the lower of cost or market rule, Chewy should report $20,000 as chocolate inventory in its December 31, 2017.

Cost of Inventory on 31 December, 2017 = $26,000

Net realizable value / replacement cost = $20,000

According to under lower of cost or market value, the replacement cost (which is the market value) is lower than the actual cost of the chocolate Inventory. So, $20,000 should be reported as inventory value in the balance sheet as at December 31, 2017.