Question

Century Inc. had three types of items in inventory, A, B, and C. Data pertaining to these items are given below:

                                                                     A                               B                C____               

Cost                                                     $28,400                    $35,000           $32,000

Replacement Cost                               29,000                 32,500             30,000

Selling Price                                          30,000                 40,000             50,000

Cost to complete and Sell                        4,000                   6,000               8,000

Normal Profit Margin as sale %              15%                     20%                  15%

Required:

1.         Calculate the value of inventory under lower of cost or NRV applied to individual items.

Answer 1

Answer : valuation of inventory

Particulars	A	B	C
Cost (A)	$35,000	$32,000	$28,400
Selling price (B)	$40,000	$50,000	$30,000
Estimated cost to complete and sell (C)	$6,000	$8,000	$4,000
NRV (B -C)	$34,000	$42,000	$26,000
Cost or NRV (which ever is lower)	$34,000	$32,000	$26,000

Explanation :

Valuation of Inventories :
Inventories should be valued at lower of cost and net realizable value. Following are the steps for valuation of inventories:

A. Determine the cost of inventories

B. Determine the net realizable value of inventories

C. On Comparison between the cost and net realizable value, the lower of the two is considered as the value of inventory. A comparison can be made the item by item or by the group of items.

In detail : A. Cost of inventories

The cost of inventories includes the following

i) Purchase cost

ii) Conversion cost

iii) Other costs which are incurred in bringing the inventories to their present location and condition.

In detail : B.

Net Realisable Value (NRV):

Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

NRV = selling price - estimated cost of completion and sell

Therefore,

Particulars	A	B	C
Cost (A)	$35,000	$32,000	$28,400
Selling price (B)	$40,000	$50,000	$30,000
Estimated cost to complete and sell (C)	$6,000	$8,000	$4,000
NRV {D = (B -C)}	$34,000	$42,000	$26,000
Cost (A) or NRV (D) (which ever is lower)	$34,000	$32,000	$26,000