LOWER OF COST AND NET REALIZABLE VALUE - JOURNAL ENTRY (SAMPLE)

INVENTORY RECORDED @ COST

1. What is NET REALIZABLE VALUE?
DR. INVENTORY
- The ESTIMATED SELLING PRICE LESS
CR. INCOME SUMMARY
ESTIMATED COST OF COMPLETION &
INVENTORY RECORDED @ COST
ESTIMATED COST OF DISPOSAL
DR. LOSS ON INV. WRITEDOWN
- COST OF INVENTORIES ---- may NOT be
CR. ALL. FOR INV. WRITEDOWN
RECOVERABLE ** if the inventories are
NOTE:
DAMAGED --- if SELLING PRICE DECLINE
 LOSS ON INV. WRITEDOWN is included in
the computation of COGS.
2. Measurement of inventory @ LOWER
 LOSS > INCREASE INVENTORY
COST AND NET REALIZABLE VALUE.
 GAIN > DECREASE INVENTORY
- NOT APPROPRIATE TO WRITE DOWN
INVENTORY BASED ON A
4. PURCHASE COMMITMENTS
CLASSIFICATION OF INVENTORY
- Obligations of entity to acquire goods
Example:
in the FUTURE @ fixed price &
 Finished goods
quantities.
- If COST IS LOWER THAN NET
- PURCHASE ORDER – already been
REALIZABLE VALUE ---- INVENTORY is
made for the future delivery of goods
stated @ COST and the INCREASE in
in FIXED price and quantities
Value is not recognized.
 LOSS on purchase commitment recognized
- If NET REALIZABLE IS LOWER THAN
NON-CANCELLABLE
COST ---- INVENTORY is measured @
 GAIN on purchase commitment recognized
NRV and DECREASE IN VALUE is
MARKET PRICE RISES @ the time entity
recognized as EXPENSE
make purchase

3. TWO METHODS OF ACCOUNTING FOR

INVENTORY WRITEDOWN TO NRV.

a. DIRECT METHOD

- RECORDED: @ the LOWER COST OF

NRV
- Known as “COST OF GOODS SOLD”
method
 Because ANY LOSS ON INVENTORY
WRITEDOWN is NOT ACCOUNTED FOR
SEPARATELY but “BURRIED” in COST OF
GOODS SOLD
- JOURNAL ENTRY (SAMPLE)
INVENTORY RECORDED @ THE LOWER
COST OR NRV
DR. INVENTORY
CR. INCOME SUMMARY

b. ALLOWANCE METHOD

- RECORDED: @ COST & ANY LOSS ON

INVENTORY WRITEDOWN is
ACCOUNTED SEPARATELY
- Known as “LOSS METHOD”