Item Quantity Unit Cost Replacement Cost/Unit Estimated Selling Price/Unit Compl
ID: 2406660 • Letter: I
Question
Item
Quantity
Unit Cost
Replacement
Cost/Unit
Estimated Selling
Price/Unit
Completion & Disposal
Cost/Unit
Normal Profit
Margin/Unit
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Lower-of-Cost-or-Market
(Per unit basis)
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Show List of Accounts
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Account Titles and Explanation
Debit
Credit
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Vaughn Co. follows the practice of valuing its inventory at the lower-of-cost-or-market. The following information is available from the company’s 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
Greg Forda is an accounting clerk in the accounting department of Vaughn 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.
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Explanation / Answer
Inventory is valued at cost or market value whichever is lower. Market value is usually the replacement cost. However this market value cannot be greater than the ceiling or less than the floor.
Ceiling (also called upper limit) = Net realizable value (NRV) of inventory. NRV is equal to estimated selling price less estimated costs of completion and disposal.
Floor (also called lower limit) = Net realizable value less normal profit margin on the inventory.
Journal entry to write down inventory from cost to market :
We can also enter single journal entry consolidately for all items.
Item Unit cost ($) Replacement cost/unit ($) Net Realisable value ($) NRV - Normal profit margin Market value Lower of cost Or Market value Quantity (units) Final inventory value ($) A 9.08 10.16 10.89 8.71 10.16 9.08 1700 15436 B 9.92 9.56 10.28 8.83 9.56 9.56 1400 13384 C 6.78 6.53 7.32 6.59 6.59 6.59 1600 10544 D 4.6 5.08 6.65 4.83 5.08 4.6 1600 7360 E 7.74 7.62 7.26 6.05 7.26 7.26 2000 14520 61244Related Questions
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