Question

Home furnishings reports inventory using the lower of cost and net realizable value (NRV). Below is information related to its year-end inventory.

 Required:

1. Calculate the total recorded cost of ending inventory before any adjustments. 

2. Calculate ending inventory using the lower of cost and net realizable value. 

3. Record any necessary adjustment to inventory. 

4. Explain the impact of the adjustment in the financial statements. 

Answer 1

1.

Inventory Quantity Unit Cost Furniture 200 Electronics 50 Total recorded cost of ending inventory before any adjustments $ 85 $ 400 Total Cost $ 17,000 $ 20,000 $ 37,000

2.

Total Cost Lower of cost and net Inventory Quantity realizable value Furniture 200 $ 85 Electronics 501 $ 300 Total ending inventory using the lower of cost and net realizable value $ 17,000 $ 15,000 $ 32,000

3.

Date Credit General Journal Cost of goods sold Inventory (37,000-32,000) Debit 5,000 5,000

4.

Increase in cost of goods sold decreases the net income on the income statement by $5,000, and decreases the retained earnings on the balance sheet by $5,000. Decrease in inventory decreases the asset on the balance sheet by $5,000.