A local Chevrolet dealership carries the following types of vehicles: Inventory

Question

A local Chevrolet dealership carries the following types of vehicles: Inventory Items Quantity Cost per Unit NRV per Unit Vans 4 $22,500 $20,500 Trucks 7 17,100 16,100 2-door sedans 3 12,100 14,100 4-door sedans 5 16,100 19,100 Sports cars 1 32,500 35,500 SUVs 6 28,200 23,500 Because of recent increases in gasoline prices, the car dealership has noticed a reduced demand for its SUVs, vans, and trucks. 1. Compute the total cost of the entire inventory. 2. Determine whether each inventory item would be reported at cost or net realizable value (NRV). Enter the Cost per Unit for the "Lower of Cost or net realizable value" and then multiply the quantity of each inventory item by the appropriate cost or NRV amount and enter it in the Total column. 3. Prepare necessary entry to write down inventory from cost to net realizable value.

Explanation / Answer

The inventory is kept at the original cost in the balance sheet and not reduced if the NRV is less than the cost. However, a contra inventory account is created with a credit balance to reflect the adjusted amount of inventory in the balance sheet. Amount to write down = Total Original Cost of the Inventory - Total Reported Amount of Inventory

Amount of write down = $528200 - $485000 = $43200

Journal entry to write down inventory from cost to net realizable value

Allowance to reduce inventory to LCM Dr. $43200

Loss on inventory written down Cr. $43200

Items Quantity Cost/unit NRV/unit Total Cost Total NRV Reported at Reporting Amount Vans 4 $22,500.00 $20,500.00 $90,000.00 $82,000.00 Total NRV $82,000.00 Trucks 7 $17,100.00 $16,100.00 $119,700.00 $112,700.00 Total NRV $112,700.00 2-door Sedans 3 $12,100.00 $14,100.00 $36,300.00 $42,300.00 Total Cost $36,300.00 4-door Sedans 5 $16,100.00 $19,100.00 $80,500.00 $95,500.00 Total Cost $80,500.00 Sports Car 1 $32,500.00 $35,500.00 $32,500.00 $35,500.00 Total Cost $32,500.00 SUVs 6 $28,200.00 $23,500.00 $169,200.00 $141,000.00 Total NRV $141,000.00 Total $528,200.00 $509,000.00 $485,000.00

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