Kahn Co., in applying the lower of cost or market method, reports its inventory at replacement cost. Which of the following statements are correct?

 Kahn Co., in applying the lower of cost or market method, reports its inventory at replacement cost. Which of the following statements are correct?
The original cost is greater than replacement cost
The net realizable value, less a normal profit margin, is greater than replacement cost

Answer

The original cost is greater than replacement cost Yes
The net realizable value, less a normal profit margin, is greater than replacement cost No

 This Answer is Correct
Under LCM, the market value of inventory is the middle of three figures (in amount):

• replacement cost
• net realizable value
• net realizable value less normal profit margin.

If the middle figure (market) is less than cost, then the inventory is reported at market. The inventory in this question is reported at replacement cost, which means that replacement cost is market value and replacement cost is less than cost. Also, replacement cost is the middle of the three figures (or tied with one of the other two).

Net realizable value less normal profit margin could not exceed replacement cost because that would imply that replacement cost is the lowest of the three figures, which contradicts the fact that replacement cost is market value.

Therefore, in terms of the question,

(1) original cost is greater than replacement cost, and

(2) net realizable value less normal profit margin is not greater than replacement cost.