Question

Consider the following data:

Ending inventory at cost $115,000
Ending inventory at market 119,000
Cost of goods sold (before consideration of LCNRV rule) 165,000

Which of the following depicts the proper account balance after the application of the LCNRV rule?
a) Ending Inventory balance will be $119,000.
b) Cost of Goods Sold will be $161,000.
c) Ending Inventory balance will be $115,000.
d) Cost of Goods Sold will be $169,000.

Answer 1

The proper account balance after applying the LCNRV rule would be the lower of the cost or market value of the ending inventory, which is $115,000. Therefore, the ending inventory balance will be $115,000. The COGS remains unchanged at $165,000.

Step-by-step explanation:

The proper account balance after the application of the Lower of Cost or Market (LCM) or Lower of Cost and Net Realizable Value (LCNRV) rule is the lower value of the cost or market value of the ending inventory. Given that the ending inventory at cost is $115,000 and the market value is $119,000, the ending inventory should be reported at $115,000, which is lower. Therefore, the correct option is:

c) Ending Inventory balance will be $115,000.

The Cost of Goods Sold (COGS) will remain at $165,000 since the LCNRV rule only affects the valuation of the ending inventory on the balance sheet and does not impact the COGS on the income statement.