You are preparing the financial statements for a business. The cost of the items in closing inventory is
$41,875. This includes some items which cost $1,960 and which were damaged in transit. You have
estimated that it will cost $360 to repair the items, and they can then be sold for $1,200.
What is the correct inventory valuation for inclusion in the financial statements?
A $39,915
B $40,755
C $41,515
D $42,995

To calculate the correct inventory valuation, we need to apply the lower of cost and net realizable value (NRV) rule. This rule states that inventory should be valued at the lower of its cost or its net realizable value.

### Step 1: Identify the cost and net realizable value of the damaged items.
- **Cost of damaged items**: $1,960
- **Estimated cost to repair**: $360
- **Expected selling price after repair**: $1,200

### Step 2: Calculate the net realizable value (NRV) of the damaged items.
\[
\text{NRV} = \text{Selling price after repair} - \text{Cost to repair}
\]
\[
\text{NRV} = 1,200 - 360 = 840
\]

### Step 3: Determine the lower of cost or NRV for the damaged items.
- **Cost of damaged items**: $1,960
- **NRV of damaged items**: $840

Since the NRV of $840 is lower than the cost of $1,960, we should use the NRV for the valuation of these damaged items.

### Step 4: Adjust the total inventory valuation.
- **Original inventory value**: $41,875
- **Subtract the cost of the damaged items**: $41,875 - $1,960 = $39,915
- **Add the NRV of the damaged items**: $39,915 + $840 = $40,755

### Final Inventory Valuation:
The correct inventory valuation for inclusion in the financial statements is **$40,755**.

So, the correct answer is **B $40,755**.

Would you like further details or have any other questions?

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Here are 5 related questions to expand your understanding:
1. What is the "lower of cost and net realizable value" rule in inventory valuation?
2. How do businesses typically estimate the net realizable value (NRV)?
3. What are some common reasons for inventory to be valued below cost?
4. How would a significant write-down of inventory affect a company's financial statements?
5. What are the accounting implications of overvaluing inventory?

**Tip:** Always ensure that damaged goods are evaluated carefully, as they can significantly affect the overall inventory valuation and financial health of a business.

Learn how to calculate inventory valuation using the lower of cost and net realizable value (NRV) rule. Understand the impact of damaged goods on financial statements with a detailed example. Suitable for advanced accounting studies.

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