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Inventory Valuation and Journal Entries

The document provides information about inventory valuation for four products (A, B, C, D) using the lower-of-cost-or-net realizable value approach. It also provides information about Dover Company's ending inventory costs and net realizable values for 2017 and 2018. Additionally, it provides information to calculate the estimated cost of inventory for Utley Co. for the month of May.

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47 views2 pages

Inventory Valuation and Journal Entries

The document provides information about inventory valuation for four products (A, B, C, D) using the lower-of-cost-or-net realizable value approach. It also provides information about Dover Company's ending inventory costs and net realizable values for 2017 and 2018. Additionally, it provides information to calculate the estimated cost of inventory for Utley Co. for the month of May.

Uploaded by

samia.ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Q1. Lower-of-cost-or-net realizable value.

The December 31, 2018 inventory of Gwynn Company consisted of four products, for which
certain information is provided below.
Estimated Expected Estimated
Product Original Cost Completion Cost Selling Price Cost to sell
A $25 $6 $40 $4
B $42 $12 $58 $8
C $120 $25 $150 $15
D $18 $3 $26 $2

Instructions

Using the lower-of-cost-or-net realizable value approach applied on an individual-item basis,


compute the inventory valuation that should be reported for each product on December 31,
2018.

Solution 9-145
Lower-of-
Net Real. Cost-or-
Product Value Cost NRV
A $30 $25 $25
B $38 $42 $38
C $110 $120 $110
D $21 $18 $18

Q2. Dover Company began operations in 2017 and determined its ending inventory at cost and
at a LCNRV at December 31, 2017, and December 31, 2018. This information is presented below.
Cost Net Realizable Value
12/31/17 £520,000 £485,000
12/31/18 615,000 585,000

Instructions
(a) Prepare the journal entries required at December 31, 2017, and December 31, 2018,
assuming that the inventory is recorded at LCNRV, using a perpetual inventory system
and the cost-of-goods-sold method.
(b) Prepare the journal entries required at December 31, 2017, and December 31, 2018,
assuming that the inventory is recorded at cost, using a perpetual system and the loss
method.
(c) Which of the two methods above provides the higher net income in each year?

Solution 9-147
(a) 12/31/15 Cost of Goods Sold………………………………… 35,000
Allowance to Reduce
Inventory to NRV…………………….. 35,000
12/31/16 Allowance to Reduce
Inventory to NRV…………………………….. 5,000
Costs of Goods Sold………………… 5,000
₤35,000 – (₤615,000 – ₤585,000)

(b) 12/31/15 Loss Due to Decline of


Inventory to NRV…………………………… 35,000
Allowance to Reduce
Inventory to NRV………….. 35,000

12/31/16 Allowance to Reduce


Inventory to NRV……………………………..5,000
Recovery of Inventory Loss………… 5,000

(c) Both methods provide the same net income.

Q3. Utley Co. prepares monthly income statements. Inventory is counted only at year end; thus,
month-end inventories must be estimated. All sales are made on account. The rate of mark-up
on cost is 20%. The following information relates to the month of May.

Accounts receivable, May 1 $21,000


Accounts receivable, May 31 27,000
Collections of accounts during May 90,000
Inventory, May 1 45,000
Purchases during May 58,000

Instructions
Calculate the estimated cost of the inventory on May 31.

Solution 9-152
Collections of accounts $ 90,000
Add accounts receivable, May 31 27,000
Deduct accounts receivable, May 1 (21,000)
Sales during May $ 96,000

Inventory, May 1 $ 45,000


Purchases during May 58,000
Goods available 103,000
Cost of sales ($96,000 ÷ 120%) (80,000)
Estimated cost of inventory, May 31 $ 23,000

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