Question

Gail Co. has determined the cost of its 12/31/Year 1 inventory on a moving-average basis to be $200,000. Information pertaining to that inventory at year-end is as follows:
Estimated selling price - $215,000
Estimated cost of disposal - 10,000
Normal profit margin - 20,000
Current replacement cost - 190,000
What loss on inventory write-down, if any, should be recognized in Gail's Year 1 income statement?

A. $10,000
B. $15,000
C. $0
D. $20,000

Answer 1

Answer:

C) $0

Explanation:

Gail determined that its inventory's worth by using the lower of cost or net realizable value (NRV). All the inventory accounting methods use this valuation method except LIFO or retail.

In this case the NRV of the inventory is the selling price minus selling costs = $215,000 - $10,000 = $205,000, but the inventory's cost is already lower since the average cost is only $200,000. Therefore the inventory's value is reported at its cost, so there is no reason why a write-down should be recognized.