Question

Recording a Loss in Applying Lower-of-Cost-or-Net Realizable Value On December 31, 2020, Vale Inc. estimated the cost of inventory under the average cost method to be $88,000 and the net realizable value of inventory to be $85,000. The company has not previously recorded a holding loss on inventory. a. Prepare the journal entry to record the holding loss on inventory using an allowance account to reduce inventory and cost of goods sold to adjust expense. b. Prepare the journal entry to record the holding loss on inventory using an allowance account to reduce inventory and a separate loss account to adjust equity. Account Name - cr. a. Cost of Goods Sold Allowance to Reduce Inventory to Net Realizable Value - b. Allowance to Reduce Inventory to Net Realizable Value - Holding Loss on Inventory Dr. O O O

Answer 1

Solution:

	Account Name	Debit	Credit
a	Cost of Goods Sold	$    3,000.00
	Allowance to reduce inventory to net realizable value		$    3,000.00
	(Being Inventory adjusted to net realizable value)
b	Loss due to decline in inventory	$    3,000.00
	Allowance to reduce inventory to net realizable value		$    3,000.00
	(Being Inventory adjusted to net realizable value)

Note:

1) Usually Inventory is recorded at cost, unless there is change in the Net Realizable Value of the Inventory

( NRV = Selling Price - Cost to Sell and Disposal )

2) If NRV is less than the Cost, then price of the inventory should be adjust to NRV .

3) Adjusting to NRV can be made in two method.

a) Cost of Goods Sold Method

b) Loss Method

4) Under Cost of Goods Sold Method, the reduction in inventory is transfer to Allowance to reduce inventory to net realizable value.