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Chapter 9: Q3Q (page 474)

Question:What approaches may be employed in applying the LCNRV procedure? Which approach is normally used and why?

Short Answer

Expert verified

The LCNRV can be applied on the basis of individual items, major categories, and total items. Individual item basis is generally used, as it provides the conservative valuation of inventories in the balance sheet.A

Step by step solution

01

Step-by-step-solutionStep1:

Under the individual items basis (or item-by-item basis), lower-of-cost-or-net-realizable-value is applied to individual items in the inventories.

Under the major categories basis, lower-of-cost-or-net-realizable-value is applied on the basis of different categories of inventories held by the business. In this approach, high selling price is offset partially.

Under the total approach, lower-of-cost-or-net-realizable-value is applied on the basis of the total value of the inventory. In this approach, the high selling price is offset totally.

02

Step 2:

In the normal scenario, individual item basis is followed to apply the LCNRV method as it indicates the correct value of the inventory, for reporting in the balance sheet.

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Most popular questions from this chapter

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for inventories

Bell, Inc. buys 1,000 computer game CDs from a distributor who is discontinuing those games. The purchase price for the lot is \(8,000. Bell will group the CDs into three price categories for resale, as indicated below. Group No. of CDs Price per CD 1 100 \) 5 2 800 10 3 100 15 Determine the cost per CD for each group, using the relative sales value method

Eastman Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. Corporate records disclose the followingInventory (beginning) \( 80,000 Sales revenue \)415,000 Purchases 290,000 Sales returns 21,000 Purchase returns 28,000 Gross profi t % based on net selling price 35%Merchandise with a selling price of \(30,000 remained undamaged after the fire, and damaged merchandise has a net realizable value of \)8,150. The company does not carry fire insurance on its inventory. Instructions Prepare a formal labeled schedule computing the fire loss incurred. (Do not use the retail inventory method.)

You have been asked by the financial vice president to develop a short presentation on the LCNRV method for inventory purposes. The financial VP needs to explain this method to the president because it appears that a portion of the company’s inventory has declined in value. Instructions The financial vice president asks you to answer the following questions. (a) What is the purpose of the LCNRV method? (b) What is meant by “net realizable value”? (c) Do you apply the LCNRV method to each individual item, to a category, or to the total of the inventory? Explain. (d) What are the potential disadvantages of the LCNRV method?

Presented below is information related to Rembrandt Inc.’s inventory, assuming Rembrandt uses lower-of-LIFO cost-or-market. (per unit) Skis Boots Parkas Historical cost \(190.00 \)106.00 $53.00 Selling price 212.00 145.00 73.75 Cost to distribute 19.00 8.00 2.50 Current replacement cost 203.00 105.00 51.00 Normal profit margin 32.00 29.00 21.25 Determine the following: (a) the two limits to market value (i.e., the ceiling and the floor) that should be used in the lower-of cost-or-market computation for skis, (b) the cost amount that should be used in the lower-of-cost-or-market comparison of boots, and (c) the market amount that should be used to value parkas on the basis of the lower-of-cost-or-market.
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