Xiaomi Inc.\'s inventory had the following related values: *********************
ID: 2525991 • Letter: X
Question
Xiaomi Inc.'s inventory had the following related values:
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Cost--------------------------------$5,450
Replacement value--------------$5,400
Market ceiling----------------------$6,100
Market floor-------------------------$5,500
Through U.S. GAAP the inventory will be valued at?
_____________________________________________________
***make the adjusting journal entry
Dr.___________________________________
Cr.___________________________________
*************************************************************************************************************
Cost--------------------------------$5,800
Replacement value--------------$5,600
Market ceiling----------------------$6,100
Market floor-------------------------$5,500
Through U.S. GAAP the inventory will be valued at?
_____________________________________________________
***make the adjusting journal entry
Dr.___________________________________
Cr.___________________________________
Explanation / Answer
Answer
As per U.S. GAAP inventories are valued at cost or market, whichever is lower (LCM).
Here, market value = Current replacement value that is subject to :-
Upper limit (Ceiling) = Net Realizable Value (NRV)
Lower limit= Net Realizable Value (NRV) - Normal Profit Margin
Case
Cost
Market value
Inventory Value (Lower of Cost or market)
1
$ 5450
$ 5500
$ 5450
2
$5800
$5600
$ 5600
No entry required as recorded at cost.
Account Debit Credit
Allowance to reduce inventory to LCM 200
Loss on inventory write down 200
Total 200 200
Case
Cost
Market value
Inventory Value (Lower of Cost or market)
1
$ 5450
$ 5500
$ 5450
2
$5800
$5600
$ 5600
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