Question

Lower of cost or market

Herman Company has three products in its ending inventory. Specific per unit data for each of the products are as follows:

	Product 1			Product 2			Product 3
Cost	$	33		$	103		$	63
Selling price		79			159			109
Disposal costs		6			66			23

Product	Cost	NRV	Per Unit Inventory Value
1
2
3

9. Exercise 9-5 Lower of cost or market

The inventory of Royal Decking consisted of five products. Information about the December 31, 2017, inventory is as follows:

Product	Cost			Selling Price
A	$	240			$	260
B		280				300
C		160				280
D		220				430
E		140				180

Disposal costs consist only of a sales commission equal to 10% of selling price and shipping costs equal to 5% of cost.

Product	Cost	NRV	Inventory Value
A
B
C
D
E

10. Exercise 9-9 Gross profit method

On November 21, 2017, a fire at Hodge Company’s warehouse caused severe damage to its entire inventory of Product Tex. Hodge estimates that all usable damaged goods can be sold for $14,000. The following information was available from the records of Hodge’s periodic inventory system:

Inventory, November 1	$	110,000
Net purchases from November 1, to the date of the fire		142,000
Net sales from November 1, to the date of the fire		222,000

Based on recent history, Hodge’s gross profit ratio on Product Tex is 30% of net sales.

Required:
Calculate the estimated loss on the inventory from the fire, using the gross profit method.
Estimated loss from fire

Answer 1

1
Product	Cost	NRV	Per Unit Inventory Value
1	33	73	33
2	103	93	93
3	63	86	63
Workings:
NRV = Selling price-Disposal costs
NRV:
1	=79-6
2	=159-66
3	=109-23
Per Unit Inventory Value = Lower of cost or NRV
Exercise 9-5
Product	Cost	NRV	Inventory Value
A	240	222	222
B	280	256	256
C	160	244	160
D	220	376	220
E	140	155	140
Workings:
NRV = Selling price-Sales commission-Shipping costs
NRV:
A	=260-(260*10%)-(240*5%)
B	=300-(300*10%)-(280*5%)
C	=280-(280*10%)-(160*5%)
D	=430-(430*10%)-(220*5%)
E	=180-(180*10%)-(140*5%)
Exercise 9-9
	Inventory, November 1	110000
	Add: Net purchases from November 1	142000
	Total goods available	252000
	Less: Cost of goods sold	-154000	=220000*(1-30%)
	Less: Salvage value of damaged goods	-14000
	Estimated loss from fire	84000