{"id":3665,"date":"2020-10-21T21:19:49","date_gmt":"2020-10-21T21:19:49","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=3665"},"modified":"2020-11-25T20:40:15","modified_gmt":"2020-11-25T20:40:15","slug":"adjusting-journal-entries-for-net-realizable-value","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/adjusting-journal-entries-for-net-realizable-value\/","title":{"raw":"Adjusting Journal Entries for Net Realizable Value","rendered":"Adjusting Journal Entries for Net Realizable Value"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Create journal entries to adjust inventory to NRV<\/li>\r\n<\/ul>\r\n<\/div>\r\nLet\u2019s recap the effect of the different methods of applying COGS, gross profit, and ultimately, net income, assuming that total selling, general, and administrative expenses of Geyer Co. are $735,000.\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement\"><caption>Geyer, Co.\r\nIncome statements\r\nFor the year ended December 31, 20XX<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"u-sr-only\" scope=\"col\">Description<\/th>\r\n<th scope=\"col\">by total<\/th>\r\n<th scope=\"col\">by individual item<\/th>\r\n<th scope=\"col\">by class<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>Beginning Inventory<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 0<\/td>\r\n<td class=\"r\">$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 0<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 0<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net purchases and freight in<\/td>\r\n<td class=\"r\">1,522,453<\/td>\r\n<td class=\"r\">1,522,453<\/td>\r\n<td class=\"r\">1,522,453<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Ending Inventory, LCNRV<\/td>\r\n<td class=\"r\">(238,687)<\/td>\r\n<td class=\"r\">(186,872)<\/td>\r\n<td class=\"r\">(227,952)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost of good sold<\/td>\r\n<td class=\"highlight r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,741,663<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,793,478<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<td class=\"highlight-green r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,752,398<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"4\"><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"4\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net sales<\/td>\r\n<td class=\"r\">$2,548,959<\/td>\r\n<td class=\"r\">$2,548,959<\/td>\r\n<td class=\"r\">$2,548,959<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost of goods sold<\/td>\r\n<td class=\"r highlight\">1,741,663<\/td>\r\n<td class=\"r\">1,793,478<\/td>\r\n<td class=\"r highlight-green\">1,752,398<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross Profit<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>807,296<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>755,481<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>796,561<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating Expenses<\/td>\r\n<td class=\"r\">735,000<\/td>\r\n<td class=\"r\">735,000<\/td>\r\n<td class=\"r\">735,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net income<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$72,296<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$20,481<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$61,561<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n<\/div>\r\nApplying LCNRV to total inventory gave us a NRV of $274,610 (see Inventory List in prior reading) which was higher than total cost, so there would be no adjustment necessary. We just left each inventory item listed at cost, even though some of the items had an NRV less than cost (first column).\r\n\r\nHowever, when we applied the LCNRV rule to each individual item, we found that we had to adjust some inventory downward, such as the Rel 5 HQ Speakers that are listed at FIFO at $110 each, but only have an NRV of $50 each. Overall, we calculated that the NRV of inventory assessing each item individually was only $186,872. Recognizing that loss in the year incurred (rather than waiting for them to sell, if ever) brought gross profit down from $807,296 to $755,481, and of course that reduced net income by the same amount (second column).\r\n\r\nAssessing LCNRV by class also reduced ending inventory, which reduced gross profit and net income (third column).\r\n\r\nIf the amount of a write-down caused by the LCNRV analysis is minor, we could charge the expense to the COGS. If the loss is material, then we might want to track it in a separate account (especially if such losses are recurring), such as \u201cLoss on LCNRV adjustment.\u201d\r\n\r\nIn addition, instead of adjusting the merchandise inventory account, which would involve adjusting the cost of each individual item in the subsidiary ledger, you may want to post the adjustment to a contra-asset account called something like \u201cAllowance to Reduce Inventory to NRV.\u201d\r\n\r\nSo, we end up with four possible combinations (using the \u201cby item\u201d analysis):\r\n<ol>\r\n \t<li style=\"font-weight: 400;\">Post the adjustment to inventory and COGS.<\/li>\r\n \t<li style=\"font-weight: 400;\">Post the adjustment to inventory and a loss account.<\/li>\r\n \t<li style=\"font-weight: 400;\">Post the adjustment to a contra-asset account and COGS.<\/li>\r\n \t<li style=\"font-weight: 400;\">Post the adjustment to a contra-asset account and a loss account.<\/li>\r\n<\/ol>\r\n<h2>Step 1<\/h2>\r\nPost the adjustment to inventory and COGS.\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 31<\/th>\r\n<td>COGS<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">51,815.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Merchandise Inventory<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">51,815.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>To adjust year end inventory to net realizable value<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWhich results in the following:\r\n\r\n<center>Selected accounts related to COGS<\/center><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133314\/Adjusting-Journal-Entries-for-Net-Realizable-Value11.png\"><img class=\"alignnone size-full wp-image-5576\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133314\/Adjusting-Journal-Entries-for-Net-Realizable-Value11.png\" alt=\"Two T accounts side by side. On the left is an intentory chart. On the debit side, there is an unadjusted balance (FIFO) entry of 238,687 dollars. There is a credit entry of 51,815 dollars. There is a debit total of 186,862 dollars. On the right side is an allowance chart. This T account does not have any entries. \" width=\"840\" height=\"213\" \/><\/a>\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133317\/Adjusting-Journal-Entries-for-Net-Realizable-Value21.png\"><img class=\"alignnone size-full wp-image-5577\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133317\/Adjusting-Journal-Entries-for-Net-Realizable-Value21.png\" alt=\"Two T accounts side by side. On the left is a cost of goods sold chart. On the debit side, there is an unadjusted balance (FIFO) entry of 1,741,663 dollars. There is a debit entry of 51,815 dollars. There is a debit total of 1,793,478 dollars. On the right side is a loss of NRV chart. This T account does not have any entries.\" width=\"893\" height=\"229\" \/><\/a>\r\n<h2>Step 2<\/h2>\r\nPost the adjustment to inventory and a loss account.\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 31<\/th>\r\n<td>Loss on LCNRV Adjustment<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">51,815.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Merchandise Inventory<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">51,815.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>To adjust year end inventory to NRV<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<center>Selected accounts related to cost of goods sold<\/center><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133320\/Adjusting-Journal-Entries-for-Net-Realizable-Value31.png\"><img class=\"alignnone size-full wp-image-5578\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133320\/Adjusting-Journal-Entries-for-Net-Realizable-Value31.png\" alt=\"Two T accounts side by side. On the left is an intentory chart. On the debit side, there is an unadjusted balance (FIFO) entry of 238,687 dollars. There is a credit entry of 51,815 dollars. There is a debit total of 186,862 dollars. On the right side is an allowance chart. This T account does not have any entries. \" width=\"892\" height=\"239\" \/><\/a>\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133324\/Adjusting-Journal-Entries-for-Net-Realizable-Value41.png\"><img class=\"alignnone size-full wp-image-5579\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133324\/Adjusting-Journal-Entries-for-Net-Realizable-Value41.png\" alt=\"Two T accounts side by side. On the left is a cost of goods sold chart. On the debit side, there is an unadjusted balance (FIFO) entry of 1,741,663 dollars. There is a debit total of 1,741,663 dollars. On the right side is a loss of NRV chart. There is a debit entry of 51,815 dollars. There is a debit total of 51,815 dollars. \" width=\"882\" height=\"211\" \/><\/a>\r\n<h2>Step 3<\/h2>\r\nPost the adjustment to a contra-asset account and COGS.\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 31<\/th>\r\n<td>COGS<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">51,815.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allowance to Reduce Inventory to NRV<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">51,815.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>To adjust year end inventory to NRV<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<center>Selected accounts related to COGS<\/center><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133327\/Adjusting-Journal-Entries-for-Net-Realizable-Value51.png\"><img class=\"alignnone size-full wp-image-5580\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133327\/Adjusting-Journal-Entries-for-Net-Realizable-Value51.png\" alt=\"Two T accounts side by side. On the left is an intentory chart. On the debit side, there is an unadjusted balance (FIFO) entry of 238,687 dollars.There is a debit total of 238,687 dollars. On the right side is an allowance chart. There is a credit entry of 51,815 dollars. There is a credit total of 51,815 dollars.\" width=\"879\" height=\"225\" \/><\/a>\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133330\/Adjusting-Journal-Entries-for-Net-Realizable-Value61.png\"><img class=\"alignnone size-full wp-image-5581\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133330\/Adjusting-Journal-Entries-for-Net-Realizable-Value61.png\" alt=\"Two T accounts side by side. On the left is a cost of goods sold chart. On the debit side, there is an unadjusted balance (FIFO) entry of 1,741,663 dollars. There is a debit entry of 51,815 dollars. There is a debit total of 1,793,478 dollars. On the right side is a loss of NRV chart. This T account does not have any entries.\" width=\"883\" height=\"220\" \/><\/a>\r\n<h2>Step 4<\/h2>\r\nPost the adjustment to a contra-asset account and a loss account.\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 31<\/th>\r\n<td>Loss on LCNRV Adjustment<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">51,815.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allowance to Reduce Inventory to NRV<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">51,815.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>To adjust year end inventory to NRV<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<center>Selected accounts related to COGS<\/center><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133334\/Adjusting-Journal-Entries-for-Net-Realizable-Value71.png\"><img class=\"alignnone size-full wp-image-5582\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133334\/Adjusting-Journal-Entries-for-Net-Realizable-Value71.png\" alt=\"Two T accounts side by side. On the left is an intentory chart. On the debit side, there is an unadjusted balance (FIFO) entry of 238,687 dollars.There is a debit total of 238,687 dollars. On the right side is an allowance chart. There is a credit entry of 51,815 dollars. There is a credit total of 51,815 dollars.\" width=\"847\" height=\"202\" \/><\/a>\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133338\/Adjusting-Journal-Entries-for-Net-Realizable-Value81.png\"><img class=\"alignnone size-full wp-image-5583\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133338\/Adjusting-Journal-Entries-for-Net-Realizable-Value81.png\" alt=\"Two T accounts side by side. On the left is a cost of goods sold chart. On the debit side, there is an unadjusted balance (FIFO) entry of 1,741,663 dollars. There is a debit total of 1,741,663 dollars. On the right side is a loss of NRV chart. There is a debit entry of 51,815 dollars. There is a debit total of 51,815 dollars.\" width=\"861\" height=\"230\" \/><\/a>\r\n\r\nAll of these methods of recording the adjustment are acceptable. It just depends on how you want to capture the data for your own internal and external reporting purposes.\r\n\r\nFor instance, <a href=\"http:\/\/filings.irdirect.net\/data\/720875\/000165495419011076\/dynt_10k2019.pdf\" target=\"_blank\" rel=\"noopener\">Dynatronics Corporation shows on the balance sheet<\/a> a line item called, \u201cInventories, net\u201d and provides details in a footnote:\r\n<blockquote>Note 3. Inventories\r\n\r\nInventories consist of the following as of June 30:\r\n<table class=\"fin-table acctstatement fw\"><caption>Inventories, net<\/caption>\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\"><\/th>\r\n<th style=\"text-align: right;\" scope=\"col\">2019<\/th>\r\n<th style=\"text-align: right;\" scope=\"col\">2018<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>Raw materials<\/td>\r\n<td style=\"text-align: right;\">$5,830,140<\/td>\r\n<td style=\"text-align: right;\">$6,216,150<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Work in process<\/td>\r\n<td style=\"text-align: right;\">706,128<\/td>\r\n<td style=\"text-align: right;\">625,830<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Finished goods<\/td>\r\n<td style=\"text-align: right;\">5,129,806<\/td>\r\n<td style=\"text-align: right;\">4,604,264<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Inventory Reserve<\/td>\r\n<td style=\"text-align: right;\">(138,553)<\/td>\r\n<td style=\"text-align: right;\">(458,389)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$11,527,521<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$10,987,855<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIncluded in cost of goods sold for the years ended June 30, 2019, and 2018, are inventory write-offs of $0 and $692,000, respectively. The write-offs reflect inventories related to discontinued product lines, excess repair parts, product rejected for quality standards, and other non-performing inventories.<\/blockquote>\r\nThe company reports COGS (cost of sales) as a single line item, but may be posting inventory write-downs to a separate expense line item in order to capture the data for the note, and also includes this statement in its Summary of Significant Accounting Principles:\r\n<blockquote>\r\n<h3>Inventories<\/h3>\r\nFinished goods inventories are stated at the lower of standard cost, which approximates actual cost using the first-in, first-out method, or net realizable value. Raw materials are stated at the lower of cost (first-in, first-out method) or net realizable value. The Company periodically reviews the value of items in inventory and records write-downs or write-offs based on its assessment of slow moving or obsolete inventory. The Company maintains a reserve for obsolete inventory and generally makes inventory value adjustments against the reserve.<\/blockquote>\r\nNext, we\u2019ll look at how inventory is presented on the financial statements, along with disclosures and an analysis of what happens when inventory is under or overstated.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23770\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li style=\"font-weight: 400;\">Create journal entries to adjust inventory to NRV<\/li>\n<\/ul>\n<\/div>\n<p>Let\u2019s recap the effect of the different methods of applying COGS, gross profit, and ultimately, net income, assuming that total selling, general, and administrative expenses of Geyer Co. are $735,000.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement\">\n<caption>Geyer, Co.<br \/>\nIncome statements<br \/>\nFor the year ended December 31, 20XX<\/caption>\n<tbody>\n<tr>\n<th class=\"u-sr-only\" scope=\"col\">Description<\/th>\n<th scope=\"col\">by total<\/th>\n<th scope=\"col\">by individual item<\/th>\n<th scope=\"col\">by class<\/th>\n<\/tr>\n<tr>\n<td>Beginning Inventory<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 0<\/td>\n<td class=\"r\">$ \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 0<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 0<\/td>\n<\/tr>\n<tr>\n<td>Net purchases and freight in<\/td>\n<td class=\"r\">1,522,453<\/td>\n<td class=\"r\">1,522,453<\/td>\n<td class=\"r\">1,522,453<\/td>\n<\/tr>\n<tr>\n<td>Ending Inventory, LCNRV<\/td>\n<td class=\"r\">(238,687)<\/td>\n<td class=\"r\">(186,872)<\/td>\n<td class=\"r\">(227,952)<\/td>\n<\/tr>\n<tr>\n<td>Cost of good sold<\/td>\n<td class=\"highlight r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,741,663<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,793,478<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<td class=\"highlight-green r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,752,398<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"4\"><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"4\"><\/td>\n<\/tr>\n<tr>\n<td>Net sales<\/td>\n<td class=\"r\">$2,548,959<\/td>\n<td class=\"r\">$2,548,959<\/td>\n<td class=\"r\">$2,548,959<\/td>\n<\/tr>\n<tr>\n<td>Cost of goods sold<\/td>\n<td class=\"r highlight\">1,741,663<\/td>\n<td class=\"r\">1,793,478<\/td>\n<td class=\"r highlight-green\">1,752,398<\/td>\n<\/tr>\n<tr>\n<td>Gross Profit<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>807,296<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>755,481<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>796,561<\/td>\n<\/tr>\n<tr>\n<td>Operating Expenses<\/td>\n<td class=\"r\">735,000<\/td>\n<td class=\"r\">735,000<\/td>\n<td class=\"r\">735,000<\/td>\n<\/tr>\n<tr>\n<td>Net income<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$72,296<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$20,481<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$61,561<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<\/div>\n<p>Applying LCNRV to total inventory gave us a NRV of $274,610 (see Inventory List in prior reading) which was higher than total cost, so there would be no adjustment necessary. We just left each inventory item listed at cost, even though some of the items had an NRV less than cost (first column).<\/p>\n<p>However, when we applied the LCNRV rule to each individual item, we found that we had to adjust some inventory downward, such as the Rel 5 HQ Speakers that are listed at FIFO at $110 each, but only have an NRV of $50 each. Overall, we calculated that the NRV of inventory assessing each item individually was only $186,872. Recognizing that loss in the year incurred (rather than waiting for them to sell, if ever) brought gross profit down from $807,296 to $755,481, and of course that reduced net income by the same amount (second column).<\/p>\n<p>Assessing LCNRV by class also reduced ending inventory, which reduced gross profit and net income (third column).<\/p>\n<p>If the amount of a write-down caused by the LCNRV analysis is minor, we could charge the expense to the COGS. If the loss is material, then we might want to track it in a separate account (especially if such losses are recurring), such as \u201cLoss on LCNRV adjustment.\u201d<\/p>\n<p>In addition, instead of adjusting the merchandise inventory account, which would involve adjusting the cost of each individual item in the subsidiary ledger, you may want to post the adjustment to a contra-asset account called something like \u201cAllowance to Reduce Inventory to NRV.\u201d<\/p>\n<p>So, we end up with four possible combinations (using the \u201cby item\u201d analysis):<\/p>\n<ol>\n<li style=\"font-weight: 400;\">Post the adjustment to inventory and COGS.<\/li>\n<li style=\"font-weight: 400;\">Post the adjustment to inventory and a loss account.<\/li>\n<li style=\"font-weight: 400;\">Post the adjustment to a contra-asset account and COGS.<\/li>\n<li style=\"font-weight: 400;\">Post the adjustment to a contra-asset account and a loss account.<\/li>\n<\/ol>\n<h2>Step 1<\/h2>\n<p>Post the adjustment to inventory and COGS.<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 31<\/th>\n<td>COGS<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">51,815.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Merchandise Inventory<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">51,815.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>To adjust year end inventory to net realizable value<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Which results in the following:<\/p>\n<div style=\"text-align: center;\">Selected accounts related to COGS<\/div>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133314\/Adjusting-Journal-Entries-for-Net-Realizable-Value11.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-5576\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133314\/Adjusting-Journal-Entries-for-Net-Realizable-Value11.png\" alt=\"Two T accounts side by side. On the left is an intentory chart. On the debit side, there is an unadjusted balance (FIFO) entry of 238,687 dollars. There is a credit entry of 51,815 dollars. There is a debit total of 186,862 dollars. On the right side is an allowance chart. This T account does not have any entries.\" width=\"840\" height=\"213\" \/><\/a><\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133317\/Adjusting-Journal-Entries-for-Net-Realizable-Value21.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-5577\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133317\/Adjusting-Journal-Entries-for-Net-Realizable-Value21.png\" alt=\"Two T accounts side by side. On the left is a cost of goods sold chart. On the debit side, there is an unadjusted balance (FIFO) entry of 1,741,663 dollars. There is a debit entry of 51,815 dollars. There is a debit total of 1,793,478 dollars. On the right side is a loss of NRV chart. This T account does not have any entries.\" width=\"893\" height=\"229\" \/><\/a><\/p>\n<h2>Step 2<\/h2>\n<p>Post the adjustment to inventory and a loss account.<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 31<\/th>\n<td>Loss on LCNRV Adjustment<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">51,815.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Merchandise Inventory<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">51,815.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>To adjust year end inventory to NRV<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div style=\"text-align: center;\">Selected accounts related to cost of goods sold<\/div>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133320\/Adjusting-Journal-Entries-for-Net-Realizable-Value31.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-5578\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133320\/Adjusting-Journal-Entries-for-Net-Realizable-Value31.png\" alt=\"Two T accounts side by side. On the left is an intentory chart. On the debit side, there is an unadjusted balance (FIFO) entry of 238,687 dollars. There is a credit entry of 51,815 dollars. There is a debit total of 186,862 dollars. On the right side is an allowance chart. This T account does not have any entries.\" width=\"892\" height=\"239\" \/><\/a><\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133324\/Adjusting-Journal-Entries-for-Net-Realizable-Value41.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-5579\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133324\/Adjusting-Journal-Entries-for-Net-Realizable-Value41.png\" alt=\"Two T accounts side by side. On the left is a cost of goods sold chart. On the debit side, there is an unadjusted balance (FIFO) entry of 1,741,663 dollars. There is a debit total of 1,741,663 dollars. On the right side is a loss of NRV chart. There is a debit entry of 51,815 dollars. There is a debit total of 51,815 dollars.\" width=\"882\" height=\"211\" \/><\/a><\/p>\n<h2>Step 3<\/h2>\n<p>Post the adjustment to a contra-asset account and COGS.<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 31<\/th>\n<td>COGS<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">51,815.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allowance to Reduce Inventory to NRV<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">51,815.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>To adjust year end inventory to NRV<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div style=\"text-align: center;\">Selected accounts related to COGS<\/div>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133327\/Adjusting-Journal-Entries-for-Net-Realizable-Value51.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-5580\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133327\/Adjusting-Journal-Entries-for-Net-Realizable-Value51.png\" alt=\"Two T accounts side by side. On the left is an intentory chart. On the debit side, there is an unadjusted balance (FIFO) entry of 238,687 dollars.There is a debit total of 238,687 dollars. On the right side is an allowance chart. There is a credit entry of 51,815 dollars. There is a credit total of 51,815 dollars.\" width=\"879\" height=\"225\" \/><\/a><\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133330\/Adjusting-Journal-Entries-for-Net-Realizable-Value61.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-5581\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133330\/Adjusting-Journal-Entries-for-Net-Realizable-Value61.png\" alt=\"Two T accounts side by side. On the left is a cost of goods sold chart. On the debit side, there is an unadjusted balance (FIFO) entry of 1,741,663 dollars. There is a debit entry of 51,815 dollars. There is a debit total of 1,793,478 dollars. On the right side is a loss of NRV chart. This T account does not have any entries.\" width=\"883\" height=\"220\" \/><\/a><\/p>\n<h2>Step 4<\/h2>\n<p>Post the adjustment to a contra-asset account and a loss account.<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 31<\/th>\n<td>Loss on LCNRV Adjustment<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">51,815.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allowance to Reduce Inventory to NRV<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">51,815.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>To adjust year end inventory to NRV<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div style=\"text-align: center;\">Selected accounts related to COGS<\/div>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133334\/Adjusting-Journal-Entries-for-Net-Realizable-Value71.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-5582\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133334\/Adjusting-Journal-Entries-for-Net-Realizable-Value71.png\" alt=\"Two T accounts side by side. On the left is an intentory chart. On the debit side, there is an unadjusted balance (FIFO) entry of 238,687 dollars.There is a debit total of 238,687 dollars. On the right side is an allowance chart. There is a credit entry of 51,815 dollars. There is a credit total of 51,815 dollars.\" width=\"847\" height=\"202\" \/><\/a><\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133338\/Adjusting-Journal-Entries-for-Net-Realizable-Value81.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-5583\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12133338\/Adjusting-Journal-Entries-for-Net-Realizable-Value81.png\" alt=\"Two T accounts side by side. On the left is a cost of goods sold chart. On the debit side, there is an unadjusted balance (FIFO) entry of 1,741,663 dollars. There is a debit total of 1,741,663 dollars. On the right side is a loss of NRV chart. There is a debit entry of 51,815 dollars. There is a debit total of 51,815 dollars.\" width=\"861\" height=\"230\" \/><\/a><\/p>\n<p>All of these methods of recording the adjustment are acceptable. It just depends on how you want to capture the data for your own internal and external reporting purposes.<\/p>\n<p>For instance, <a href=\"http:\/\/filings.irdirect.net\/data\/720875\/000165495419011076\/dynt_10k2019.pdf\" target=\"_blank\" rel=\"noopener\">Dynatronics Corporation shows on the balance sheet<\/a> a line item called, \u201cInventories, net\u201d and provides details in a footnote:<\/p>\n<blockquote><p>Note 3. Inventories<\/p>\n<p>Inventories consist of the following as of June 30:<\/p>\n<table class=\"fin-table acctstatement fw\">\n<caption>Inventories, net<\/caption>\n<tbody>\n<tr>\n<th scope=\"col\"><\/th>\n<th style=\"text-align: right;\" scope=\"col\">2019<\/th>\n<th style=\"text-align: right;\" scope=\"col\">2018<\/th>\n<\/tr>\n<tr>\n<td>Raw materials<\/td>\n<td style=\"text-align: right;\">$5,830,140<\/td>\n<td style=\"text-align: right;\">$6,216,150<\/td>\n<\/tr>\n<tr>\n<td>Work in process<\/td>\n<td style=\"text-align: right;\">706,128<\/td>\n<td style=\"text-align: right;\">625,830<\/td>\n<\/tr>\n<tr>\n<td>Finished goods<\/td>\n<td style=\"text-align: right;\">5,129,806<\/td>\n<td style=\"text-align: right;\">4,604,264<\/td>\n<\/tr>\n<tr>\n<td>Inventory Reserve<\/td>\n<td style=\"text-align: right;\">(138,553)<\/td>\n<td style=\"text-align: right;\">(458,389)<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$11,527,521<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$10,987,855<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Included in cost of goods sold for the years ended June 30, 2019, and 2018, are inventory write-offs of $0 and $692,000, respectively. The write-offs reflect inventories related to discontinued product lines, excess repair parts, product rejected for quality standards, and other non-performing inventories.<\/p><\/blockquote>\n<p>The company reports COGS (cost of sales) as a single line item, but may be posting inventory write-downs to a separate expense line item in order to capture the data for the note, and also includes this statement in its Summary of Significant Accounting Principles:<\/p>\n<blockquote>\n<h3>Inventories<\/h3>\n<p>Finished goods inventories are stated at the lower of standard cost, which approximates actual cost using the first-in, first-out method, or net realizable value. Raw materials are stated at the lower of cost (first-in, first-out method) or net realizable value. The Company periodically reviews the value of items in inventory and records write-downs or write-offs based on its assessment of slow moving or obsolete inventory. The Company maintains a reserve for obsolete inventory and generally makes inventory value adjustments against the reserve.<\/p><\/blockquote>\n<p>Next, we\u2019ll look at how inventory is presented on the financial statements, along with disclosures and an analysis of what happens when inventory is under or overstated.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23770\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23770&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23770\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-3665\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Adjusting Journal Entries for Net Realizable Value . <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":17,"menu_order":15,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Adjusting Journal Entries for Net Realizable Value \",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"bada3aa0-a77b-45db-b4cb-851c7d0a67d4, cfb3f9f7-3c30-44e2-ada0-e6fc0b0280a6","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-3665","chapter","type-chapter","status-publish","hentry"],"part":102,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3665","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/users\/17"}],"version-history":[{"count":19,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3665\/revisions"}],"predecessor-version":[{"id":6616,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3665\/revisions\/6616"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/parts\/102"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3665\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/media?parent=3665"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=3665"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/contributor?post=3665"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/license?post=3665"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}