Problem 3: LCNRV and LCM The accountant of Sun Shine Ltd. compiled the following

Question

Problem 3: LCNRV and LCM The accountant of Sun Shine Ltd. compiled the following information about its inventories on December 31, 2017, The selling cost is 12% of the selling price. The normal profit margin is 20% of the selling price Selling Price Replacement Cost Cost $160,000 $200,000 $160,000 $180,500 Beauty Products A Beauty Products B Personal Care Products A $168,000 $189,000 Personal Care Products b $135,000 $165,000 Baby, Kids, and Toys $180,000 $120,000 $163,000 $145,000 $126,000 $114,000 $125,000 Required Part 1. Determine the amount of inventory to be reported on the 12/31/2017 balance sheet when the lower of cost or NRV rule is applied (1) by individual line of products, (2) by major category of products (l.e., beauty products, persona care products, and baby/kids products) (3) by entire inventory. Part 2. Prepare the adjusting entry when the lower of cost or NRV rule is applied by individual line of products. Part 3. Determine the amount of inventory to be reported on the 12/31/2017 balance sheet when the lower of cost or market rule is applied (1) by individual line of products, (2) by entire inventory

Explanation / Answer

Answer - Part 1 - 1 By Products Cost   Selling Price NRV Inventory Value A B C = B - (B X 12%) Beauty Products A          160,000                 200,000          176,000          160,000 Beauty Products B          160,000                 180,500          158,840          158,840 Personal Care Products A          168,000                 189,000          166,320          166,320 Personal Care Products B          135,000                 165,000          145,200          135,000 Baby, Kids and Toys          114,000                 125,000          110,000          110,000 Total Inventory Value          737,000                 859,500          756,360          730,160 Answer - Part 1 - 2 By Category Cost   Selling Price NRV Inventory Value Beauty Products          320,000                 380,500          334,840          320,000 Personal Care Products          303,000                 354,000          311,520          303,000 Baby, Kids and Toys          114,000                 125,000          110,000          110,000 Total Inventory Value          733,000 Answer - Part 1 - 3. Cost   Selling Price NRV Inventory Value By Entire Inventory          737,000                 859,500          756,360          737,000 Answer - Part 2. Cost Before adjustment          737,000 Lower of Cost or NRV          730,160 Difference              6,840 Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1 Cost of Goods Sold / Loss on Inventory   Dr.              6,840 To Inventory / Inventory Allowance          6,840 Answer - Part 3 - 1 By Products Cost   Replacement Cost Inventory Value Beauty Products A          160,000                 180,000          160,000 Beauty Products B          160,000                 120,000          120,000 Personal Care Products A          168,000                 163,000          163,000 Personal Care Products B          135,000                 145,000          135,000 Baby, Kids and Toys          114,000                 126,000          114,000 Total Inventory Value          737,000                 734,000          692,000 Answer - Part 3 - 2 Cost   Replacement Cost Inventory Value By Entire Inventory          737,000                 734,000          734,000

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