# Realizable value less normal profit floor replacement

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Realizable Value Less Normal Profit (Floor) Replacement Cost Designated Market Cost LCM D \$90* \$70** \$120 \$90 \$75 \$75 E 80 60 72 72 80 72 F 60 40 70 60 80 60 G 55 35 30 35 80 35 H 80 60 70 70 50 50 I 60 40 30 40 36 36 \$328 *Selling price – Estimated disposal costs = \$120 – \$30 = \$90. **Net realizable value – Normal profit margin = \$90 – \$20 = \$70. Solution:

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9-7 Methods of Applying LCM Example: Lower-of-Cost-or-Market Lower-of-Cost-or-Market by: Item Cost Designated Market Individual Items Logical Categories Total Inventory Type A Goods D \$75 \$90 \$75 E 80 72 72 F 80 60 60 Total A \$235 \$222 \$222 Type B Goods G 80 35 35 H 50 70 50 I 36 40 36 Total B \$166 \$145 145 Total \$401 \$367 \$328 \$367 \$367 These two amounts will not always be the same.
9-8 Ending inventory (cost) \$401,000 Ending inventory (market – individual item basis) 328,000 Adjustment to LCM \$ 73,000 Inventory* 73,000 Loss on write-down of inventory 73,000 Inventory* 73,000 Cost of goods sold 73,000 Loss Method Loss Method COGS Method COGS Method Recording “Market” Instead of Cost Lower-of-Cost-or-Market *An allowance account can also be used

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9-9 Loss COGS Method Method Sales 600,000 \$ 600,000 \$ Cost of goods sold 210,000 283,000 Gross profit 390,000 317,000 Operating expenses: Selling 95,000 95,000 General and administrative 120,000 120,000 Loss on Write-Down of Inventory 73,000 - Total operating expenses 288,000 215,000 Other revenue and (expense): Interest income 11,000 11,000 Total other 11,000 11,000 Income from operations 113,000 113,000 Income tax expense 33,900 33,900 Net income 79,100 \$ 79,100 \$ Income Statement Presentation: Lower-of-Cost-or-Market
9-10 U. S. GAAP vs. IFRS Inventory is valued at the lower of cost or market with market selected from replacement cost, net realizable value or NRV reduced by the normal profit margin. Designated market is compared to historical cost to determine LCM. The LCM rule can be applied to individual items, logical inventory categories, or the entire inventory. Reversals are not permitted. Inventory is valued at the lower or cost of market and net realizable value. The assessment usually is applied to individual items, although using logical inventory categories is allowed under certain circumstances. If an inventory write-down is no longer appropriate, it must be reversed.

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9-11 Inventory Estimation Techniques Estimate ending inventory instead of taking physical inventory 1. Less costly 2.
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