Question: Office Furnishings reports inventory using the lower of cost and net realizable value (NRV). Below is information related to its year-end inventory.
Inventory Quantity Unit Cost Unit NRV
Furniture 120 $77 $92
Electronics 42 320 270
Required:
1. Calculate the total recorded cost of ending inventory before any adjustments.
2. Calculate ending inventory using the lower of cost and net realizable value.
3. Record any necessary adjusting entry for inventory.
4. Determine the impact of the adjusting entry in the financial statements.
Complete this question by entering your answers in the tabs below.
Required 1
Required 2
Required 3
Required 4
Explain the impact of the adjusting entry in the financial statements.
Note: Amounts to be deducted should be entered with minus sign.
Income Statement:
Revenues = Expenses = Net Income
1. **State the problem:**
Calculate the inventory values and adjusting entries for Office Furnishings using the lower of cost and net realizable value (NRV) method.
2. **Calculate total recorded cost of ending inventory before adjustments:**
- Furniture cost = $120 \times 77 = 9240$
- Electronics cost = $42 \times 320 = 13440$
- Total cost = $9240 + 13440 = 22680$
3. **Calculate ending inventory using lower of cost and NRV:**
- Furniture: lower of $77$ (cost) and $92$ (NRV) is $77$
- Electronics: lower of $320$ (cost) and $270$ (NRV) is $270$
- Furniture inventory = $120 \times 77 = 9240$
- Electronics inventory = $42 \times 270 = 11340$
- Total lower of cost or NRV = $9240 + 11340 = 20580$
4. **Calculate adjusting entry for inventory:**
- Adjustment = Total cost - Lower of cost or NRV = $22680 - 20580 = 2100$
- This is a write-down, so debit Inventory Loss (or Expense) and credit Inventory by $2100$
5. **Impact on financial statements:**
- Income Statement:
- Revenues: no change
- Expenses: increase by $2100$
- Net Income: decrease by $2100$
- Balance Sheet:
- Assets (Inventory) decrease by $2100$
- Liabilities: no change
- Stockholders' Equity decreases by $2100$ due to lower net income
**Final answers:**
- Total recorded cost before adjustment: $22680$
- Ending inventory after adjustment: $20580$
- Adjusting entry amount: $2100$ write-down
- Income statement impact: Revenues = unchanged, Expenses = +2100, Net Income = -2100