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Chapter 9: Q1CA. (page 489)

You have been asked by the financial vice president to develop a short presentation on the LCNRV method for inventory purposes. The financial VP needs to explain this method to the president because it appears that a portion of the company鈥檚 inventory has declined in value. Instructions The financial vice president asks you to answer the following questions. (a) What is the purpose of the LCNRV method? (b) What is meant by 鈥渘et realizable value鈥�? (c) Do you apply the LCNRV method to each individual item, to a category, or to the total of the inventory? Explain. (d) What are the potential disadvantages of the LCNRV method?

Short Answer

Expert verified
  1. The LCNRV method is used to report the inventory at a net realizable value to record the loss resulting from a decline in inventory.
  2. Net realizable value is the estimated amount that the business will be able to generate by selling the inventory.
  3. The LCNRV method is applied on an individual basis, category basis, and total inventory basis.
  4. The disadvantages include the override cost principle; the loss related to declining is recorded in the year of loss.

Step by step solution

01

Purpose of LCNRV method

a. Lower-of-cost-or-net- realizable-value (LCNRV) is used to report the inventory at the lowest net realizable value or original cost of the asset. In case the future utility of the inventory reduces due to obsoleteness, deterioration, change in price levels, etc., the inventories are recorded at net realizable value, and loss is recorded for the decline in the inventory.

02

Definition of net realizable value

b. Net reliable value (NRV) is compared with the original cost to measure the inventory per LCNRV. Net realizable is estimated by subtracting the cost of completion, disposal, and transportation from the selling price of the product.

03

Application of LCNRV

c. On an individual basis, the LCNRV approach is applied based on each item produced by the business. Under major categories basis, LCNRV is applied to the major categories of inventories produced by the business. Under the total inventory method, the original cost of total inventory is compared with the NRV of total inventory to apply LCNRV.

04

Disadvantages of LCNRV

d. The disadvantages of LCNRV are as follows:

  • Under the LCNRV method, inventories are reported at lower-of-cost-or-net-realizable-value, which is incorrect as per the cost principle, wherein inventory must be reported at the original cost.
  • The loss related to a decline in inventory value is recorded in the year of reduction, not in the year of sale of inventory.

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Most popular questions from this chapter

Question:Refer to the data in IFRS9-8 for Keyser鈥檚 Fleece Inc. Prepare the journal entries for (a) the wool harvested in the first six months of 2017, and (b) the wool harvested that is sold for $10,500 in July 2017.

Boyne Inc. had beginning inventory of \(12,000 at cost and \)20,000 at retail. Net purchases were \(120,000 at cost and \)170,000 at retail. Net markups were \(10,000, net markdowns were \)7,000, and sales revenue was $147,000. Compute ending inventory at cost using the conventional retail method

Fiedler Co. follows the practice of valuing its inventory at the lower-ofcost-or-market. The following information is available from the company鈥檚 inventory records as of December 31, 2017. Item Quantity Unit Cost Replacement Cost/Unit Estimated Selling Price/Unit Completion & Disposal Cost/Unit Normal Profit Margin/Unit A 1,100 \(7.50 \)8.40 \(10.50 \)1.50 $1.80 B 800 8.20 7.90 9.40 0.90 1.20 C 1,000 5.60 5.40 7.20 1.15 0.60 D 1,000 3.80 4.20 6.30 0.80 1.50 E 1,400 6.40 6.30 6.70 0.70 1.00Instructions Greg Forda is an accounting clerk in the accounting department of Fiedler Co., and he cannot understand why the market value keeps changing from replacement cost to net realizable value to something that he cannot even figure out. Greg is very confused, and he is the one who records inventory purchases and calculates ending inventory. You are the manager of the department and an accountant. (a) Calculate the lower-of-cost-or-market using the individual-item approach. (b) Show the journal entry he will need to make in order to write down the ending inventory from cost to market. (c) Write a memo to Greg explaining what designated market value is as well as how it is computed. Use your calculations to aid in your explanation

Riegel Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2017, consists of products D, E, F, G, H, and I. Relevant per unit data for these products appear below. Item DE F GH I Estimated selling price \(120 \)110 \(95 \)90 \(110 \)90 Cost 75 80 80 80 50 36 Cost to complete 30 30 25 35 30 30 Selling costs 10 18 10 20 10 20 Instructions Using the LCNRV rule, determine the proper unit value for balance sheet reporting purposes at December 31, 2017, for each of the inventory items above.

What modifications to the conventional retail method are necessary to approximate a LIFO retail flow?
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