Question

At year end, the XYZ Company had the following information available:

Item	Cost	Replacement Cost	Sales Price	Net Realizable Value (NRV)	Normal Profit
A	70,000	62,500	64,000	56,000	5,100
B	86,000	79,400	94,000	84,800	7,400
C	112,000	124,000	186,400	168,300	18,500
D	140,000	126,000	154,800	140,000	15,400
Total	408,000	391,900	499,200	449,100	46,400

The Allowance to Reduce Inventory to Net Realizable Value (NRV) has a credit balance of $27,500, prior to any required adjusting entry.

Determine the proper balance in the Allowance to Reduce Inventory to Market at year end:

Determine the amount of the gain or loss that should be recorded due to the change in the Allowance to Reduce Inventory to Market:

Using the attached T-account template, prepare the entry to recognize the gain or loss due to the change in the Allowance to Reduce Inventory to Market:

Answer 1

Item	Cost	Replacement Cost	NRV ( Ceiling)	Normal Profit	NRV less Normal Profit ( Floor)	LCM
	$	$	$	$	$	$
A	70,000	62,500	56,000	5,100	50,900	56,000
B	86,000	79,400	84,800	7,400	77,400	79,400
C	112,000	124,000	168,300	18,500	149,800	112,000
D	140,000	126,000	140,000	15,400	124,600	126,000
	408,000	391,900	449,100	46,400	402,700	373,400

Allowance at year end = Inventory Cost - LCM Valuation = $ 408,000 - $ 373,400 = $ 34,600.

Adjusting Entry:

	Debit	Credit
	$	$
Loss on Valuation of Inventory $ ( 34,600 - 27,500)	7,100
Allowance to Reduce Inventory to Market		7,100