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317. Debit Credit
$m $m
Inventory at 31 December 20X8 8.6
The inventory count was completed on 31 December 20X8, but two issues have been noted. First, products with a sales value of $0.6m had been incorrectly excluded from the count. Second, items costing $0.2m which had been included in the count were damaged and could only be sold for 50% of the normal selling price. Diaz Co makes a mark?up of 50% on both of these items.SOLUTION
The correct answer is $8.95m. This is the $8.6m plus the $0.4m missing items ($0.6m ×
100/150) less the write down of $0.05m ($200,000 – $150,000 (normally sold for $300,000
but actually being sold at $150,000)Good day,Please i don’t understand how the write down value was calculated. Why was the $150,000 removed from $200,000,I’ll appreciate if you can explain you can explain better.
Hi,
OK, so inventory is valued at the lower of cost and NRV. There are current goods costing $200,000 are included at cost in the inventory valuation and have been damaged. They are in at $200,000 as this was the lower of the cost and NRV, as it is usually sold at a 50% mark-up meaning the NRV would be higher.
We now need to assess if that NRV is still higher given the information in the question. If it is still higher then we don’t need to do anything and if not then we need to make an adjustment.
We are told that the goods can only be sold for 50% of their normal selling price, and the normal selling price is $300,000 (=200,000 x 150/100). We are therefore going to sell them at $150,000 (=50% x 300,000) and so they have reduced the 200,000 down to the 150,000, resulting in the 50,000 reduction (200,000 – 150,00).
Thanks
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