ASC 905-330: Agricultural Produce Valuation Journal Entries

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The valuation of agricultural produce inventory is a significant aspect of financial accounting for companies involved in the agriculture sector. The Accounting Standards Codification (ASC) 905-330, specifically deals with the accounting and reporting of inventory related to agricultural produce. This article will provide an in-depth understanding of ASC 905-330 inventory, the methods for agricultural produce valuation, and how to record these transactions using journal entries.
 

Overview of ASC 905-330

ASC 905-330 is a part of the Accounting Standards Codification issued by the Financial Accounting Standards Board (FASB) in the United States. This standard provides guidance on the recognition, measurement, and disclosure of inventory costs associated with agricultural produce. Agricultural produce refers to harvested crops, plants, and livestock products that are ready for sale. ASC 905-330 focuses on the cost accumulation and allocation methods for determining the value of agricultural produce inventory at the reporting date.
 

Methods for Agricultural Produce Valuation

There are two primary methods for valuing agricultural produce inventory under ASC 905-330:

 

1. Lower of Cost or Market (LCM): Under this method, agricultural produce inventory is valued at the lower of cost or market value. Cost includes all expenses incurred in the production of the agricultural produce, while market value refers to the current selling price of the produce in the marketplace.
    

2. Net Realizable Value (NRV): This method values agricultural produce inventory at the estimated selling price, less the costs of disposal, such as commissions, transportation, and any other costs directly attributable to the disposal of the inventory.

 

Journal Entries for Agricultural Produce Inventory

To illustrate the application of ASC 905-330, let's consider a hypothetical example of a farm that grows and sells corn. The farm has harvested 10,000 bushels of corn with a total production cost of $30,000. The current market value of the corn is $35,000, and the estimated cost of disposal is $2,000.
 

1. Recording the cost of harvested corn:
 

                    Debit: Agricultural Produce Inventory (Corn) - $30,000

                    Credit: Various Expense Accounts (Production Costs) - $30,000
 

This journal entry records the cost of the harvested corn as inventory, and the corresponding credit to various expense accounts reflects the production costs incurred.

 

2. Valuation of corn inventory using LCM:

As the market value of corn ($35,000) is greater than the cost ($30,000), the LCM method would value the corn inventory at its cost.

 

                Debit: No Entry Required

                Credit: No Entry Required
 

In this case, no journal entry is required, as the inventory is already recorded at the lower of cost or market value.

 

3. Valuation of corn inventory using NRV:

            Net Realizable Value = Estimated Selling Price - Costs of Disposal

            NRV = $35,000 - $2,000 = $33,000
 

            Debit: Agricultural Produce Inventory (Corn) - $3,000

            Credit: Inventory Adjustment - $3,000
 

This journal entry adjusts the inventory value from the cost of $30,000 to the NRV of $33,000, with the credit entry to an inventory adjustment account.

Understanding the ASC 905-330 inventory standard and applying the appropriate valuation method for agricultural produce is essential for accurate financial reporting in the agriculture sector. By following the guidance provided in this standard and recording transactions using journal entries, agricultural businesses can ensure compliance with accounting requirements and provide transparent financial information to stakeholders.