ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
LOWER OF COST AND NET REALIZABLE VALUE (NRV)
If the cost is lower than net realizable value, the inventory is measured at cost.
If the net realizable value is lower than cost, the inventory is measured at net
realizable value, and the decrease in value is recognized
DIRECT METHOD
The inventory is recorded at the lower of cost or net realizable value
ALLOWANCE METHOD
The inventory is recorded at cost and any loss on write down of inventory is accounted for
separately
ILLUSTRATION:
ABC Merchandising has the following data about its inventories:
Dec. 31, 2018 Dec. 31, 2019 Dec. 31, 2020
Cost 500,000 520,000 600,000
Lower of Cost and NRV 480,000 490,000 575,000
DIRECT METHOD
Dec. 31, 2018 Inventory 480,000
Income Summary 480,000
To record ending inventory
Because 480,000 is lower than 500,000
Dec. 31, 2019 Income Summary 480,000
Inventory 480,000
To close beginning inventory
ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
The ending inventory of 2018 is the beginning inventory of 2019
Dec. 31, 2019 Inventory 490,000
Income Summary 490,000
To record ending inventory
Because 490,000 is lower than 520,000
Dec. 31, 2020 Income Summary 490,000
Inventory 490,000
To close beginning inventory
The ending inventory of 2019 is the beginning inventory of 2020
Dec. 31, 2020 Inventory 575,000
Income Summary 575,000
To record ending inventory
Because 575,000 is lower than 600,000
ALLOWANCE METHOD
Dec. 31, 2018 Inventory 500,000
Income Summary 500,000
ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
To record ending inventory
Dec. 31, 2018 Loss on Inventory Writedown 20,000
Allowance for Inventory Writedown 20,000
To record inventory at lower of cost and NRV
At this point, “Allowance for Inventory Writedown” has a Credit Balance of P20,000
Dec. 31, 2019 Income Summary 500,000
Inventory 500,000
To close beginning inventory
The ending inventory of 2018 is the beginning inventory of 2019
Dec. 31, 2019 Inventory 520,000
Income Summary 520,000
To record ending inventory
Dec. 31, 2019 Loss on Inventory Writedown 10,000
Allowance for Inventory Writedown 10,000
To record inventory at lower of cost and NRV
At this point, “Allowance for Inventory Writedown” has a Credit Balance of P30,000 (P20,000 +
10,000)
Dec. 31, 2020 Income Summary 520,000
Inventory 520,000
To close beginning inventory
The ending inventory of 2019 is the beginning inventory of 2020
Dec. 31, 2020 Inventory 600,000
Income Summary 600,000
To record ending inventory
Take note that the difference between the Cost (P600,000) and the Lower of Cost and NRV
(P575,000) is P25,000. This amount of P25,000 should be the ending balance of “Allowance for
Inventory Writedown”.
Take note further that at the start of 2020, the balance of “Allowance for Inventory Writedown” is
P30,000. Hence, in order to bring this P30,000 to P25,000, the account should be debited by P5,000
Dec. 31, 2020 Allowance for Inventory Writedown 5,000
Recovery in NRV of Inventory 5,000
To record inventory at lower of cost and NRV
