Question

In: Accounting

Determine the unit value that should be used for inventory costing following "lower of cost or...

Determine the unit value that should be used for inventory costing following "lower of cost or market value" as described in ARB No. 43. A B C D E F Cost $2.35 $2.45 $2.35 $2.63 $2.47 $2.47 Replacement cost 1.95 2.55 1.95 2.61 2.37 2.49 Net realizable value 2.50 2.50 2.50 2.43 2.53 2.53 Net realizable value less normal profit 2.25 2.30 2.40 2.25 2.33 2.33 Case A $ Case B $ Case C $ Case D $ Case E $ Case F $

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Expert Solution

If at a point of time the carrying value of an inventory is more than its replacement cost, the inventory is written down. The written down value is equal to replacement cost if its not more than the net realizable value and not less than the net realizable value - normal profit. If its more than NRV, the cost is brought down to NRV and not replacement cost, and if it is below NRV - normal profit, the cost is brought down to NRV - normal profit.

Inventory type Cost Replacement Value Net realizable value Net realizable value- normal profit New carrying cost
A 2.35 1.95 2.5 2.25 2.25
B 2.45 2.55 2.5 2.3 2.45
C 2.35 1.95 2.5 2.4 2.35
D 2.63 2.61 2.43 2.25 2.43
E 2.47 2.37 2.53 2.33 2.37
F 2.47 2.49 2.53 2.33 2.47
(As the cost of C is below the replacement cost, but the replacement cost is also below the NRV - normal profit the new carrying nvalue should be NRV -normal profit, but as NRV - normal profit is above the cost, the inventory wont be written down)
Notes :
A
Cost > replacement cost so the inventory will be written down
replacement cost < NRV - normal profit so the new carrying value will be NRV - normal profit
B
Cost < replacement cost, no adjustment needed
C
Cost > replacement cost
replacement cost < NRV - normal profit
But as NRV-normal profit > cost, therefore no adjustment will be done
D Cost > replacement cost, replacement cost > NRV
therefor new carryuing value = NRV
E Cost > replacement cost , replacement cost < NRV
therefore new carrying value = replacement cost

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