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The inventories at the close of business on 31st dec 20×9 were valued at cost of 19871$ . Included in this balance was an inventory line costing $4000 that, due to change in legislation , is now illegal.clerc could rectify the items at a cost of $2500 and plans to do so.the items usually retail to customers at 6000$.
[note: question from ACCA F3 , revision kit 1st feb 2014-31st aug 2015 page no 85 qno 3 ]
Can u please tell me what to do in this adjustment to make financial statments.
(You do not say which revision kit you are using, so that is no help! 🙂 )
At the date of the SOFP, the cost is $4,000.
The NRV is 6000 – 2500 = 3500
It should be valued at the lower of the two, which is 3500.
So inventory on the SOFP should be reduced by 500.
Reducing the inventory will also reduce the profit in the SOPOL by 500.
hello John
I understand that NRV for above question is 3500 but it said that 4000 which he took into account is illegal. Now to rectify, it cost 2500 and therefore NVR is less than initially charged £ 4000
My question is why did it say that charging 4000 was illegal.. Because it was illegal and he had to rectify it for 2500 NRV was lower than 4000. I just dont understand why 4000 initially charged was illegal. Shouldn’t he charge 4000 initially,Awaiting your reply
I actually think that the person who originally posted the question actually copied it from his book correctly, because if he did then it was a very odd way for it to be described.
Assuming it was posted correctly, then the fact that the items themselves can be rectified must mean that it is the goods themselves that are now illegal to sell without rectifying. (For example, maybe they are buying and selling toys for children, and the safety laws have changed meaning that they can no longer sell the toys without spending money to make them safer.)
It doesn’t change the fact that they originally cost $4,000 or that the NRV is $3,500, hence the need for the adjustment.What is an accounting treatment for the revaluation of an asset (other than land) adjustment at end of year ? Explain me with double entry aspect of this particular adjustment ??
Thank you
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