Question

Question 3

Wolfe Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2020, consists of products D, E, F, G, H, and I. Relevant per-unit data for these products appear below.

	Item	Item	Item	Item	Item	Item
	D	E	F	G	H	I
Estimated selling price	$240	$220	$190	$180	$220	$180
Cost	150	160	160	160	100	72
Replacement cost	240	144	140	60	140	60
Estimated selling expense	60	60	60	50	60	60
Normal profit	40	40	40	40	40	40

Instructions

Using the LCNRV rule, determine the proper unit value for balance sheet reporting purposes at December 31, 2020, for each of the inventory items above.

(LCNRV—Valuation Account) Presented below is information related to Webby Inc.

	Jan. 31	Feb. 28	Mar. 31	Apr. 30
Inventory at cost	$21,500	$23,000	$19,010	$24,000
Inventory at the LCNRV	20,000	20,500	16,500	23,100
Purchases for the month		49,000	43,000	51,000
Sales for the month		71,000	76,000	67,000

Instructions

1. From the information, prepare (as far as the data permit) monthly income statements in columnar form for February, March,andApril.Theinventoryistobeshowninthestatementatcost,thegainorlossduetomarketfluctuationsistobe shown separately(using a valuationaccount).
2. Prepare the journal entry required to establish the valuation account at January 31 and entries to adjust it monthly thereafter.

Answer 1

	Part 1
		Item	Item	Item	Item	Item	Item
		D	E	F	G	H	I
	Estimated selling price	240	220	190	180	220	180
Less:	Estimated selling expense	60	60	60	50	60	60
A	Net realizable value	180	160	130	130	160	120
B	Cost	150	160	160	160	100	72
	Applying the LCNRV Rule Lower of A or B	$      150	$      160	$      130	$      130	$      100	$        72
	The following data points are not relevant for LCNRV. They are relevant for lower of cost of market
	Replacement cost	240	144	140	60	140	60
	Normal profit	40	40	40	40	40	40

Part 2
Amount in $	Jan. 31	Feb. 28	Mar. 31	Apr. 30
Sales for the month	N/A	71,000	76,000	67,000
Opening inventory	N/A	(20,000)	(20,500)	(16,500)
Purchases for the month	N/A	(49,000)	(43,000)	(51,000)
Inventory at cost	21,500	23,000	19,010	24,000
Valuation account	(1,500)	(2,500)	(2,510)	(900)
Monthly income	N/A	$     22,500	$      29,000	$    22,600

Date	Particulars	Dr/Cr	Debit	Credit
Jan. 31	Loss due to decline in NRV	Dr	1,500
	Allowance due to decline to NRV	Cr		1,500
Feb. 28	Loss due to decline in NRV	Dr	1,000
	Allowance due to decline to NRV	Cr		1,000
Mar. 31	Loss due to decline in NRV	Dr	10
	Allowance due to decline to NRV	Cr		10
Apr. 30	Allowance due to decline to NRV	Dr	1,610
	Recovery of loss due to decline in NRV	Cr		1,610

Date	Inventory at cost	Inventory at the LCNRV	Amount required in allowance account	Allowance account before adjustment	Adjustment of allowance account balance	Effect on net income
Jan. 31	21,500	20,000	1,500	-	1,500	Increase	Loss
Feb. 28	23,000	20,500	2,500	1,500	1,000	Increase	Loss
Mar. 31	19,010	16,500	2,510	2,500	10	Increase	Loss
Apr. 30	24,000	23,100	900	2,510	(1,610)	Decrease	Gain