Inventory Valuation Tutorial [PDF]

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Inventory Valuation E9-1 (LCNRV) The inventory of Oheto Company on December 31, 2017, consists of the following items. Part Quantity Cost Per Unit Net Realizable Value 110 600 $95 $100 111 1,000 60 52 112 500 80 76 113 200 170 180 120 400 205 208 121 1,600 16 1 122 300 240 235 Part no. 121 is obsolete and has a realizable value of $1 each as scrap. Instructions (a) Determine the inventory as of December 31, 2017, by the LCNRV method, applying this method to each item. (b) Determine the inventory by the LCRNV method, applying the method to the inventory as a whole. Solution Per Unit Part No. 110 111 112 113 120 121 122 Totals (a)



$335,100.



(b)



$341,300.



Quantity 600 1,000 500 200 400 1,600 300



Cost $ 95 60 80 170 205 16 240



NRV $100 52 76 180 208 1 235



Total Cost



Total NRV



Lower-ofCost-or-NRV



$ 57,000 60,000 40,000 34,000 82,000 25,600 72,000 $370,600



$ 60,000 52,000 38,000 36,000 83,200 1,600 70,500 $341,300



$ 57,000 52,000 38,000 34,000 82,000 1,600 70,500 $335,100



E9-6 (LCNRV-Error Effect) LaGreca Company uses the LCNRV method, on an individual item basis, in pricing its inventory items. The inventory at December 31, 2017, included product X. Relevant per-unit data for product X are as follows. Estimated selling price: $50 Cost: $40 Estimated selling costs: $14 Normal profit: $9 There were 1,000 units of product X on hand at December 31, 2017. Product X was incorrectly valued at $38 per unit for reporting purposes. All 1,000 units were sold in 2018. Instructions Compute the effect of this error on net income for 2017. Solution Net realizable value Cost Lower-of-cost-or-NRV $38 figure used – $36 correct value per unit = $2 per unit. $2 X 1,000 units = $2,000. Therefore, net income for 2017 was overstated by $2,000.



$50 – $14 = $36 $40 $36



P9-5 (Lower of Cost or Market) Fiedler Co. follows the practice of valuing its inventory at the lower of cost or market. The following information is available for December 31, 2017. Item Quantity Unit Cost Replacemen Estimated Completio Normal t Cost/unit Selling n Cost/unit Profit Price/unit Margin/unit A 1,100 $7.50 $8.40 $10.50 $1.50 $1.80 B 800 8.20 7.90 9.40 0.90 1.20 C 1,000 5.60 5.40 7.20 1.15 0.60 D 1,000 3.80 4.20 6.30 0.80 1.50 E 1,400 6.40 6.30 6.70 0.70 1.00 Instructions (a) Calculate the lower of cost or market using the individual item approach. (b) Show the journal entry he will need to make in order to write down the ending inventory. Solution (a)



Item A B C D E



Schedule A



On Hand Quantity 1,100 800 1,000 1,000 1,400



Replacement Cost/Unit $8.40 7.90 5.40 4.20 6.30



NRV (Ceiling) $9.00 8.50 6.05 5.50 6.00



NRV— Normal Profit (Floor) $7.20 7.30 5.45 4.00 5.00



Designated Market $8.40 7.90 5.45 4.20 6.00



Cost $7.50 8.20 5.60 3.80 6.40



Lower-ofCost-orMarket $7.50 7.90 5.45 3.80 6.00



*$10.50-$1.50 Schedule B Item A B C D E



Cost 1,100 X $7.50 = $8,250 800 X $8.20 = $6,560 1,000 X $5.60 = $5,600 1,000 X $3.80 = $3,800 1,400 X $6.40 = $8,960



Lower-of-Cost-or-Market 1,100 X $7.50 = $8,250 800 X $7.90 = $6,320 1,000 X $5.45 = $5,450 1,000 X $3.80 = $3,800 1,400 X $6.00 = $8,400



Difference None $240 $150 None $560 $950



(b)



Cost of Goods Sold.................................................................................................... 950 Inventory.........................................................................................................



950



or Loss Due to Market Decline of Inventory................................................................ 950 Inventory......................................................................................................... Exercise On March 31, 2018, Club Go Co. had 85,000 units of a product at $14 per unit in inventory based on FIFO. This product is not selling well and so shortly before year-end, management decided to cut the selling price from $13 per unit to $8 per unit. A sales commission of 5% of the selling price is usually paid to the sales-force of the company. The company is unsure how to value the inventory. Solution Cost = 85,000 X 14 = $1,190,000 NRV = (85,000 X 8) – (85,000 X 8 X 0.05) = $646,000 LCNRV adjustment = $544,000 Cost of Goods Sold…………. 544,000 Inventory…………………….. 544,000



950