REALIZABLE VALUE

APPROACH
MENDOZA | MONTALES
 REALIZABLE VALUE APPROACH
● No value is recognized for the by- product
until it is sold.
● The realized value (other income)
approach shows the NRV of the by-
product/scrap on the income statement as
either:

 other revenue method

 other income method

EXAMPLE:
 Total processing for month: 10,000 tons of turkey, resulting in 9,000 tons of joint
products

 By-products from joint product production: 1,000 tons (or 2,000,000 pounds) of
fertilizer pellet ingredients

 Selling price of fertilizer pellets: $0.30 per pound

 Processing costs per pound of fertilizer pellets: $0.08 for labor and $0.02 for
overhead

 Net realizable value per pound of fertilizer pellets: $0.20

 Other Revenue Method
 To record the labor and overhead costs of by-product processing

Work in Process Inventory—Joint Products (2,000,000 x $0.08) 160,000

Manufacturing Overhead Control (2,000,000 x $0.02) 40,000
Various accounts 200,000

 To record sale of by-product

Cash (or Accounts Receivable) (2,000,000 x $0.30) 600,000

Other Revenue 600,000
EXAMPLE:
 Total processing for month: 10,000 tons of turkey, resulting in 9,000 tons of joint
products

 By-products from joint product production: 1,000 tons (or 2,000,000 pounds) of
fertilizer pellet ingredients

 Selling price of fertilizer pellets: $0.30 per pound

 Processing costs per pound of fertilizer pellets: $0.08 for labor and $0.02 for
overhead

 Net realizable value per pound of fertilizer pellets: $0.20

 Other Income Method
 To record the labor and overhead costs of by-product processing

Work in Process Inventory—Fertilizer Pellets (2,000,000 x $0.10) 200,000

Various accounts 200,000

 To record sale of by-product net of processing/disposal costs

Cash (or Accounts Receivable) 600,000

Work in Process Inventory—Fertilizer Pellets 200,000
Other Income 400,000
 Other Income Method
The Other Income method matches by-product revenue with related storage, further
processing, transportation, and disposal costs:

• Presents detailed information on financial responsibility and accountability for

disposition of these secondary outputs

• Provides better control opportunities than the net realized value approach

• Could improve performance because managers are more apt to look for new or
expanded sales potential given that the net benefits of doing so are provided on the
income statement.
TRIVIA

TURKEY PEACOCK
PROBLEM

Trevor White is a real estate broker who is in

the process of valuing an apartment block. The
gross income that the property generates is
$500,000 per year. Expenses, including
vacancy and collection loss add up to
$100,000. Consequently, the net operating
income works out to $400,000. The
capitalization rate for the apartment building is
8.75%.
THANK YOU!!