In: Accounting
Bingley Company reports the following for year-end (Dec 31st) 2019:
Inventory $6,100 at cost and $5,100 at market
The following is information relating to the inventory as of December 31st, 2020:
Item | Orig. Cost per Unit | Replacement Cost | Net Realizable Value | NRV less Profit | Inventory Value per unit |
A | $0.65 | $0.45 | $0.90 | $0.60 | |
B | $0.45 | $0.40 | $0.90 | $0.60 | |
C | $0.70 | $0.75 | $0.90 | $0.60 | |
D | $0.75 | $0.65 | $0.90 | $0.60 | |
E | $0.90 | $0.85 | $0.90 | $0.60 |
The selling price of all items is $1.00. Disposal costs amount to 10% of selling price and profit is 30% of selling price. There are 1,500 units of each of the six items in the 2020 year-end inventory.
Complete the last column of the table using lower of cost or market rules
According to ARB 43, Inventory is to be valued at the lower of Cost or Market .
Here are the steps to valuing inventory at the lower of cost or
market:
1. First, determine the purchase cost of inventory.
2. Second, determine the replacement cost of inventory. It is the
same as the market value of inventory.
3. Compare replacement cost to net realizable value and net
realizable value minus a normal profit margin. If:
Replacement cost > net realizable value, use net realizable
value for replacement cost.
Replacement cost < net realizable value minus a normal profit
margin, use net realizable value minus a profit margin for
replacement cost.
Net realizable value minus a normal profit margin < replacement
cost < net realizable value, use replacement cost.
4. Compare the cost of inventory to replacement cost. Lastly,
if:
Cost of inventory < replacement cost, a write-down is not
necessary.
Cost of inventory > replacement cost, write-down inventory to
replacement cost.
Here I attach the statement showing Inventory value per unit relating to inventory as of December 31st 2020
Statement showing innentry as of Inventory value per unit selating to December 31st 2020. COS7 N PER TORY UNIT | REPLACEMENT NET REALIZABLE NR V len COST VALUE Profit CNRU) (NRV-P) Innestory value] per unit (IV) I e Lower c ester Market value CRC) $0.65 $0.60 A $0.65 $0.45 $0.90 I $0.60 Lower of cost Market value IRC KNRU-P $0.60 ..IV = $0.60 Market value = NRU-P B $0-45 $0.40 I $0.90 $0.60 /Lower of Cost - $0.45 RC NRU-P Market value $0.60 Market value = NRV-P $0.60 ..IV = $0.45 c $0.70 $0.95 I $0.90 $0.60 Lower of Cost to. To NRU-PK RC <NRV Market valu $0.75 Market value RC $0.75 IV $0.70 D $0.75 $ 0.65 I $0.90 $0.60 Lower of Cost $0.75 NRV-PK RCTNRV Market value $0.65 Market value - RC $0.65 1.IV $0.65 $0.90 $0.85 $0.90 $0.60 Lower of Cost=10.90 NRU-P < RC <NRV Market value = $0.85 Market = RC = $0.85 .. I $0.85