Question

1.Given the following information for an inventory item of the Sierra Corporation:



Using the LCNRV Rule, the proper inventory amount for the balance sheet is:

$318 $312 Cost Replacement Cost Estimated Sales Price Normal Profit Cost of Completion $360 $39

Select one:

a. $318

b. $321

c. $312

d. $319

e. $323

2.

Doyle Company discovered in 2019 that the ending inventories reported on its financial statements were incorrect by the following amounts:

2017   $60 understated
2018   $75 overstated

Indicate the error in 1/1/19 Retained Earnings:

Select one:

a. No Error

b. $75 Overstated

c. $75 Understated

d. $135 Overstated

e. $135 Understated

Answer 1

1

Correct Option A i.e. 318

Reason: LCNRV rule states that inventory should be valued at lower of cost or net realizable value. Here cost is 318 and NRV is 321 (360-39). Thus we will report inventory at lower value i.e. $318.

2

Correct Option D i.e. 135 Overstated

Reason: Overstatement of opening inventory results in understatement of Retained earning/profits and Vice versa

And Overstatement of closing inventory results in overstatement of retained earning/profits.

Here, Opening of 2018 (means closing of 2017) is understated thereby results in overstatement of retained earning and closing inventory of 2018 is also overstated thereby results in overstatement of closing inventory.