Question

H.T. Tan Company is preparing the annual financial statements dated December 31 of the current year. Ending inventory information about the five major items stocked for regular sale follows:
Item Quantity on hand Unit Cost when acquired(FIFO) Net Realizable value (market) at year end
A 50 $15 $12
B 80 30 40
C 10 48 52
D 70 25 30
E 350 10 5

Required:
Compute the valuation that should be used for the current year ending inventory using lower of cost or net realizable value applied on an item-by-item basis.

Answer 1

Answer:

H.T. Tan Company

Computation of the Ending Inventory, using lower of cost or net realizable value:

Item     Quantity   (FIFO cost)    Net Realizable Value     Valuation

A            50               $15                   $12                           $600 ($12 x 50)

B            80                30                     40                        $2,400 ($30 x 80)

C            10                48                     52                            $480 ($48 x 10)

D           70                25                     30                          $1,750 ($25 x 70)

E         350                10                        5                         $1,750 ($5 x 350)

Total   560                                                                     $6,980

Explanation:

Conservatism principle requires that in valuing inventory, an entity should choose a method that does not overstate the inventory value.  The LCNRV method meets this requirement.  The method takes the lower of the historical cost of the goods and the market price to determine the value of inventory.