Question

Xiaomi Inc.'s inventory had the following related values: ************************************************************************************************** Cost--------------------------------$5,450 Replacement value--------------$5,400 Market ceiling--

Xiaomi Inc.'s inventory had the following related values:

**************************************************************************************************

Cost--------------------------------$5,450

Replacement value--------------$5,400

Market ceiling----------------------$6,100

Market floor-------------------------$5,500

Through U.S. GAAP the inventory will be valued at?

_____________________________________________________

***make the adjusting journal entry

Dr.___________________________________

Cr.___________________________________

*************************************************************************************************************

Cost--------------------------------$5,800

Replacement value--------------$5,600

Market ceiling----------------------$6,100

Market floor-------------------------$5,500

Through U.S. GAAP the inventory will be valued at?

_____________________________________________________

***make the adjusting journal entry

Dr.___________________________________

Cr.___________________________________

Business   Accounting   
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Answer #1

Answer

As per U.S. GAAP inventories are valued at cost or market, whichever is lower (LCM).

Here, market value = Current replacement value that is subject to :-

  1. Upper limit (Ceiling) = Net Realizable Value (NRV)

  2. Lower limit= Net Realizable Value (NRV) - Normal Profit Margin

Case

Cost

Market value

Inventory Value (Lower of Cost or market)

1

$ 5450

$ 5500

$ 5450

2

$5800

$5600

$ 5600

  1. No entry required as recorded at cost.

Account                                                             Debit                   Credit

Allowance to reduce inventory to LCM          200

Loss on inventory write down                                                     200   

Total                                                                     200              200

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