Question

On December 31, 20X8, Varsity Motors (VM) had an inventory of five different types of oil well parts. Due to economic downturn and declining demand for oil, the market prices for oil well parts have declined. The year-end unit costs (determined by applying the weighted-average cost formula), estimated unit selling prices, estimated costs to sell, and net realizable values for each of the items are presented below. The determination of the amount of inventories to be reported in the statement of financial position is presented below. VM tests its inventory for impairment on an item-by-item basis.

a.            For each item of inventory, A through E, calculate the separate NRV and LCNRV (20 points)

Item	Original Cost	Selling Price	Estimated Cost to sell	NRV	LCNRV
A	$6,000	$5,100	$500
B	4,500	4,300	100
C	3,900	4,000	50
D	1,800	1,600	75
E	1,400	1,450	150
Total	$17,600

b.            What journal entry is made on December 31, 20X8 to record the adjustment? (5 points)

Answer 1

a.            For each item of inventory, A through E, calculate the separate NRV and LCNRV (20 points)

Item	Original Cost	Selling Price	Estimated Cost to sell	NRV	LCNRV
A	$6,000	$5,100	$500	4600	4600
B	4,500	4,300	100	4200	4200
C	3,900	4,000	50	3950	3900
D	1,800	1,600	75	1525	1525
E	1,400	1,450	150	1300	1300
Total	17600				15525

Adjusting entry

date	account and explanation	Debit	Credit
	Cost of goods sold (17600-15525)	2075
	Inventory		2075