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LCNRV and PURCHASE COMMITMENTS Exercises

1. For each of Prime Company's four products, determine the unit value applying the lower of cost or net realizable value. Product 1 is $700, Product 2 is $950, Product 3 is $255, and Product 4 is $450. 2. Winter Company should record an inventory write-down of $200,000 using the allowance method, decreasing inventory by $5,000,000 and recording an allowance for inventory write-down of $200,000. 3. For Naysayer Company's purchase commitments, a loss of $300,000 should be recorded if the market price on December 31, 2020 is $170 per gallon.

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267 views3 pages

LCNRV and PURCHASE COMMITMENTS Exercises

1. For each of Prime Company's four products, determine the unit value applying the lower of cost or net realizable value. Product 1 is $700, Product 2 is $950, Product 3 is $255, and Product 4 is $450. 2. Winter Company should record an inventory write-down of $200,000 using the allowance method, decreasing inventory by $5,000,000 and recording an allowance for inventory write-down of $200,000. 3. For Naysayer Company's purchase commitments, a loss of $300,000 should be recorded if the market price on December 31, 2020 is $170 per gallon.

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g.canoneo.59990.dc
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Problem 1- LCNRV

Prime Company manufactures and sells four products, the inventories of which
are priced at cost or net realizable value whichever is lower. A normal profit of
30% is usually maintained on each product.

The following information is compiled at year-end:

Original Cost to Estimated Normal


Product cost dispose selling price selling price
1 700 150 800 700
2 475 205 950 950
3 255 50 300 350
4 450 260 1,000 900

Required:

Determine the unit value for each product applying the lower of cost and net
realizable value in measuring inventory.

Problem 2_ Methods of Accounting Inventory Write-down

Winter Company provided the following inventory data at the end of first year of
operations:

Cost NRV
Skis 2,200,000 2,500,000
Boots 1,700,000 1,500,000
Ski equipment 700,000 800,000
Ski apparel 400,000 500,000
======================
Required:

Prepare journal entries to adjust the ending inventory under:


a. Direct method

Solution:

Cost NRV LCNRV


Skis 2,200,000 2,500,000 2,200,000
Boots 1,700,000 1,500,000 1,500,000
Ski equipment 700,000 800,000 700,000
Ski apparel 400,000 500,000 400,000
Total 5,000,000 5,300,000 4,800,000
Entry:
Inventory, end 4,800,000
Income summary 4,800,000

b. Allowance method
Entry:
1. Inventory, end 5,000,000
Income summary 5,000,000

2. Loss on inventory write-down 200,000


Allowance for inventory write-down 200,000

Problem 12-6 Purchase Commitments

On December 31, 2020, Naysayer Company has outstanding purchase


commitments for 10,000 gallons at P200 per gallon of raw material to be used in
the manufacturing process.
Required:
Prepare journal entry under each of the following independent assumptions:

a. The market price on December 31, 2020 is P210.

Ans: No adjustment. Market price is higher. No initial recognition of gain.

b. It is expected that the market price will decline to P 170 in early January
2021.

Ans: Market decline is only a possible loss.

c. The market price on December 31, 2020 is P 170.

Ans:
Loss on purchase commitments 300,000
Estimated liability for purchase commitments 300,000

d. The market price on December 31, 2020 is P 170. On January 31, 2021 when
the 10,000-gallon shipment is received, the market price is P 150.
Ans:
DEC 31, 2020:

Loss on purchase commitments( 10,00 X 30 ) 300,000


Estimated liability for purchase commitments 300,000

Actual Delivery: Jan 31, 2021

Purchases (10,000 X 150) 1,500,000


Estimated liability…. 300,000
Loss on purchase commitment 200,000
Accounts Payable 2,000,000

e. The market price On December 31, 2020 is P 170. On January 31, 2021 when
the 10,000-gallon shipment is received, the market price is P210.
P190

Ans:
Dec 31, 2020
Loss on purchase commitments 300,000
Estimated liability for purchase commitments 300,000

Actual Delivery: Jan 31, 2021

Purchases (10,000 X 200) 2,000,000


Estimated liability…. 300,000
Accounts Payable 2,000,000
Gain on purchase commitment 300,000

Actual Delivery: Jan 31, 2021 (market price P190)

Purchases (10,000 X 190) 1,900,000


Estimated liability…. 300,000
Accounts Payable 2,000,000
Gain on purchase commitment 200,000

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