Question

1. The Hendrix Company sells four products that can be grouped into two major categories. Hendrix uses the FIFO cost flow assumption. Sales commissions and transportation costs average 10% of the selling price. The inventory of Hendrix Company consists of four products as summarized below. Products A and B are in Category 1 and products C and D are in Category 2. Product Cost $ 120,000 175,000 160,000 45,000 Selling Price $ 160,000 180,000 160,000 60,000 a) Apply the LCNRV method and determine at what amount the ending inventory should be reported for each of the following: i. ii. iii. Individual items Major categories Total inventory b) Assume that the above results are for the first year of operations for Hendrix Company. Prepare the journal entry to record the results of applying the LCNRV method. Hendrix uses the loss method and applies the LCNRV based on a total inventory approach. c) Assume that at the end of the next year of operations Hendrix's inventory balance on the financial statements is $550,000. The total NRV of the inventory is $475,000. Prepare the journal entry to record the results of applying the LCNRV method.

Answer 1

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The Hendrix Company
Answer a i
Individual Items	E	F	G=F*10%	H=F-G	I= Lower of E or H
Product	Cost	Selling Price	Sales commission and transportation	NRV	LCNRV
A	120,000.00	160,000.00	16,000.00	144,000.00	120,000.00
B	175,000.00	180,000.00	18,000.00	162,000.00	162,000.00
C	160,000.00	160,000.00	16,000.00	144,000.00	144,000.00
D	45,000.00	60,000.00	6,000.00	54,000.00	45,000.00
Ending Inventory					471,000.00
Answer a ii
Categories	E	F	G=F*10%	H=F-G	I= Lower of E or H
Product	Cost	Selling Price	Sales commission and transportation	NRV	LCNRV
A	120,000.00	160,000.00	16,000.00	144,000.00
B	175,000.00	180,000.00	18,000.00	162,000.00
Category 1	295,000.00	340,000.00	34,000.00	306,000.00	295,000.00
C	160,000.00	160,000.00	16,000.00	144,000.00
D	45,000.00	60,000.00	6,000.00	54,000.00
Category 2	205,000.00	220,000.00	22,000.00	198,000.00	198,000.00
Ending Inventory					493,000.00
Answer a iii
Total Inventory	E	F	G=F*10%	H=F-G
Product	Cost	Selling Price	Sales commission and transportation	NRV
A	120,000.00	160,000.00	16,000.00	144,000.00
B	175,000.00	180,000.00	18,000.00	162,000.00
C	160,000.00	160,000.00	16,000.00	144,000.00
D	45,000.00	60,000.00	6,000.00	54,000.00
Total	500,000.00			504,000.00
Ending Inventory- Lower of E or H= $ 500,000.
Answer b
Under total inventory approach the inventory will be valued at cost only. So no journal entry required.
Answer c
Cost of Inventory	550,000.00
NRV	475,000.00
Loss to be booked	75,000.00
Journal Entry
Account	Debit $	Credit $
Loss Due to Decline of Inventory to NRV	75,000.00
Allowance to Reduce Inventory to NRV		75,000.00