Q35PGB_2 - Horngren'S Financial And Managerial Accounting

Question

Some of L and K Electronics’s merchandise is gathering dust. It is now December 31, 2018, and the current replacement cost of the ending merchandise inventory is\(32,000 below the business’s cost of the goods, which was \)98,000. Before any adjustmentsat the end of the period, the company’s Cost of Goods Sold account has a balanceof $410,000.

 

Requirements

2. At what amount should the company report merchandise inventory on the balancesheet?

Step-by-Step Solution

Answer

The ending inventory would be reported at $32,000 on the balance sheet.

Step1: Lower-of-cost-or-net-realizable value approach

Per the lower of cost or net realizable approach, the inventory should be shown at the lowest value among the two. This is because if the adjustment has not been made, there would be overvalued gross profit and ending inventory.

Step 2: Inventory value in the balance sheet

As discussed above, the inventory should be shown at the lower value of cost or net realizable value.  

In the given case, the cost of the inventory is $98,000. But the net realizable value of the inventory is $32,000. 

So, per the rule, the ending inventory should be shown at $32,000 on the balance sheet.