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Question from internet. It will be great if you explain me. Thank you in advance
A machine constructed for another customer for a contracted price of $36,000. This has recently been completed at a cost of $33,600. It has now been discovered that in order to meet certain health and safety regulations modifications at an extra cost of $8,400 will be required. The customer has agreed to meet half of the extra cost.
What should be the total value of these two items of inventory in the statement of financial position?
Answer is kit: cost is 33600+4200 = 37800 and NRV is 36000-4200= 31800. So record at lower at 31800. It really don’t make sense.
I am unable to get what he has done. Cost for us should be 33600+8400 (total cost incurred) = 42000 and NRV should be 36000+4200 (cost promised by customer to pay)= 40200 so record at 40200.
The answer of 31,800 is correct (although assuming that you have typed it out correctly then the 37800 is of no relevance).
The machine should be valued at the lower of cost and NRV.
The cost is the amount that has been spent so far, which is $33,600.
The net realisable value is the expected selling price ($36,000) less the cost of any future work before sale ($4,200 because we will only pay half), and is therefore 36,000 – 4,200 = $31,800.
The lower of the two is $31,800.
Have you watched my free lectures on IAS 2? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
(I do suggest that you do not just find questions on the internet – you cannot be sure that they are correct or are the right level of difficulty! You should be using a Revision Kit from one of the ACCA Approved Publishers (BPP or Kaplan) – it is full of exam-standard questions and answers.