Question

A company normally sells its product for $20 per unit. However, the selling price has fallen to $15 per unit. This company's current FIFO inventory consists of 200 units purchased at $16 per unit. Net realizable value has now fallen to $13 per unit. What is the amount of the lower cost of market adjustment the company must make as a result of this decline in value?

Answer 1

Answer:$2

Explanation:

A company normally is expected to value it's inventory at the lower of cost or net realisable value. The cost price is the price on purchase of the inventory while the net realisable value is selling price less cost of sales and cost to completion.

The amount of the lower cost of market adjustment the company must make, is the difference between the new selling price of $15 and net realisable value of $13 which is $2.

Answer 2

Answer:

Inventory write down to $2,600

Inventory loss of $600

Explanation:

According to the generally accepted accounting principles we always record inventory at the lower of market or net realizable value.

We record at Cost of $13/unit which gives us a total closing inventory of

Closing inventory = 13*200 = $2,600, this is the amount that is to be recorded in the balance sheet.

A loss of 16-16=$3/ unit is to be recorded, giving a total loss of 3*200 = $600

This loss can be recorded in the cost of goods sold part when the inventory is actually sold.

Hope that helps.