Chapter 12: Lower of Cost or Net Realizable

Value (LCNRV)
Computation Journal Entry
Computation for Net Realizable Value Decrease Req. all. xx All. for IW xx
Estimated selling price xx in All. bal. xx Gain on rev of IW xx
allowanc Dec. in all. (xx)
Less: Estimated cost of disposal (and completion) xx
e
Net realizable value (NRV) xx
PURCHASE COMMITMENT
Determining LCNRV - Obligations of the entity to acquire
Total NRV LCNRV certain goods sometime in the future at
Cost
a fixed price and fixed quantity
Product A xx xx xx
- Any losses which are expected to arise
Product B xx xx xx
from firm and noncancelable
aa bb cc
commitments shall be recognized
- If there is a decline in purchase price
METHODS OF ACCOUNTING FOR INVENTORY
after a purchase commitment has been
WRITEDOWN
made, a loss is recorded in the period of
price decline
Direct/COGS Allowance/Loss
method method
Record Inv. end (@LCNRV) cc Inv. end (@cost) aa
inventory IS IS
at year- cc aa
end
Inventory Loss on IW (aa-cc) xx
write- All. For IW xx
down
Reversal of All. For IW xx
inventory Gain on rev. of IW
writedown xx
Computation Inv. Beg (@LCNRV) xx Inv., beg (@cost) xx
of cost of Net purchases xx Net purchases xx
goods sold Total xx Total xx
Inv. End (@LCNRV) Inv., end (@cost)
(xx) (xx)
COGS xx COGS before IW xx
Loss (Gain) on IW xx
Cogs after IW xx

ALLOWANCE/LOSS METHOD
Computation Journal Entry
Inventory Cost xx Loss on IW xx
writedown NRV (xx) All. for IW xx
Loss on IW xx
Increase in Req. All. xx Loss on IW xx
allowance All. Bal. (xx) All. for IW xx
Inc. in all. xx
 Journal Entry
Case 1
Case 3 12/31/20
Loss on PC 300k No entry is made [when market
Agreed price: 2,000,000
Agreed price: 2,000,000 Est. Liab. On PC price is higher than the agreed
[200 x 10,000 units]
[200 x 10,000 units] 300k price, gain on purchase
commitment is NOT
Market price: 2,100,000
MP (12/31/20): 1,700,000 Date received recognized]
[210 x 10,000 units]
[170 x 10k units] Purchases 2M
Est. Liab. for PC 300k
Case 2
MP (received): 2,100,000 AP
[210 x 10k units] 2M
Agreed price: 2,000,000
Gain on PC
[200 x 10,000 units]
3M No entry is made [“expected”
decline only, not actual decline;
Expected Market Price:
Note: market decline is only possible]
1,700,000
Gain is limited to 300k,
[170 x 10k units]
which is the amount of
loss previously recognized
When the current
market price is higher than Case 3 12/31/20
the agreed price, both Loss on PC 300k
Purchases ad Accounts Agreed price: 2,000,000 Est. Liab. On PC 300k
Payable are based on the [200 x 10,000 units]
agreed price. Date received
MP (12/31/20): Purchases 1.5M
1,700,000 Loss on PC 200k
[170 x 10k units] Est. Liab. On PC 300k
---------------------------------------------------------------- AP 2M
Notes: MP (received): 1,500,000
 COGS is equal for both direct and [150 x 10k units]
allowance method
 Gain on reversal of inventory write-
down is limited only to the extent of the
allowance balance
 Gain on purchase commitment is
limited only to the loss on purchase
commitment previously recorded
 Normal profit rate is ignored
 If NRV is not given, along with the
factors (SP and COD), assume current
replacement cost as the NRV
 If cost per cost flow assumption is not
given, use the historical cost figure to
compare with NRV
 If obsolete, assume zero NRV. If scrap
value is given, use it as NRV