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At the date of acquisition, some of Danute’s inventory had a fair value $12,000 in excess of its carrying value. All of this inventory had been sold before the year end.
How come the answer for inventory is ($100,000 + $50,000 – $5850 = $144,150) and not ($100,000+$50,000 + $12,000 – $5850 = $156,150)? Why wasn’t the fair value adjustment being included inside?
Inventory is an asset that is valued at a moment in time (the date of the statement of financial position) Ask yourself, how much of those $12,000 goods were in inventory?
Need I say more?
Hi Mike,
I still do not quite understand as to why there isn’t a need to include the FV adjustment for inventory? Is it because inventory is always valued as of year end and thus the FV adjustment had been accounted for?
sorry for the trouble.
Thanks
Joanna, transport yourself mentally into the warehouses of Ausra and Danute. Stand there in the middle of those warehouses and look around. What can you see?
Loads of inventory in the Ausra warehouse – about $100,000 worth.
And then loads more in the Danute warehouse – another $50,000 worth.
And you also, following enquiry, discover that there’s another element of inventory in transit between the group entities – another $5,850
Now, what I’m going to ask you to do is look around and thoroughly search the premises of both Ausra and Danute and tell me when you have found that inventory that was $12,000 undervalued two years ago
Let me know when you have found it and we’ll go on further with your query (if necessary)
Hi Mike,
Is it because inventories are valued at lower of cost and NRV. Therefore, it is not possible to revalue the inventory upwards? Hence, there will not be any upward adjustment for inventories?
Thanks and sorry for the trouble.
No, Joanna, that has nothing at all to do with it!
When you were looking, as I asked you, how much of that $12,000 inventory did you see?
Hi Mike,
I will be able to see inventory but all the inventory will be looking identical. So it is not possible to determine which inventory had been undervalued?
Thanks!
But doesn’t the question say specifically that that $12,000 has been sold? So how can you see it now in the warehouse?
Since the inventory had already been sold off, it will not reflect on the financial statements. Therefore, it will not affect the valuation of inventory. Is my understanding correct?
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