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inventory at 31 october 06 was valued at $275,000 based on its original cost. however, $45000 of this inventory has been in the warehouse for over two years and the directors have agreed to sell it in november 06 for a cash price $20,000
my question is why the answer directly subtract the figures (275-45+20) and no double entry(debit cash/credit sales) made for that??
As at 31 October the goods have not been sold, and so there is no double entry for the sale!
However, the inventory as at 31 October should be valued at the lower of cost and net realisable value (as per IAS 2). Since the NRV is only 20,000 the company was wrong to value it at the cost of 45,000. Therefore the value of the closing inventory needs changing.
It will help you to watch the free lecture on Inventory.
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