Question

Sanchez company was formed on january 1 of the current year and is preparing the annual financial statements dated december 31, current year. ending inventory information about the four major items stocked for regular sale follows:

ending inventory, current year

item quantity on hand unit cost when acquired (fifo) net realizable value (market) at year-end
A 37 $22 $17
B 72 51 47
C 52 62 64
D 27 39 34


required:

compute the valuation that should be used for the current year ending inventory using lower of cost or net realizable value applied on an item-by-item basis.

Answer 1

To calculate the ending inventory valuation for Sanchez Company using the lower of cost or net realizable value, we compare the unit cost and net realizable value for each item individually and take the lower value, then multiply by the quantity on hand.

Step-by-step explanation:

To determine the valuation for the current year ending inventory for Sanchez Company, we apply the lower of cost or net realizable value (LCNRV) rule on an item-by-item basis. The rule states that inventory should be reported at the lower of its historical cost or its net realizable value. The historical cost of an inventory item is the unit cost when acquired, while the net realizable value is the expected selling price in the ordinary course of business minus any estimated costs necessary to make the sale. Here's how to calculate the valuation for each item:

• Item A: Quantity on hand is 37 units. The unit cost is $22 and the net realizable value is $17. We choose the lower value, which is $17. Inventory valuation for A = 37 units * $17 = $629.
• Item B: Quantity on hand is 72 units. The unit cost is $51 and the net realizable value is $47. We choose the lower value, which is $47. Inventory valuation for B = 72 units * $47 = $3,384.
• Item C: Quantity on hand is 52 units. The unit cost is $62 and the net realizable value is $64. Here the net realizable value is higher but we still choose the lower cost. Inventory valuation for C = 52 units * $62 = $3,224.
• Item D: Quantity on hand is 27 units. The unit cost is $39 and the net realizable value is $34. We choose the lower value, which is $34. Inventory valuation for D = 27 units * $34 = $918.

Finally, we add up the individual valuations to find the total ending inventory valuation:

Ending inventory valuation = $629 (Item A) + $3,384 (Item B) + $3,224 (Item C) + $918 (Item D) = $8,155.