Nutone values its inventory on the lower of cost and market basis. The following data came from the 20X7 inventory, which consisted of two items: $$\begin{array} { | l | r | r | }
\hline & \text { Components } & \text { Cables } \
\hline \text { Original cost } & \$ 12,000 & \$ 15,000 \
\hline \text { Selling price } & 15,000 & 26,000 \
\hline \text { Estimated selling costs } & 5,000 & 10,000 \
\hline \text { Normal profit margin } & 1,500 & 1,000 \
\hline
\end{array}$$ What would be the value of inventory on Nutone's statement of financial position?

Question

Nutone values its inventory on the lower of cost and market basis. The following data came from the 20X7 inventory, which consisted of two items: $$\begin{array} { | l | r | r | } 
\hline & \text { Components } & \text { Cables } \
\hline \text { Original cost } & \$ 12,000 & \$ 15,000 \
\hline \text { Selling price } & 15,000 & 26,000 \
\hline \text { Estimated selling costs } & 5,000 & 10,000 \
\hline \text { Normal profit margin } & 1,500 & 1,000 \
\hline
\end{array}$$ What would be the value of inventory on Nutone's statement of financial position?

Quizplus · Accepted Answer

The inventory is valued at the lower of cost or market (LCM). For Components, the net realizable value (NRV) is calculated as selling price ($15,000) minus estimated selling costs ($5,000), which equals $10,000. Since the original cost ($12,000) is higher than the NRV ($10,000), the inventory value for Components is $10,000. For Cables, the cost is $15,000, and the NRV (selling price $26,000 minus selling costs $10,000) is $16,000. Since the cost is lower than the NRV, the inventory value for Cables is at its cost, $15,000. Adding both values gives a total inventory value of $25,000.

Nutone Values Its Inventory on the Lower of Cost and Market