In: Accounting
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 |
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 ) |