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Chapter
4 /
Inv entories (lAS 2)
31
Required
Vigilant LLC has approached you to compute the value of its inventory and the cost per unit of the
inventory at March 31, 2006, September 30, 2006, and December 31, 2006, under the weighted-average
cost method.
Solution
Rate
Month Purchases/Sales/Balan ce
per unit
Amoullt
Jan 15
Purchases
100
units
$250
25,000
Jan 3 1 Balance
100
units
Mar 10
Purchases
150 units
$300
1i.QQQ
Mat
10 Balance
250 units
$280
70000
Mar 15 Sales
(150)
units
$280
ill.QQQ)
Mar31 Balance
100 units
$28000
Sep 25 Purchases 200
units
$350
70000
Sep 30 Balance
300 units
$28.QQQ
Dec 15 Sales
(170)
units
$326.667 (55 533)
Dec 31 Balance
130 units
$42 467
8.
NET REALIZABLE VALUE
Weighted–
average cost
per unit
$280.00
$326.667
$326.667
Valuation date
March 31, 2006
September 30, 2006
December 31, 2006
8.1
Invento ries are written down to net realizable value (NRV) on the basis that assets should not
be carried in excess of amount s likely to be realized from their sale or use. Write-down of invento–
ries become s necessary for seve ral reasons; for example, invent ories may be damaged or become
obso lete or their selling prices may have declined after year-end (or period- end ).
8.2 Inven tories are usually written down to their NRV on an item- by- item basis , but in certain
conditions, also by a group of similar or related items. It is, however, not appropriate to mark down
inventories by classification of inventories, such as finishe d goods, or all inventories in a geo–
graphica l segment or industry.
8.3
NRV estimates are based on most reliable evidence of the inventori es' realizable amounts.
They take into account price fluctuati ons or costs directly related to event s after the period-end,
confirming condit ions that exis t at the perio d-end. Estimates of NRV also take into acco unt the
reaso n or purpose for which inventories are held. For instance, NRV of a quantity of inventory be–
ing held to satisfy firm sales contracts or service contracts are based on con trac t prices.
8.4 Inventories of raw materials and other supplies held for use in production of inventories are
not written down below cost if the finished goods in which they will be used are expected to be
sold at or above cost. However, when decrease in the price of raw material indicates that the cost of
the finished goods exceeds net reali zable value, the materi als are written down to NRV. In such
cases, the repl acement cost of the raw materials may be the best available measure of their NRV.
8.5 NRV is assessed in each successive period. If changes in economic circumstances warrant,
earlier write-downs are reversed to make the new carryi ng amount equal to the lower of cost and
the revised NRV.
Facts
Moonstruck Enterprises Inc. is a retailer of Italian furniture and has five major product lines: sofas,
dining tables, beds, closets, and lounge chairs. At December 31, 200X, quantity on hand, cost per unit,
and net realizable value (NRV) per unit of the product lines are as follows:
Quanti ty
Cost
NRV
Product line
on hand per unit
($)
per unit
($)
Sofas
100
1,000
1,020
Dining tables
200
500
450
Beds
300
1,500
1,600
Closets
400
750
770
Lounge chairs
500
250
200