Ivanhoe Company sells product 1976 NLC for $25 per unit. The cost of one unit of 1976 NLC is $23, and the replacement cost is $22. The estimated cost to dispose of a unit is $5, and the normal profit is 20% of selling price. At what amount per unit should product 1976 NLC be reported, applying lower-of-cost-or-market

The product should be reported at $20

Explanation:

The formulae for net realizable value is given as ;

Net realizable value = Estimated selling price - Cost of completion and disposal

= $25 - $5

= $20

But,

The upper limit of Market = Net realizable value = $20

Market = Replacement cost = $22

Hence,

Lower limit of market = Net realizable value - Normal profit margin

Lower limit of market = $20 - ( 20% × 25 )

= $20 - $5

= $15

It therefore means that if the present replacement cost is higher than the selling price, it then means that the selling amount is the market amount.

The product should therefore be reported at $20

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