ExpertHard1 markMultiple Choice
CPA · Question 21 · Area II: Balance Sheet Accounts
A company uses the LIFO inventory method. At year-end, the following data is available for Item X:<br/>- Cost: $50<br/>- Replacement Cost: $45<br/>- Selling Price: $60<br/>- Disposal Costs: $5<br/>- Normal Profit Margin: $15<br/><br/>What is the carrying amount of Item X at year-end?
A company uses the LIFO inventory method. At year-end, the following data is available for Item X:<br/>- Cost: $50<br/>- Replacement Cost: $45<br/>- Selling Price: $60<br/>- Disposal Costs: $5<br/>- Normal Profit Margin: $15<br/><br/>What is the carrying amount of Item X at year-end?
Answer options:
A.
$50
B.
$45
C.
$40
D.
$55
How to approach this question
1. Identify method: LIFO -> Use Lower of Cost or Market (LCM). <br/>2. Calculate Market: Middle of (Replacement Cost, NRV, NRV-Profit). <br/>3. Compare Cost vs. Market. Take lower.
Full Answer
B.$45✓ Correct
Method: LIFO (requires Lower of Cost or Market).<br/>Step 1: Determine Market.<br/>- Ceiling (NRV) = $60 - $5 = $55.<br/>- Floor (NRV - Profit) = $55 - $15 = $40.<br/>- Replacement Cost = $45.<br/>- Market = Middle value of ($55, $40, $45) = $45.<br/>Step 2: Compare Cost ($50) to Market ($45).<br/>Lower is $45.
Common mistakes
Using Lower of Cost or NRV (that's for FIFO/Weighted Avg). Picking Replacement Cost without checking floor/ceiling.
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