Explain how net realizable value (NRV) is calculated and how the lower of cost of net realizable value rule (LCNRV) is applied to valuing inventory.

a) Definition of net realizable value

b) Alternative methods for applying the rule

c) Describe the two alternative methods for recording adjustments under the LCNRV method

d) Assume that a firm has an ending inventory valued at cost of $100,000 and at NRV at $85,000, record the journal entries for each of the two recording options discussed in the text using an allowance instead of booking directly to inventory.

e) If the firm had sales of $150,000 and cost of goods sold before adjustment of $90,000, show the income statement presentation for each of the two methods discussed in the text for recording NRV instead of cost.

f) Show how the balance sheet would present the application of the LCNRV rule given the above informationassuming the use of a valuation allowance.

g) The year following one for which data are presented above, the firm’s ending inventory was value at cost of $125,000 and NRV of $115,000, prepare the journal entries for the cost of goods sold and loss methods that the firm would make at the end of the second year also assuming the use of a valuation allowance account.