Question

AP7-10B  

(Lower of cost and net realizable value)

T2T Hockey Inc. has the largest selection of hockey equipment of any retailer in the city in which it operates. T2T reported the following cost and net realizable value information for inventory at December 31:

Item	(Units)	(Unit Cost)	(Unit NRV)
Hockey sticks:
Bauer	23	$​95	$200
CCM	13	$200	$150
Warrior	57	$250	$250
Helmets:
Adidas	11	$190	$125
Nike	10	$175	$175
Mission	25	$75	$200

Required

a.  

Calculate the ending inventory balance for hockey sticks and helmets using the lower of cost and net realizable value for each item.

b.  

Calculate the ending inventory balance for hockey sticks and helmets using the historical unit costs provided.

c.  

Compare the difference in the ending inventory amounts. Which amount provides a more faithful representation of the inventory value? Explain.

Answer 1

Solution:  

a.

Item	Units	lower of cost or NRV	Amount
Hockey sticks
Bauer	23	$95	$2,185
CCM	13	$150	$1,950
Warrior	57	$250	$14,250
		ending inventory balance	$18,385

Item	Units	lower of cost or NRV	Amount
Helmets
Addidas	11	$125	$1,375
nike	10	$175	$1,750
Mission	25	$75	$1,875
		ending inventory balance	$5,000

b.

Item	Units	Historical unit cost	Amount
Hockey sticks
Bauer	23	$95	$2,185
CCM	13	$200	$2,600
Warrior	57	$250	$14,250
		ending inventory balance	$19,035

Item	Units	Historical unit cost	Amount
Helmets
Addidas	11	$190	$2,090
nike	10	$175	$1,750
Mission	25	$75	$1,875
		ending inventory balance	$5,715

c.

Item	lower of cost & NRV	historical unit costs	Difference
Hockey sticks	$18,385	$19,035	$650
Helmets	$5,000	$5,715	$715

lower of cost and net realizable value method provides a more faithful representation of the inventory value because it reflects the true value of the inventory for selling in the market.