diff --git a/grade/report/grader/ajax_callbacks.php b/grade/report/grader/ajax_callbacks.php
index 82fc9eb49a414..f0c7188ffff47 100644
--- a/grade/report/grader/ajax_callbacks.php
+++ b/grade/report/grader/ajax_callbacks.php
@@ -81,10 +81,13 @@
                 // Warn if the grade is out of bounds.
                 if (is_null($finalgrade)) {
                     // ok
-                } else if ($finalgrade < $grade_item->grademin) {
-                    $errorstr = 'lessthanmin';
-                } else if ($finalgrade > $grade_item->grademax) {
-                    $errorstr = 'morethanmax';
+                } else {
+                    $bounded = $grade_item->bounded_grade($finalgrade);
+                    if ($bounded > $finalgrade) {
+                        $errorstr = 'lessthanmin';
+                    } else if ($bounded < $finalgrade) {
+                        $errorstr = 'morethanmax';
+                    }
                 }
 
                 if ($errorstr) {
diff --git a/grade/report/grader/lib.php b/grade/report/grader/lib.php
index 2890159a44e72..067453cbdef23 100644
--- a/grade/report/grader/lib.php
+++ b/grade/report/grader/lib.php
@@ -256,7 +256,7 @@ public function process_data($data) {
                         } else {
                             $bounded = $gradeitem->bounded_grade($finalgrade);
                             if ($bounded > $finalgrade) {
-                            $errorstr = 'lessthanmin';
+                                $errorstr = 'lessthanmin';
                             } else if ($bounded < $finalgrade) {
                                 $errorstr = 'morethanmax';
                             }
diff --git a/grade/tests/reportgrader_test.php b/grade/tests/reportgrader_test.php
new file mode 100644
index 0000000000000..07be5e32f2b6e
--- /dev/null
+++ b/grade/tests/reportgrader_test.php
@@ -0,0 +1,116 @@
+<?php
+// This file is part of Moodle - http://moodle.org/
+//
+// Moodle is free software: you can redistribute it and/or modify
+// it under the terms of the GNU General Public License as published by
+// the Free Software Foundation, either version 3 of the License, or
+// (at your option) any later version.
+//
+// Moodle is distributed in the hope that it will be useful,
+// but WITHOUT ANY WARRANTY; without even the implied warranty of
+// MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE.  See the
+// GNU General Public License for more details.
+//
+// You should have received a copy of the GNU General Public License
+// along with Moodle.  If not, see <http://www.gnu.org/licenses/>.
+
+/**
+ * Unit tests for grade/report/user/lib.php.
+ *
+ * @package  core_grade
+ * @category phpunit
+ * @copyright 2012 Andrew Davis
+ * @license  http://www.gnu.org/copyleft/gpl.html GNU Public License
+ */
+
+defined('MOODLE_INTERNAL') || die();
+
+global $CFG;
+require_once($CFG->dirroot.'/grade/lib.php');
+require_once($CFG->dirroot.'/grade/report/grader/lib.php');
+
+/**
+ * Tests grade_report_grader (the grader report)
+ */
+class grade_report_graderlib_testcase extends advanced_testcase {
+
+    /**
+     * Tests grade_report_grader::process_data()
+     *
+     * process_data() processes submitted grade and feedback data
+     */
+    public function test_process_data() {
+        global $DB, $CFG;
+
+        $this->resetAfterTest(true);
+
+        $course = $this->getDataGenerator()->create_course();
+        $coursecontext = context_course::instance($course->id);
+
+        // Create and enrol a student.
+        $student = $this->getDataGenerator()->create_user(array('username' => 'Student Sam'));
+        $role = $DB->get_record('role', array('shortname' => 'student'), '*', MUST_EXIST);
+        $this->getDataGenerator()->enrol_user($student->id, $course->id, $role->id);
+
+        // Test with limited grades.
+        $CFG->unlimitedgrades = 0;
+
+        $forummax = 80;
+        $forum1 = $this->getDataGenerator()->create_module('forum', array('assessed' => 1, 'scale' => $forummax, 'course' => $course->id));
+        // Switch the stdClass instance for a grade item instance.
+        $forum1 = grade_item::fetch(array('itemtype' => 'mod', 'itemmodule' => 'forum', 'iteminstance' => $forum1->id, 'courseid' => $course->id));
+
+        $report = $this->create_report($course, $coursecontext);
+        $testgrade = 60.00;
+
+        $data = new stdClass();
+        $data->id = $course->id;
+        $data->report = 'grader';
+
+        $data->grade = array();
+        $data->grade[$student->id] = array();
+        $data->grade[$student->id][$forum1->id] = $testgrade;
+
+        $warnings = $report->process_data($data);
+        $this->assertEquals(count($warnings), 0);
+
+        $studentgrade = grade_grade::fetch(array('itemid' => $forum1->id, '' => $student->id));
+        $this->assertEquals($studentgrade->finalgrade, $testgrade);
+
+        // Grade above max. Should be pulled down to max.
+        $toobig = 200.00;
+        $data->grade[$student->id][$forum1->id] = $toobig;
+        $warnings = $report->process_data($data);
+        $this->assertEquals(count($warnings), 1);
+
+        $studentgrade = grade_grade::fetch(array('itemid' => $forum1->id, '' => $student->id));
+        $this->assertEquals($studentgrade->finalgrade, $forummax);
+
+        // Grade below min. Should be pulled up to min.
+        $toosmall = -10.00;
+        $data->grade[$student->id][$forum1->id] = $toosmall;
+        $warnings = $report->process_data($data);
+        $this->assertEquals(count($warnings), 1);
+
+        $studentgrade = grade_grade::fetch(array('itemid' => $forum1->id, '' => $student->id));
+        $this->assertEquals($studentgrade->finalgrade, 0);
+
+        // Test unlimited grades so we can give a student a grade about max.
+        $CFG->unlimitedgrades = 1;
+
+        $data->grade[$student->id][$forum1->id] = $toobig;
+        $warnings = $report->process_data($data);
+        $this->assertEquals(count($warnings), 0);
+
+        $studentgrade = grade_grade::fetch(array('itemid' => $forum1->id, '' => $student->id));
+        $this->assertEquals($studentgrade->finalgrade, $toobig);
+    }
+
+    private function create_report($course, $coursecontext) {
+
+        $gpr = new grade_plugin_return(array('type' => 'report', 'plugin'=>'grader', 'courseid' => $course->id));
+        $report = new grade_report_grader($course->id, $gpr, $coursecontext);
+
+        return $report;
+    }
+}