TEST I. PROBLEM-SOLVING
Item
A
B
C
D
E
Units
1,000
1,500
1,200
1,800
1,700
Cost
120
110
150
140
130
Estimated Sales Price
180
140
170
190
200
Item
Units
Cost
Total Cost
A
B
C
D
E
1,000
1,500
1,200
1,800
1,700
120
110
150
140
130
120,000
165,000
180,000
252,000
221,000
Item
A
B
C
D
E
Total Cost
120,000
165,000
180,000
252,000
221,000
938,000
Cost
938,000
LCNRV
926,000
Inventory Writedown
12,000
Estimated
Sales Price
180
140
170
190
200
Cost of Sell
30
20
30
30
40
Cost of
Sell
30
20
30
30
40
Total NRV
150,000
180,000
168,000
288,000
272,000
1,058,000
NRV per
unit
150
120
140
160
160
Total NRV
150,000
180,000
168,000
288,000
272,000
LCNRV
120,000
165,000
168,000
252,000
221,000
926,000
TEST II. ESSAY
1. Net Realizable Value is the estimated selling price in the ordinary course of business less the
estimated cost of completion and the estimated cost of disposal. This is a conservative method
accountants use to ensure that the value of asset in the balance sheet is not overstated.
2. The measurement of LCNRV is applied to inventory by comparing the values of total cost and
total net realizable value, and then selecting the lower cost between the two. This allows the
business to ensure accurate valuation of inventory and avoid overstating assets on the balance
sheet.
3. If the cost is lower than the net realizable value, the inventory is measured at cost and the
increase in value is not recognized.
If the net realizable value is lower than cost, the inventory is measured at net realizable value
and the decrease in value is recognized.
4. There are two methods of accounting for the inventory writedown, namely “Direct Method or
Cost of Goods Sold Method” and “Allowance Method or Loss Method”.
The Direct Method records inventory at the lower of cost or net realizable value, where any
loss on inventory writedown or gain on reversal of inventory writedown is not accounted for
separately but “buried” in the cost of goods sold. The journal entry for this is:
Inventory – December 31, 20XX
XX
Income Summary
XX
➢ The loss on inventory writedown is not accounted for separately.
Whereas, the Allowance Method records the inventory at cost and loss on inventory
writedown is accounted for separately. This method is used in order that the effects of
writedown and reversal of writedown can be clearly identified. The journal entry for this is:
Inventory – December 31, 20XX
Income Summary
Loss on Inventory Writedown
Allowance for Inventory Writedown
XX
XX
XX
XX
5. Purchase commitments are obligations of the entity to acquire certain goods sometime in the
future at a fixed price and fixed quantity. Any losses which are expected to arise from firm and
noncancelable commitments shall be recognized. For a loss purchase to be recognized, the
purchase commitment must be noncancelable. If the purchase price falls below the agreed
price at the end of the reporting period, the difference is accounted and recorded for as:
Loss on Purchase Commitments
Estimated liability for Purchase Commitment
XX
XX