Chapter 9, Problem 9.1P

1.

To determine

LCM (Lower of Cost or Market) approach: It is an approach that values the inventory at historical cost or lesser than the market replacement cost. The replacement cost refers to the amount that could be realized from the sale of the inventory.

NRV (Net Realizable Value): It refers to an estimated selling price that a company expects to collect in the form of cash from the customers by the sale of inventory. The value is reduced by the expected cost of completion, disposal and transportation. Sales commission and shipping costs also included in the predictable cost.

To Calculate: The book value of inventory at December 31, 2016 by using the rule of LCM and NRV.

Explanation of Solution

The following table shows the book value of inventory at December 31, 2016 by using the rule of LCM and NRV.

Lower of Cost or NRV
Product	Units	Unit Cost ($)	Cost ($)	NRV ($)	Inventory value ($)
	(A)	(B)	(A) × (B)
A	1,000	10	10,000	13,600 (1)	10,000
B	800	15	12,000	12,240 (2)	12,000
C	600	3	1,800	4,080 (3)	1,800
D	200	7	1,400	1,020 (4)	1,020
E	600	14	8,400	6,630 (5)	6,630
Total			33,600	37,570	31,450

Table (1)

Working Notes:

Calculate the amount of NRV for product A.

$\begin{array}{c}\text{NRV for product A = }\left[\begin{array}{l}\left\{\begin{array}{l}\text{Selling price}-\\ \left(\begin{array}{l}\text{Cost to sell at 15\%}\\ \times \text{Selling price}\end{array}\right)\end{array}\right\}\\ \times \text{Units}\end{array}\right]\\ \text{= }\left[\begin{array}{l}\left\{\$16\left(\text{15\%}\times \$16\right)\right\}\\ \times \text{1,000}\end{array}\right]\\ =\$13.6\times \text{1,000}\\ =\$13,600\end{array}$ (1)

Calculate the amount of NRV for product B.

$\begin{array}{c}\text{NRV for product B = }\left[\begin{array}{l}\left\{\begin{array}{l}\text{Selling price}-\\ \left(\begin{array}{l}\text{Cost to sell at 15\%}\\ \times \text{Selling price}\end{array}\right)\end{array}\right\}\\ \times \text{Units}\end{array}\right]\\ \text{= }\left[\begin{array}{l}\left\{\$18\left(\text{15\%}\times \$18\right)\right\}\\ \times \text{800}\end{array}\right]\\ =\$15.3\times \text{800}\\ =\$12,240\end{array}$ (2)

Calculate the amount of NRV for product C.

$\begin{array}{c}\text{NRV for product C = }\left[\begin{array}{l}\left\{\begin{array}{l}\text{Selling price}-\\ \left(\begin{array}{l}\text{Cost to sell at 15\%}\\ \times \text{Selling price}\end{array}\right)\end{array}\right\}\\ \times \text{Units}\end{array}\right]\\ \text{= }\left[\begin{array}{l}\left\{\$8\left(\text{15\%}\times \$8\right)\right\}\\ \times 6\text{00}\end{array}\right]\\ =\left[\begin{array}{l}\left\{\$8-\$1.2\right\}\\ \times 6\text{00}\end{array}\right]\\ =\$6.8\times 6\text{00}\\ =\$4,080\end{array}$ (3)

Calculate the amount of NRV for product D.

$\begin{array}{c}\text{NRV for product D = }\left[\begin{array}{l}\left\{\begin{array}{l}\text{Selling price}-\\ \left(\begin{array}{l}\text{Cost to sell at 15\%}\\ \times \text{Selling price}\end{array}\right)\end{array}\right\}\\ \times \text{Units}\end{array}\right]\\ \text{= }\left[\begin{array}{l}\left\{\$6\left(\text{15\%}\times \$6\right)\right\}\\ \times 2\text{00}\end{array}\right]\\ =\left[\begin{array}{l}\left\{\$6-\$0.9\right\}\\ \times 2\text{00}\end{array}\right]\\ =\$5.1\times 2\text{00}\\ =\$1,020\end{array}$ (4)

Calculate the amount of NRV for product E.

$\begin{array}{c}\text{NRV for product E = }\left[\begin{array}{l}\left\{\begin{array}{l}\text{Selling price}-\\ \left(\begin{array}{l}\text{Cost to sell at 15\%}\\ \times \text{Selling price}\end{array}\right)\end{array}\right\}\\ \times \text{Units}\end{array}\right]\\ \text{= }\left[\begin{array}{l}\left\{\$13\left(\text{15\%}\times \$13\right)\right\}\\ \times 6\text{00}\end{array}\right]\\ =\left[\begin{array}{l}\left\{\$13-\$1.95\right\}\\ \times 6\text{00}\end{array}\right]\\ =\$11.05\times 6\text{00}\\ =\$6,630\end{array}$ (5)

Conclusion

Therefore, the book value of inventory at December 31, 2016 by using the rule of LCM and NRV is $31,450.

2.

To determine

The book value of inventory at December 31, 2016, assuming the LCNRV rule is applied for entire inventory.

Explanation of Solution

The total aggregate inventory cost and aggregate inventory net realizable value is $33,600 and $31,450 respectively. Therefore, the book value of inventory at December 31, 2016, using the LCNRV rule applied for entire inventory is $31,450. There is loss from inventory write-down of $2,150 ($33,600 - $31,450).