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Dear sir, I come across alot of easy questions like these and do the same mistake.
At 31 december 20X4, a business had inventory which cost 300 to manufacture.Due to water damage, the business would have to spend 75 to repair the item. Following the repair, the item would be sold for 280.
What amount will the inventory be valued in the financial statements?
A. 300
B.280
C.225
D.205The answer is D. But what made me choose B was the wordings ‘following the repair’ where I thought it meant, after the repairs, the inventory can be sold at 280. But turns out thats not the case.
It is the same that the 280 is the sale price after doing the repair.
Therefore the NRV is 280 – 75 = 205, and since this is lower that the cost, it is at this amount that it is valued.
I suggest that you watch my free lectures on this 🙂
I have watched your lectures,thats what’s helping me do F3 without any external help!
So,what you mean to say is 280 is the realisable value, so after minusing 75 from 280 only we get the NET REALIZABLE VALUE.
Yes – that’s what I wrote before, and is what I explain in the lecture (see example 4 in the chapter on inventory) 🙂
Mr. Moffat,
One of the multitask questions in Kaplan’s workbook has made me confused. The question goes like this:Inventories as the close of the business on 31 December 20X9 were valued at cost of $19,781. Included in this amount was an inventory line at a cost of $4000 that, due to change in legislation, is now illegal. Clerk(the entity) could rectify the items at a cost of $2500 and plans to do so. The items usually retail to customer at $6000.
Thank you!
The inventory which is no illegal is valued at the lower of cost (4,000) and net realisable value (6,000 – 2,500 = 3.500), and so is valued at 3,500.
The remainder of the inventory of 15,781 (19781 – 4,000) is valued at cost and there is no mention of there being a problem with it.
Therefore the total value is 15,781 + 3,500 = 19,281
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