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On 30 September 20X4 Razor’s closing inventory was counted and valued at its cost of
This included some items of inventory which had cost $210,000 and had been damaged in a
flood on 15 September 20X4. These are not expected to achieve their normal selling price
which is calculated to achieve a gross profit margin of 30%.
The sale of these goods will be handled by an agent who sells them at 80% of the normal
selling price and charges Razor a commission of 25%.
At what value will the closing inventory of Razor be reported in its statement of financial
position as at 30 September 20X4?
Why do we deduct the expected loss from $1 million to arrive at the final answer?
Inventory is valued at the lower of cost and NRV, so if we expect to sell it for less than its cost (which we will when we apply the margin, reduced selling price and commission) then we need to reduce the value of the inventory.