Inventory Valuation: A 5,000 P185 P230 P35 B 20,000 69 100 30 C 15,000 31 43 15 D 18,000 75 105 37

INVENTORY VALUATION
Inventories are to be presented in the financial statements at the lower of cost and net realizable
value (NRV). COST OR NRV WHICH EVER IS LOWER. NRV is estimated selling price less estimated
cost to complete and sell.
Cost is P100
NRV 75
APPLYING COST OR NRV WHICH EVER IS LOWER, THE INVENTORY IS TO BE PRESENTED IN THE
BALANCE SHEET AT P75 THE LOWER AMOUNT.
To illustrate the application of the lower of cost and net realizable value, assume the following
information for the different inventory items held by MS company at December 31,2020.
Item Units Cost Sales price Selling expense
A 5,000 P185 P230 P35
B 20,000 69 100 30
C 15,000 31 43 15
D 18,000 75 105 37
The inventory value is determined as follows:

Item Units Cost NRV sales Lower of COST Inventory
price-s.exp and NRV value
A 5,000 P185 P195 (230-35) P185 P925,000
B 20,000 69 70 69 1,380,000
C 15,000 31 28 28 420,000
D 18,000 75 68 68 1,224,000
TOTAL INVENTORY VALUE P3,949,000
On December 31, 2020, the inventory of MS Company is to be reported at P3,949,000
Prob. 1.
Based on physical inventory taken on December 31, 2020, Apple Company determined its chocolate
inventory on a FIFO basis at P26,000. The company estimated that after further processing costs of
P12,000, the chocolate could be sold as finished candy bars for P40,000. The company’s normal
profit margin is 10% of sales.
Under the lower of cost and net realizable value rule, what amount should Apple Company
report as chocolate inventory on December 31, 2020? P26,000
2. Orange Company had determined its December 31, 2020 inventory on a FIFO basis at P200,000.
Information pertaining to that inventory follows:
Estimated selling price P204,000
Estimated cost of disposal 10,000
Normal profit 30,000
Questions:
1. At what amount should inventory be shown in the Dec. 31, 2020 financial statements? P194,000
2. How much loss will be reported by the company in 2020, resulting from the decline in value of
Inventory?P6,000
3. The following information is available for Lemon Company.

Product A B C D
Cost P102 P45 P24 P9
Estimated sales price 120 60 30 15
Estimated disposal cost 15 18 8 5
Number of units 4,000 6,000 5,500 7,200
Under the lower of cost and NRV rule, What is the total inventory value of Lemon Company at
December 31,2020? 845,800
4. Pine Company has partially completed inventory located in its factory to which the following
information relates:
Production cost to date P29,000
Additional expected selling costs 4,000
Production costs to complete 20,000
Estimated sales price 54,000
Transport costs to customer 3,000
Following lower of cost and net realizable value rule, at what amount should this inventory be presented
in the statement of financial position? P27,000
5. Apple Company uses the lower of cost and net realizable value for its products in its ending inventory.
Data pertaining to one of its products follow:
Historical cost - P680 Estimated selling price – P1,200
Normal profit - P240 Est. cost to complete and sell – P420
What is the inventory unit value for this product? P680
LOSS ON PURCHASE COMMITMENT
Companies contract with suppliers to purchase goods during future period at an agreed price. This is
usually done to lock in prices and to insure the supply of goods. When purchase contracts are non
cancelable, and when a loss is probable and can be reasonably estimated, the loss and the related
liability should be recorded.
Illustration:
On October 1, 2020, Kiwi Company entered into a non-cancelable contract to purchase 100,000 units of
an inventory at P10 each, come first quarter of 2021. On December 31, 2020, the market price of such
inventory has decline to P9 per unit.
Because of the decline in the market value of the inventory, the company has incurred a loss on
purchase commitment computed as follows:
Non-cancelable contract price per unit P10

Market price at December 31, 2020 9
Difference in price P1
Multiply by units to be purchased 100,000
Loss on purchase commitment (year 2020) P100,000
The entry on Dec. 31, 2020 to record the loss on purchase commitment is:
Loss on purchase commitment 100,000
Liability on purchase commitment 100,000
On February 14, 2021, Kiwi purchased 100,000 units of these inventory. The market price of these
inventory at Feb. 14, 2021 is P8/ unit.
The entry to record the purchase on Feb. 14, 2021 is:
Merchandise Inventory(100,000 x the market price of P8) 800,000

Liability on purchase commitment 100,000
Loss on purchase commitment (year 2021) 100,000
Cash (100,000 units x the contract price of P10 each) 1,000,000
Problem 1.
In 2020, Philips Company signed a non-cancelable contract with Moderna Company to purchase 1,000,
50-kilos sacks of rice at P2,700 per sack to be delivered by Moderna on January 15, 2021. On December
31,2020, the price per sack of rice had fallen to P2,680. On January 15, 2021, The price per sack of rice
further decreased to P2,670.
Required: Prepare the entries to be prepared on the following dates.

1. December 31, 2020
2. January 15, 2021
Questions:
1. How much loss on purchase commitment is to be recorded on December 31, 2020? P20,000
2. How much loss on purchase commitment is to be recorded on January 15, 2021?P10,000
3. What is the cost of merchandise purchased on January 15, 2021?P2,670,000

Inventory Valuation: A 5,000 P185 P230 P35 B 20,000 69 100 30 C 15,000 31 43 15 D 18,000 75 105 37

Uploaded by

Copyright:

Available Formats

Inventory Valuation: A 5,000 P185 P230 P35 B 20,000 69 100 30 C 15,000 31 43 15 D 18,000 75 105 37

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Inventory Valuation: A 5,000 P185 P230 P35 B 20,000 69 100 30 C 15,000 31 43 15 D 18,000 75 105 37

Uploaded by

Copyright:

Available Formats

INVENTORY VALUATION

The inventory value is determined as follows:

On December 31, 2020, the inventory of MS Company is to be reported at P3,949,000

3. The following information is available for Lemon Company.

What is the inventory unit value for this product? P680

LOSS ON PURCHASE COMMITMENT

Non-cancelable contract price per unit P10

The entry to record the purchase on Feb. 14, 2021 is:

Merchandise Inventory(100,000 x the market price of P8) 800,000

Required: Prepare the entries to be prepared on the following dates.

You might also like