Question

On April 1, Robert LLC purchased two units of inventory, A and B. The cost of unit A was $660, and the cost of unit B was $595. On April 30, Robert LLC had not sold the inventory. The net realizable value of unit A was now $670 while the net realizable value of unit B was $510. The adjustment associated with the lower of cost and net realizable value on April 30 will be:

Answer 1

Answer:

Adjustment entry:

Cost of goods Sold A/c Dr.             $85

         To Inventory                                       $85

Explanation:

As for the provided information, using specific identity method, both goods are considered different and evaluated separately:

Goods A

Cost = $660, Net realizable value = $670

Therefore, it will be valued at cost of $595, thus, no adjustment required.

Goods B

Cost = $595, Net Realizable Value = $510

Thus, it will be valued at net realizable value.

The difference that is $595 - $510 = $85 will be written off from inventory and will be charged to cost of goods sold.

Entry will be:

Cost of goods Sold A/c Dr.             $85

         To Inventory                                       $85

This will reduce the balance of inventory by $85, and will follow lower of cost or Net Realizable Value method.