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70 percent of inventory was sold lower than cost. so, its NRV is lower to cost. it is an adjusting event. how to treat this in SOFP.
treatment 1
write 70 percent of inventory to its new NRV and the impairment in 70 % inventory to IS.
treatment 2
write 100% inventory to its new NRV and its impairment value in IS.
which treatment is right?Sorry, but neither really! You would be unlikely to find an expense line in the Income Statement “Impairment in Inventory”. What you would find is the net, revised, reduced inventory value included within the closing inventory which figure itself is subsumed within the “Cost of sales” figure.
Now, to your real question. Inventory valuation should be on a line by line basis assessing whether nrv is less than cost FOR THAT PARTICULAR line of inventory. Your question suggests that 70% of the inventory should be valued at nrv but, unless the remainder is equally devalued, it should be valued at cost.
So, probably what you meant, the remainder is ok at cost but 70% should be valued at nrv – ie your suggestion number 1
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