I have a question about the NRV of byproducts. I got this question in my ninja mcq.
The following information pertains to a byproduct called Moy:
Sales in 20X2 5,000 units
Selling price per unit $6
Selling costs per unit 2
Processing costs 0
Inventory of Moy was recorded at net realizable value when produced in 20X1. No units of Moy were produced in 20X2. What amount should be recognized as profit on Moy's 20X2 sales?
A.
$0
B.
$10,000
C.
$20,000
D.
$30,000
The explanation per Ninja is:
Net realizable value equals expected market value (selling price) less any separable processing and selling costs. If byproduct Moy was recorded at net realizable value, the following entry would have been made in 20X1:
Dr. Byproduct Inventory 5,000($6-$2) $20,000
Cr. Work-In-Process $20,000
When the 5,000 units of Moy were sold in 20X2, the sale would be recorded using the following summary journal entry:
Dr. Cash (5,000 x $6) $30,000
Cr. Byproduct Inventory $20,000
Cr. Cash (for selling costs) (5,000 x $2) 10,000
As can be seen, no profit is recognized when byproduct inventory is recorded at net realizable value.
I was reading up on this in my book, and it says “if one of the products resulting from production is considered a by-product, and is only being produced as an incidental result of production of the main product or products, then the NRV of the byproduct is simply subtracted from the cost of production of the main.”
Can someone explain to me how this lines up with no profit being recognized? To me, in the example above, it looks like the NRV of $20K is being ADDED to the costs of production, resulting in $0 profit.
.