following information is related product X of zempa company:. 1. current replacement cost is $230. 2. cost of distribute is $42. 3. historical cost is $215. 4. normal profit margin is $36. 5. selling price is $245. if lower of cost or market rule (LCM rule) is applied, then the value of product X would be reported in the balance sheet is option (1) $215 (2) 230 (3) 203 (4) 167
Answers
Given:
Current replacement cost $230
Cost to distribution $42
Historical cost $215
Normal profit margin $36
Selling price $245
To find:
If lower-of-cost-or-market rule (LCM rule) is applied, then the value of Product X that would be reported in the balance sheet is:
(a) $215
(b) 230
(c) 203
(d) 167
Solution:
Cost for LCM Comparison Value
1. Historical Cost: (Cost) $215
Factors Determining Market Value:
2. Current Replacement Cost 230
3. Selling Price 245
4. Cost to Distribute: 42
5. Normal Profit 36
6. Market Ceiling: Net Realizable Value $203
7. Market Floor: NRV - Norm Profit $167
8. Market Value for LCM Comparison $203
9. LCM Reported Inventory: $203
Net Realizable Value = $245 - $42 = $203
Market Floor: NRV - N.P = $203 - $36 = $167
When Replacement cost is higher than Market
Ceiling, the Market value from LCM Rule is M. Ceiling.