Question

During 2020, Monty Furniture Limited purchased a railway carload of wicker chairs. The manufacturer of the chairs sold them to Monty for a lump sum of $58,600, because it was discontinuing manufacturing operations and wanted to dispose of its entire stock. Three types of chairs are included in the carload. The three types and the estimated selling price for each are as follows:

Type		No. of Chairs			Estimated Selling Price per Chair
Lounge chairs		470			$93
Straight chairs		640			53
Armchairs		370			83

Monty estimates that the costs to sell this inventory would be $4 per chair. During 2020, Monty sells 390 lounge chairs, 270 armchairs, and 150 straight chairs, all at the same prices as estimated. At December 31, 2020, the remaining chairs were put on sale: the lounge chairs at 25% off the regular price, the armchairs at 30% off, and the straight chairs at 40% off. All were expected to be sold at these prices.

A) What is the total cost of the chairs remaining in inventory at the end of 2020, using the relative sales value method?

B) What is the net realizable value of the chairs remaining in inventory?

C) What is the appropriate inventory value to be reported on the December 31, 2020 statement of financial position, assuming the lower of cost and NRV is applied on an individual item basis?

Answer 1

A) What is the total cost of the chairs remaining in inventory at the end of 2020, using the relative sales value method?

Answer:

Total Costs

22,545.40

Calculation:

(Amounts and percentages are rounded)

The formulas are given along with the table headings.

Type	Number of Units (a)	Selling Price (b)	Total (c) = (a) * (b)	% (d)	Allocation (e)= 58,600 * (d)	Each (f) =(e)/(a)	Ending Inventory (g)	Cost of Inventory (f) * (g)
Lounge	470	93	43,710	40.3%	23,616	50.25	80	4,020.00
Straight	640	53	33,920	31.3%	18,342	28.66	490	14,043.40
Arm	370	83	30,710	28.3%	16,584	44.82	100	4,482.00
			108,340					22,545.40

% calculation:

Type Total/Overall Total =

Lounge = 43,710/108,340 = 40.3%

Straight = 33,920/108,340 = 31.3%

Arm = 30,710/108,340 = 28.3%

Ending Inventory :

Lounge = 470 - 390 = 80

Straight = 640 - 150 = 490

Arm = 370 - 270 = 100

B) What is the net realizable value of the chairs remaining in inventory?

Answer:

Net Realizable Value

24,292

Calculation:
(Amounts and percentages are rounded)

Type	Selling Price (a)	Discount (b)	New Price (c)= (a)-(a)*(b)	Less Selling Cost (d)	Each (e)=(c)-(d)	Ending Inventory (f)	Net Realizable Inventory (e) *(f)
Lounge	93	25%	69.750	4	65.75	80	5,260
Straight	53	40%	31.800	4	27.8	490	13,622
Arm	83	30%	58.100	4	54.1	100	5,410

5,260 +13 622 + 5,410 = 24,292

C) What is the appropriate inventory value to be reported on the December 31, 2020 statement of financial position, assuming the lower of cost and NRV is applied on an individual item basis?

Answer:

Inventory Value

22,124

Calculation:

(Amounts and percentages are rounded)

Lower of cost and NRV is applied. So,

We need to take Lower of cost or NRV which is applicable to each.

Lounge = 4,020 (Cost)

Straight = 13,622 (NRV)

Arm = 4,482 (Cost)

And we need to total these amounts to get the appropriate inventory value to be reported on the December 31, 2020 statement of financial position

Hence, 4,020 + 13,622 + 4,482 = 22,124