QUESTION:

A company purchased inventory for $50,000 and sold 75% of it during the year. The inventory has a fair value of $60,000 at the end of the year. What would be the cost of goods sold for the year and the value of the inventory at year-end using the lower of cost or net realizable value method?

Answer:

The cost of goods sold for the year would be $37,500 ($50,000 x 75%). The value of the inventory at year-end would be $45,000 (75% x $60,000), which is lower than its original cost.

Here's the tabulated working calculation for the cost of goods sold and the value of inventory at year-end using the lower of cost or net realizable value method:

To calculate the cost of goods sold, we need to multiply the cost of inventory purchased by the percentage sold during the year, which results in $37,500.

To calculate the value of the inventory at year-end using the lower of cost or net realizable value method, we compare the cost of the inventory purchased to its net realizable value at year-end. The net realizable value is the fair value minus any costs necessary to sell the inventory. Since the fair value of the inventory at year-end is $60,000 and there are no costs necessary to sell the inventory, we can compare it to the original cost of the inventory purchased. Since $45,000 (75% x $60,000) is lower than the original cost of $50,000, the value of the inventory at year-end is $45,000.

Therefore, the cost of goods sold for the year is $37,500 and the value of the inventory at year-end using the lower of cost or net realizable value method is $45,000.