Question

Bora Company uses the LCNRV method to evaluate inventory for financial reporting purposes. Information related to inventory at December 31, 2020 appears below.

	Item A	Item B	Item C
Quantity	50 units	40 units	100 units
Estimated Selling Price per unit	$70	$35	$30
Purchasing price per unit	40	50	30
Freight-in (transportation) cost per unit	5	5	5
Cost to complete per unit	9	5	7
Cost to sell per unit	6	3	3

Required

a) Determine the correct value to be reported for inventory on the Financial Position Statement applying LCNRV for each item individually. Prepare the necessary journal entry if needed using the loss method. (5+5 = 10 points)

	Item A	Item B	Item C	Total inventory
LCNRV

JOURNAL ENTRY
DATE	ACCOUNT TITLES	DEBIT	CREDIT

b) Determine the correct value to be reported for inventory on the Financial Position Statement applying LCNRV for inventory in total. Prepare the necessary journal entry if needed using the loss method. (5+5 = 10 points)

	Total inventory
LCNRV

JOURNAL ENTRY
DATE	ACCOUNT TITLES	DEBIT	CREDIT

c) What should the company do if during 2021 total NRV for inventory rises above total original cost? (10 points)

Answer 1

Answer(a) Item A $2,250 Item B $1,080 Item C $2,000 Total Inventory $5,330 LCNRV Working note Calculation of Total Cost Item А No of units 50 40 100 Purchase Price Freight in cost Total Cost per per unit(A) per unit(B) unit(A+B) $40 $5 $45 50 5 $55 30 5 $35 Total Cost $2,250 $2,200 $3,500 B C Calculation of Total NRV Item A B Selling Price Estimated cost Estimated cost NRV per unit per unit (A) to complete(B) to sell(C) (D =A-B-C) No of units $70 $9 $6 $55 50 $35 $5 $3 $27 40 $30 $7 $3 $20 100 Total NRV $2,750 1,080 2,000 с Calculation of Inventory value using LCNRV Inventory price (Lower of (A) or Item Total Cost (A) Total NRV (B) (B)) A $2,250 $2,750 $2,250 B $2,200 1,080 $1,080 с $3,500 2,000 $2,000 Total $7,950 $5,330 Credit Journal Entry Date Account Title Dec 31,2020 Loss due to decline to NRV Allowance to reduce Inventory to NRV (To adjust Inventory to LCNRV) Debit $2,620 $2,620

Answer(b) Total Inventory $5,830 LCNRV Working note Calculation of Total Cost Item A B No of units 50 40 100 Purchase Price Freight in cost Total Cost per per unit(A) per unit(B) unit(A+B) $40 $5 $45 50 5 $55 30 5 $35 Total Cost $2,250 $2,200 $3,500 C Calculation of Total NRV Item A B Selling Price Estimated cost Estimated cost NRV per unit per unit (A) to complete(B) to sell(C) (D =A-B-C) $70 $9 $6 $55 $35 $5 $3 $27 $7 $3 $20 No of units 50 40 100 Total NRV $2,750 1,080 2,000 С $30 Calculation of Inventory value using LCNRV Inventory price (Lower of (A) or Item Total Cost (A) Total NRV (B) (B) х $2,250 $2,750 Y $2,200 $1,080 Z $3,500 $2,000 Total $7,950 $5,830 $5,830 Credit Journal Entry Date Account Title Dec 31,2020 Loss due to decline to NRV Allowance to reduce Inventory to NRV (To adjust Inventory to LCNRV) Debit $2,120 $2,120

Answer(c) If NRV rises above cost in 2021, the amount written down in 2020 needs to be reversed and that reversal should be limited to original write down. For case (a) The following journal entry will be passed under loss method to recover Inventoy loss Date Credit Journal Entry Account Title Allowance to reduce Inventory to NRV Recovery of Inventory Loss (To record recovery of Inventoy Loss) Debit $2,620 $2,620 For case (b) The following journal entry will be passed under loss method to recover Inventoy loss Date Credit Journal Entry Account Title Allowance to reduce Inventory to NRV Recovery of Inventory Loss (To record recovery of Inventoy Loss) Debit $2,120 $2,120