Chapter 8
Inventory Valuation
236
LCRNV
Cost
NRV Individual
Category
Point-and-Shoot
Camera 1
40,000
12,000
12,000
Camera 2
35,000
45,000
35,000
Total Point-and-Shoot
75,000
57,000
57,000
DSLR
Camera A
80,000
110,000
80,000
Camera B
90,000
130,000
90,000
Total DSLR
170,000
240,000
170,000
Camera Bags
15,000
20,000
15,000
Total
$260,000 $317,000
_______________
FIGURE 8.11
The total cost of $260,000 is the current balance of the inventory account and is broken down
between the various inventory items carried by the store. NRV is the net realizable value of the
different inventory items. Notice that the point-and-shoot camera 1 has an NRV significantly less
than the cost.This model may be outdated and thus difficult to sell.
Usually, LCNRV is applied to individual inventory items. In our example, only camera 1 shows an
NRV less than cost.The difference between its cost and its NRV is $28,000 ($40,000 − $12,000).
Therefore inventory must be written down by $28,000. The write-down decreases inventory and
increases cost of goods sold.The journal entry is shown in Figure 8.12.
JOURNAL
Page 1
Date
2016
Account Title and Explanation
Debit Credit
Dec 31 Cost of Goods Sold
28,000
Inventory
28,000
Adjust inventory to LCNRV
_______________
FIGURE 8.12
LCRNV is generally applied to individual inventory items, but in certain circumstances can be
applied to categories of inventory. In our example, if all point-and-shoot cameras are becoming
obsolete and will no longer be sold by the store, it may be easier to write-down the entire category.
The difference between cost and NRV for the point-and-shoot category is $18,000 ($75,000 −
$57,000). If LCNRV were applied to inventory categories, the value used in the journal entry
would have been $18,000.
If the NRV of an inventory item increases after it has already been written down, a company may
reverse the write-down. However, the reversal cannot exceed the amount of the original write-
down. In other words, the value recorded for any inventory item cannot exceed its historical cost.
