Principles of Business

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CHAPTER 9

Inventories: Additional Valuation Issues

SOLUTIONS TO PROBLEMS

| PROBLEM 9-1| |

Item| |

Cost| | Net Realizable Value*| | Lower-of-Cost-or-NRV|
A| | $470| | $ 450| | $450|
B| | 450| | 430| | 430|
C| | 830| | 640| | 640|
D| | 960| | 1,000| | 960|

*Net Realizable Value = 2011 catalog selling price less estimated costs to complete and sell. (2011 catalog prices are in effect as of 12/01/10.)

| PROBLEM 9-2| |

(a)1.The balance in the Allowance to Reduce Inventory to NRV at May 31, 2010, should be $15,200, as calculated in Exhibit 1 below.

| Cost| | NRV | | LCNRV|
Aluminum siding| $ 70,000| | $ 56,000| | $ 56,000| Cedar shake siding| 86,000| | 84,800| | 84,800| Louvered glass doors| 112,000| | 168,300| | 112,000| Thermal windows| 140,000| | 140,000| | 140,000| Totals| $408,000| | $449,100| | $392,800|

| |
Inventory cost| $408,000|
LCNRV valuation| 392,800|
Allowance at May 31, 2010| $ 15,200|

2.For the fiscal year ended May 31, 2010, the gain that would be recorded due to the change in the Allowance to Reduce Inventory to Net Realizable Value would be $12,300, as calculated below.

Balance prior to adjustment| $27,500|
Required balance| (15,200)|
Gain to be recorded| $(12,300)|

PROBLEM 9-2 (Continued)

(b)The use of the lower-of-cost-or-net realizable value (LCNRV) rule is based on both the expense recognition principle and the concept of conservatism. The expense recognition principle applies because the application of the LCNRV rule allows for the recognition of a decline in the utility (value) of inventory as a loss in the period in which the decline takes place.

The departure from the cost principle for inventory valuation is permitted on the basis of...
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