
Concept explainers
1.
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.
1.

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.
Calculate the amount of NRV for product B.
Calculate the amount of NRV for product C.
Calculate the amount of NRV for product D.
Calculate the amount of NRV for product E.
Therefore, the book value of inventory at December 31, 2016 by using the rule of LCM and NRV is $31,450.
2.
The book value of inventory at December 31, 2016, assuming the LCNRV rule is applied for entire inventory.
2.

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).
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