ABC uses a periodic inventory system, and the ending inventory for each year is

Question

ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete physical inventory at year-end. A physical count was taken on December 31, 2014, and the inventory on-hand at that time totaled $75,000, which reflects historical cost.Purchases are $350,000.

Record the 2014 Cost of Goods Sold and the 12/31/14 Inventory adjustment.

Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. A review of inventory data further indicated that the current retail sales value of the ending inventory is $110,000 and estimated costs of completion and shipping is 15% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting for adjustments of inventory to market value.

Please Help! I’m not sure about the Loss method for accounting for adjustments of inventory to market value.

I have the following:

BOOK VALUE (HISTORICAL COST) = 75,000

NRV = MV+ESTIMATED COST

110,000 + 15% of 110,000 = NRV 93,500

There is no adjustment required since historical cost is less than NRV.

You can only make allowance for losses not profit. Is that correct or do I need to make an entry for $16,500?

Explanation / Answer

As per the loss method for accounting for inventory valuation - Inventory must be accounted at lower of cost or the NRV.

Here in this question, the year ending book value of inventory as per the physical count is $ 75000

whereas the NRV i.e. the relalizable value less the estimated cost of making sale.

Realizable value of the ending inventoru as per the current retail sales = $ 110000

and the estimated cost of making sale = 15% of the retail value

Thus, NRV = $ 110000 - 15% ( $ 110000)

= $ 93500

In this case the, BV < NRV, thus no adjustment required.

The inventory must be accounted as per the book value.

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