Question

In: Accounting

SLR Corporation has 2,600 units of each of its two products in its year-end inventory. Per...

SLR Corporation has 2,600 units of each of its two products in its year-end inventory. Per unit data for each of the products are as follows:

Product 1 Product 2
Cost $ 82 $ 50
Selling price 150 52
Costs to sell 12 3


Determine the carrying value of SLR’s inventory assuming that the lower of cost or net realizable value (LCNRV) rule is applied to individual products. What is the before-tax income effect of the LCNRV adjustment?

Determine the carrying value of SLR’s inventory assuming that the lower of cost or net realizable value (LCNRV) rule is applied to individual products

Product Cost NRV

Per Unit Inventory Value

Unit Cost Lower of Cost or NRV
1 2,600
2 2,600
               Cost $
                              Inventory value $

What is the before-tax income effect of the LCNRV adjustment?

Before tax income effect                                    


  

Solutions

Expert Solution

Solution :

The inventory must be writtern down to market subsequent to acquisition if its utility is no longer as great as its cost. the difference shoule be recognised as a loss in the current period.

The lower of cost to market rule is applicable to goods that would be sold in the ordinary course of business.

Market is the current cost to replace inventory . Market should not exceed a ceiling equal to net realizable value (NRV). NRV is the estimated selling price minues costs of disposal/other costs to sell.

Hence, the below tabel shows the calculations :

Product Cost NRV Per unit inventory Value Unit Total Cost lower of cost or NRV
1 82 138 82         2,600              213,200                               213,200
2 50 49 49         2,600              130,000                               127,400
Total Cost              343,200                               340,600
Inventory Value                               340,600
Before tax income effect                                 (2,600)
( the cost of prodcut 2 was reduced from 50 to 49 thereby causing reduction
of income to the tune of 2,600 )

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