Question

What to do if NRV ends up being more and cost in the future:

a) Recognize a loss
b) Increase the carrying amount
c) No adjustment is required
d) Recognize a gain

Answer 1

When the NRV of inventory is higher than its cost, a company should increase the carrying amount, thereby recognizing a gain, which is compliant with the lower of cost or market accounting rule.

Step-by-step explanation:

If the Net Realizable Value (NRV) of inventory is found to be more than its cost in the future, then according to accounting principles, a company should recognize a gain. This is because the inventory is valued on the lower of cost or market basis. When the market value (NRV) increases above the historical cost, the carrying amount of the inventory is adjusted upward to reflect the increase in value, effectively recognizing a gain.

However, it's important to note that this gain is only realized when the inventory is actually sold. Until then, the gain is considered to be unrealized and is not recognized in the income statement. This adjustment to the carrying amount of the inventory is made to align with the conservatism principle in accounting, which stipulates that companies should avoid overstatement of assets and income.

So the correct answer to the question would be (b) Increase the carrying amount.

Answer 2

If NRV is higher than cost in the future, the answer would theoretically be to recognize a gain, as inventory is valued at the lower of cost or NRV. However, writing inventory above the previous carrying amount is typically not allowed under U.S. GAAP. So, the correct option is d) Recognize a gain.

Step-by-step explanation:

If the Net Realizable Value (NRV) ends up being more than the cost in the future, the correct course of action would be to recognize a gain.

This is because the NRV is an estimate of the expected selling price in the ordinary course of business minus the estimated costs of completion and the estimated costs necessary to make the sale.

If the NRV exceeds the cost, the inventory is written up to its new NRV, and this increase is recorded as a gain. However, it is important to note that the write-up of inventory to an amount greater than the previous carrying amount is generally not permitted under U.S. Generally Accepted Accounting Principles (GAAP), with some exceptions.

So, the correct option is d) Recognize a gain.