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Example of net realizable value?
To exemplify a necessary write-down in the cost of inventory presume that an automobile dealer has a demonstrator on hand. The dealer obtained the auto at a cost of USD 18000. The auto had an actual selling price of USD 19600. Ever since the dealer used the auto as a demonstrator and the new models are coming in the auto now has an estimated selling price of only USD 18100. But the dealer is able to get the USD 18100 only if the demonstrator receives some scheduled maintenance including a tune-up and some paint damage repairs. This work in addition to the sales commission cost USD 300. The net realizable value of the demonstrator after that is USD 17800 (selling price of USD 18100 less costs of USD 300). For inventory purposes the required journal entry is as
Loss Due to the Decline in Market Value of Inventory (-SE) 200
Merchandise Inventory (-A) 200
To write down inventory to net realizable value ($18,000 -$17,800) This entry treats the USD 200 inventory turn down as a loss in the period in which the decline in utility occurred. Such an entry is essential only when the net realizable value is less than cost. If a net realizable value decline but still exceeds cost the dealer would continue to carry the item at cost.
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