An organization has 1,000 units of a defect item in stock. Per unit, market price is $10; production cost is $4; and the defect selling price is $5. What is the carrying amount (inventory value) of defects at year end?
An organization has 1,000 units of a defect item in stock. Per unit, market price is $10; production cost is $4; and the defect selling price is $5. What is the carrying amount (inventory value) of defects at year end?
The carrying amount (inventory value) of the defective items should be calculated based on the lower of cost or net realizable value (NRV). The cost of the item is given as $4 per unit. However, since the items are defective, their NRV would be the defect selling price, which is $5 per unit. In this case, the NRV ($5) is lower than the market price ($10) but higher than the cost ($4). Therefore, the carrying amount of the inventory should be based on the NRV, which is $5 per unit. For 1,000 units, this would result in an inventory value of $5,000.
In compliance with GAAP, inventory values are to be calculated with the lower of the market price or cost to the company. B is correct
It's C, because the production cost mentioned does not include the materials. And the item requested is the carrying amount (inventory value).