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Inventories at the close of business on 31 December 20X9 were valued at cost of
$19,871. Included in this amount was an inventory line at a cost of $4,000 that, due
to change in legislation, is now illegal. Clerc could rectify the items at a cost of
$2,500 and plans to do so. The items usually retail to customers at $6,000.This was an adj given. Can you explain the logic as in the Ans given they subtracted as follows – Closing inv – (4000-3500)
Inventory is valued at the lower of cost and net realisable value (as per my free lectures).
The cost was 4,500.. The net realisable value if the selling price of 6,000 less the extra costs of 2,500, which is 3.500.
Therefore the value of the inventory needs reducing by the difference of 1,000.
Do watch my free lectures. The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well.
Hi John,
I know the ruling IAS 2, but what I don’t understand with this question is the business would incur extra costs for these items to sit in inventory, would this then not increase the cost to 4000+2500=6500
As we need to take the lower of cost and NRV it would accounted we would include these items at £6000?
I’m not sure why we would do 4000-3500?
Thank you
The NRV is the final selling price less any costs that will be needed before they are sold.
I do suggest that you watch my free lectures on this.
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