Chapter 8, Problem 2E

### Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

Chapter
Section

### Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
440 views

# Inventory Write-Down Stiles Corporation uses the FIFO cost flow assumption and is in the process of applying the LCNRV rule for each of two products in its ending inventory. A profit margin of 30% on the selling price is considered normal for each product. Specific data for each product are as follows:Inventory Write-Down Use the information in E8-1. Assume that Stiles uses the LIFO cost flow assumption and is applying the LCM rule.Required: 1. What is the correct inventory value for each product? 2. Next Level With regard to requirement 1, what effect does the imposition of the constraints on market value have on the inventory valuations?

1.

To determine

Calculate the correct inventory value for Product A and Product B.

Explanation

Lower-of-cost-or-market: The lower-of-cost-or-market (LCM) is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, either at current market value or at historical cost price of the inventory, whichever is less.

NRV (Net Realizable Value): It refers to an estimated selling price that a company expects to collect in the form of cash from the customers by the sale of inventory. The value is reduced by the expected cost of completion, disposal and transportation. Sales commission and shipping costs are also included in the predictable cost.

 Product Cost Replacement Cost NRV/Ceiling Floor ($) ($) ($) ($) A 80 70 118 73 B 96 98 90 54

Working notes:

Calculate the amount of NRV for product A.

NRV for product A = (Estimated selling priceEstimated cost of disposal)=($150$32)=$118 Calculate the amount of NRV for product B. NRV for product B = (Estimated selling priceEstimated cost of disposal)=($120$30)=$90

Calculate the amount of floor for product A

2.

To determine

Explain the effect of the imposition of the constraints on market value, on the valuation of inventory.

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