Wascana Photography Services sells and services a variety of high-end photography equipment for professional photographers. An inventory count is conducted each year end to verify the information contained in the company’s perpetual inventory system. Once counted, the inventory is valued for the purposes of preparing the financial statements. The following inventory items represent a cross-section of Wascana’s inventory for the year ended June 30, 2020. Because computerized records are maintained and a specific identification method of inventory is applied, the historical cost of each inventory item can easily be determined. 

In addition to the historical cost, the store management has included information detailing net realizable value for each item.

Aleksander Dudyk, the manager of Wascana, is confused about why there is a difference between historical cost and net realizable value. Aleksander is not an accountant and is unfamiliar with these terms. He is also wondering which number should be used to value the company’s inventory on June 30, 2020.

Required

For the purposes of this case, assume that the above items represent the total inventory of Wascana Photography Services on June 30, 2020.

a. Explain the meaning of historical cost and net realizable value in the context of inventory valuation for Aleksander.

b. Calculate the ending inventory value using the lower of cost and net realizable value.

c. Explain the reasons for valuing ending inventory at the lower of cost and net realizable value to Aleksander.

Transcribed Image Text:

Quantity on hand June 30, Historical cost (per unit) Net realizable value (per unit) $ 350 Item Nikon D3100 body Nikon 5200 with zoom lens Nikon 80-200 mm/2.8 lens Canon EOS 60 body Canon EF 24-70 mm/2.8 zoom lens Olympus E5 body Pentax K3 body 2020 4 2 2 2 $ 400 $1,600 $1,150 $1,900 $1,500 $1,100 $1,600 1 $2,500 $1,900 $1,050 $2,300 $1,700 $1,300 3 6.