Question

On April 1, Robert LLC purchased two units of inventory, A and B. The cost of unit A was $650, and the cost of unit B was $625. On April 30, Robert LLC had not sold the inventory. The net realizable value (NRV) of unit A was now $685 while the net realizable value of unit B was $550. The adjustment associated with the lower-of-cost-or-NRV method on April 30 will be: Multiple Choice

Answer 1

Answer:

$1,200

Explanation:

                purchase cost             net realizable value          LCM

unit A          $650                                $685                           $650

unit B          $625                                $550                          $550        

total          $1,275                                                                  $1,200

When you apply the lower of cost or market value, you must value your inventory at whichever is lower between historic cost (purchase cost) and the net realizable value (NRV). Any adjustments made will increase cost of goods sold and decrease inventory. In this case, the adjusting journal entry should be:

Dr Cost of goods sold 75

    Cr Inventory 75